European Investment Bank’s Green Bonds

Presentation made by Yamina SAFER, Capital Markets Officer, Finance Directorate, Capital Markets Department, European Investment Bank(EIB) in the margins of CICA Board-Council Meeting, Paris, November 22, 2016
EIB’s objective is to finance projects mainly in the European Union (EU), to do that they have a very simple model. They are a multilateral development bank, they borrow cash, in the form of bonds and then they lend this money for projects, mainly infrastructure projects. They raise funds in the form of bonds; they have a funding program every year in the amount between 60 and 80 billion euros. They are the largest multilateral in terms of borrowing program and in terms of lending. 90% of their projects are in the EU.
A green bond is a bond instrument where the proceeds of the issue are used to finance green projects, it’s a segment of the bond market. Green bonds have taken off since 2014, before that it was a very small market under the 1 billion euro mark. In 2014 the volume issued was multiplied by 3 because some corporates decided to issue green bonds. The outstanding size of this market is 150 billion euro and the bond market is a 100 trillion dollars but the green bonds market is increasing in size very rapidly. EIB is also the largest climate lender, it was planned to have 25 billion euros equivalent of lending for climate action and they delivered 20 billion, which is very close the estimates. What differentiates the EIB from the World Bank is that the EIB lends mainly for advanced economies and World Bank for developing economies. Over the last 6 years the EIB has lent 110 billion equivalent for climate and has taken the commitment to lend 100 billion by 2020. The EIB also took the commitment for developing countries that the percentage for climate action will raise to 35%. Example of energy efficiency: they have lent 100 million to make energy efficient apartment buildings in Ile de France. The percentage they have for climate adaptation is still very small but they tend to increased it.
With the COP 21, the EIB upgraded its climate strategy and took the commitment to increase the impact of their lending. They will try to examine the relevant projects and suggest to the promoter of the project further measures in order to improve the climate impact of this particular project. They want to do more for adaptation, that’s what they call resilience; it’s everything that can help the project to adapt to climate change risks. For every single investment project, they want climate to be looked at very closely to mitigate any particular problems that a particular project can have from a climate point of view. They want to have more tools to assess climate vulnerabilities.
In 2015, the EIB issued over 4 billion dollars of green bonds which is very high compared to other multilateral development banks. For 2016 they have issued 3.8 billion euros of green bonds, they are the largest issuer of green bonds in their asset class. EIB wants to contribute to the development of the green bond market by doing 3 things:
– Issuing green bonds because investors are looking for large instruments;
– Participating in industry working groups;
– Setting an example for transparency and accountability.
In 2007, the EIB was the first institution to issue a green bond, it was a marketing exercise because in 2007 the EU had an action plan for energy, they put high targets for renewable energy and took the commitment that by 2020, 20% of the energy mix in the EU will be in the field of renewable energy. The self-commitment that they took as well was to improve energy efficiency by 20%. All these commitments are major commitments in the field of climate change and the EIB was asked to participate more, to focus more on climate and particularly on renewable energy and energy efficiency. They launched a green bond and instead of stating in the bond prospect that the proceed will be used for general operations they wrote that the proceeds of this bond will be used for green projects. And since then all of their green bonds have stated in the bond documentation that the proceeds of this particular bond will be for projects in the area of renewable energy and energy efficiency. They have never deviated from that, they have only kept green bonds for these 2 sectors. Investors like predictability, they like information. The first transaction was a 600 million euros transaction. In order to clarify in what exactly these projects consist, they mention which projects were financed with their green bonds: a list of all the projects, the amounts. The first report was issued in 2009 and since then they report every year. In 2015 they did an impact reporting, they communicated the list of projects that have been financed with the green bonds as well as some internal figures that typically the engineers keep to themselves: the green impact of each project and the carbon footprint. Later in 2015, they did a project report and linked projects with bonds because investors like to see which bond went to which project. They price green bonds the same way they do normal ones, so when an investor buys a green bond he will get it at the same interest rate.
They have issued in 11 currencies, the largest ones are euros and dollars. Up to 2015, there are 131 projects funded with their green bonds in 43 countries most of which are in UE. Non UE projects represent 12% of the green allocations.
Green Bond Principle is a capital market initiative, they have an association which is called ICMA (International Capital Market Association). It puts together issuers, investors and banks because in the bond market you need 3 people: the issuers, the investor and the bank which is intermediating between the investor and the issuer. There are 4 banks which in 2014 wanted to do something for green bonds and these 4 banks created the Green Bond Principles, this is a recommendation to make a green bond issue credible. This coalition has been joined by 122 members which are issuers, investors and banks. Green Bond Principles are advocating disclosure and transparency.
The name Green Bond is not patented, any company can issue green bonds and call them green bonds but there is a reputational issue for an issuer to issue a green bond and not to be transparent about it. Green Bonds allow to obtain a better funding and to highlight the green aspect.
Depending on the continent the needs are different. For example, China has done a lot in the area of green bonds. The government decided to put together some regulations so that green bonds issuers in China have preferential treatment.
One of the reproaches made to green bonds is about additionality. Do green bonds help create additional green projects? It’s a difficult question, green bond is not so much a product, it’s a process. What is wanted is to install market confidence, once you have market confidence you can have more green projects. That’s why reporting and disclosing are crucial. In order to make green infrastructure investable you need measurement to be ready because investors want to buy something that they know and the risk needs to be managed.