The Climate Bonds Standard Board has approved the long-awaited Climate Bonds Standard Version 3.0 (Standard V3) the overarching guide to Climate Bonds Standard and Certification Scheme. Under Standard V3 green bond issuers and investors will have a ‘universal adaptor’ that ensures a green debt product meets regulatory requirements for major global jurisdictions.
Standard V3 will be compatible with the newly proposed EU Green Bond Standard (GBS), and the Green Bond Principles (GBP) as well as the latest market developments including guidelines adopted by India, ASEAN and Japan. Thus, certification through the more stringent Climate Bonds Standard, will mean compliance with the GBP and the EU GBS.
Standard V3 is aligned with the Paris Agreement goals to limit warming to under 2 degrees provides a compatible harmonised platform for investors to compare and analyse a green debt product from any nation, including disclosure requirements, climate impacts and low carbon credentials. Standard V3 is the most detailed climate aligned investment criteria available in the market and provides guidance to issuers, investors, governments and regulators.
Release of Standard V3 is part of the ongoing Climate Bonds development programmed to extend the reach of underlying Sector-based Criteria, strengthen overarching Adaptation and Resilience (A&R) factors in green bond investment and update the core Climate Bonds green Taxonomy. The next iteration of the Taxonomy is planned for release in Q3, after the Northern Summer.
Standard V3 is a major revision to the existing Climate Bonds Standard which was first launched in 2013. It has gained international recognition and acceptance amongst market participants and is the basis of the Climate Bonds Certification Scheme.
Formal launch including stakeholder presentations and an outreach program with Verifiers and Issuers will take place from early September.
Halfway through the year, and already breaking records
In 2017, the USD100bn green bond benchmark issuance was reached in November during COP23. In 2018, in mid-Sept. This year, green bond issuance surpassed the USD100bn mark 2 months earlier again in July. A good sign for a buoyant market and strong growth in 2019, and estimates for total green bond issuance in 2019 now range from USD180bn through to USD250bn.
But Climate Bonds is looking further afield and will continue setting its own records.
Strong growth for Climate Bond Certifications
CBI Certifications have also grown with the market, with volumes certified for H1 2019 close to exceeding total Certification volume for all of 2018.
Given that the debt capital markets have generally been more active compared to 2018, we expect that 2019 will be a record year for Certified issuances. We have Certified over $80 billion in issuances so far.
More sovereigns join the party
The Republic of Chile (USD1.4bn) became the first government of the Americas to issue a sovereign green bond when the first stage in its debut offering in June.
Chile is the third sovereign to issue a Certified Climate Bond, after Nigeria (December 2017) and the Netherlands, which issued the largest Sovereign green bond (at USD6.7bn) in May 2019.
The Certified sovereign issuances from Chile (USD 1.42bn) and the Netherlands (EUR 5.98bn) have accounted for almost 40% of issuance volumes in 2019.
International interest in Certification
Q1 and Q2 also saw the debut Certified issuances from several countries, including Russia Railways, FS Italiane (Italy’s national rail network), PKO Bank (Poland) and JRTT (Japan). We very much welcome debut Certified issuances from these countries. Italy and Poland issuing Certified Climate Bonds mean that Certified Climate Bonds have now been issued in 10 countries in Europe.
The Netherlands has emerged as a leading Certified bond issuer, following its sovereign issuance.
It is followed closely by the U.S, France, China and Australia.
Russian interest in green bonds and Certification is also growing, a Certified Climate Bond by Russia Railways was also the first international green bond issued from the country.
The entry of Japan into the Certified Bond arena and the wider green bond market was also a very welcome development in the green bond market. Japan has the second largest debt capital market globally, as well as a very strong societal awareness of climate change and environmental issues generally.
Meidensha Corporation has issued its first Certified Climate Bond linked to the manufacture of electric and hybrid vehicles. The proceeds will be used to finance and refinance the expansion of existing and the construction of new facilities at manufacturing sites across Japan. These facilities will be solely and wholly for the purpose of manufacturing motors and related car parts of electric and hybrid electric vehicles.
California’s Bay Area Rapid Transport (BART) opened its green bond to retail investors with institutional investors expected to follow later in August. BART estimates the final offering will be approximately USD674m with the Preliminary Official Statement (POS) declaring that proceeds will go to financing or refinancing projects under the Earthquake Safety Program and to finance continued work on BART’s core infrastructure through improvements to network infrastructure including track, tunnel and system upgrades.
Q1 and Q2 also saw the return to the market of several issuers who had previously issued Certified Climate Bonds, including a sub-sovereign from Queensland Treasury Corp and deals from LA County MTA and Renew Power.
Programmatic Certifiers SNCF Reseau and Societé du Grand Paris (SGP) added to their ongoing green programs funding low carbon transport infrastructure. As at May 2019, SGP have issued 8 green bonds in total amounting to a total of EUR4,995m under the streamlined programmatic process for large and multiple green issuers.
Total Certified Issuances by Proceeds is becoming more evenly distributed across a few of the Sector Criteria that are currently available. The launch of new sector criteria (see below) is expected to continue diversifying that mix.
The EU Taxonomy: Alignment with CBI
The European Commission has published its guidelines on corporate climate-related information reporting, as part of its Sustainable Finance Action Plan.
It has also launched three new important reports (1, 2, 3) by the Technical Expert Group on sustainable finance including key recommendations on the types of economic activities that can make a real contribution to climate change mitigation or adaptation.
This is a significant move for investors in the EU as it provides a clear framework for what should be counted as green, a move CBI is highly supportive of having developed our own taxonomy and climate eligibility criteria for use in the green bond market – which we view as essential for delivering consistency and integrity in the market.
CBI’s CEO Sean Kidney was a TEG member and CBI’s Standards Team was closely engaged in the development of the Taxonomy. We have started the process of harmonizing the Sector Criteria under the Climate Bonds Standard with the EU Taxonomy criteria as appropriate.
We will also be reviewing the sectors covered in the EU Taxonomy but not covered under the existing Climate Bonds Standard sector, namely manufacturing and ICT, with a view to using the EU Taxonomy to expand our Criteria and thereby increase the range of assets and projects that can be Certified under the Climate Bonds Standard. Expect further information and updates on this in Q3.
The three reports include:
The EU Taxonomy Technical Report: The proposed EU Taxonomy is a classification system for environmentally-sustainable activities. It sets eligibility criteria for what counts as a substantial contribution to mitigation (in line with achieving a net zero carbon economy by 2050, including transition action), and substantial contribution to adaptation, and doing no significant harm to water management, pollution, circular economy and healthy ecosystems for 67 activities across 8 sectors of the economy. The Taxonomy report is open for consultation until 13 September and we encourage readers to provide feedback here.
The EU Green Bond Standard: This report recommends a clear and comparable framework for issuing green bonds, following the structure and approach of the Climate Bonds Standard and Green Bond Principles in respect of the 4 pillars of green bonds: Use of Proceeds, Project Evaluation and Selection, Management of Proceeds and Reporting. It refers to the EU Taxonomy as the basis for determining eligible use of proceeds.
The EU climate benchmarks and benchmarks' ESG disclosures sets out the methodology and minimum technical requirements for indices that will enable investors to orient the choice of investors who wish to adopt a climate-conscious investment strategy, and address the risk of greenwashing. It outlines disclosure requirements by benchmark providers in relation to environmental, social and governance (ESG) factors and their alignment with the Paris agreement.
The guidelines are part of the Commission's ongoing efforts to ensure that the financial sector – private capital – can play a critical role in transitioning to a climate-neutral economy and in funding investments at the scale required. They will provide guidance to around 6,000 EU-listed companies, banks and insurance companies that have to disclose non-financial information under the Non-Financial Reporting Directive. They are inspired by recent proposals by the Technical Expert Group on sustainable finance (TEG), and integrate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) established by the G20's Financial Stability Board.
Bioenergy Criteria now available for Certifications
Following approval from the Climate Bonds Standard Board in Q2, we are now certifying Bioenergy assets and projects relating to production of liquid biofuel, solid and gaseous biomass for the purposes of electricity production, transport, heating, cooling and co-generation, as well as heating/cooling, and co-generation plants using biomass, so long as the source feedstock for these facilities is not woody biomass.
Discussions are in the final stages regarding supplementary Criteria for production of electricity from biomass, and the use of woody biomass for all types of bioenergy and biofuels, and we expect to release Criteria relating to these elements of Bioenergy shortly.
Waste Management and Hydropower Criteria out for Public Consultation
The Standards team has released their latest set of Criteria for public consultation, for Waste Management and Hydropower assets and projects. Both sets of Criteria are open for consultation until 2nd August and we welcome your feedback. We expect that the final Criteria with public consultation taken into account will be released for use for Certification before the end of the year.
Other Criteria Updates
The buildings criteria continue to expand – we have published new criteria for residential and commercial buildings in Poland. In Germany, we have developed new city baselines for certifications of commercial buildings. This means that Climate Bonds Certification is now available for green building investments in multiple locations across Europe. Read our latest Low carbon Building Blogs here and here.
The fourth round of TWG and IWG calls is scheduled for July. Discussions have moved on from the scope and trajectory of the criteria and are now focused on developing mitigation criteria and data requirements that are aligned (but also exceed) the IMO’s policy commitments. There has also been discussion about the role of LNG-fuelled ships, and whether vessels that are dedicated solely to transporting fossil fuels should potentially be eligible for Climate Bonds certification. Similarly, we are discussing how to incorporate non-self-propelled assets (such as jack up rigs) which can be used to support the installation of offshore wind turbines.