ri insight green bonds 2014

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GreenBonds:the future ofsustainabilityfinancing

www.responsible-investor.com

In association with:

Lead Sponsor:

OCTOBER 2014www.responsible-investor.com

LEAD SPONSOR:

CO SPONSORS:

CONTRIBUTORS:

IN ASSOCIATION WITH:

1Contents Page


OCTOBER 2014

Bank of America Merrill Lynch: The coming of green bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

TIAA-CREF Asset Management: The future of green bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

SEB: What is a green bond? and why does it work? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

European Investment Bank: Green bonds - the role of public finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Skanska Financial Services: Skanska Green Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

oekom research: Corporate green bonds: challenges for a real contribution to sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Climate Bonds Initiative: How standardization can help ensure that the green bonds market delivers on its potential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Vigeo: Drawing the line: why second party opinion and verification provide an important and useful guiding line for the success of the burgeoning green bond market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Sustainalytics: Key considerations for navigating green bond issuances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

MSCI/Barclays: Catalyzing change Defining a benchmark index for the green bond market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Bloomberg New Energy Finance: Growth of the project bond market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Lnsfrskringar AB: Green bonds are great investments but be aware of green washing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Actiam: The climate bonds market in need of standards maybe even a small range of them? . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

ICMA: The Green Bonds Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Green Bond Underwriter League Tables 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Largest green bond issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Forthcoming RI Insights:

provides in-depth market intelligence for investmentprofessionals who need a comprehensive overview of investor strategies,business activity and regulatory initiatives in the field of responsibleinvestment, ESG and sustainable finance.

Institutional investors around the world are increasingly integrating ESG factors into their fiduciary oversight of assets and their financial strategies in key decision areas such as investment research, risk budgeting, asset allocation, stock selection, mandates and manager monitoring.

is the educational guide which enables those institutional investors to understand how this influences and impacts their business - it gets to the heart of what institutional investment professionals need to know.

is the ideal thought leadership platform for service providers toposition their brand and sustainable investment expertise. Contribute an article towards one of our three forthcoming reports: Emerging Markets, Private Equity, Green Real Estate.

OCTOBER 2014

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The green bonds market has been anincredible success in a short space of time.This is testament, we believe, to three mainfeatures.

The first is the simplicity of the green bondsconcept in hypothecating loans towardsenvironmental or sustainability-orientatedprojects within an existing, highlydeveloped financial market structure.

The second is the ability of the bond markets - and the actors withinthe market - to act as a rapid financing stream when the product isright and the terms even with existing loan paper.

The third, and certainly not the least, is the determination and gusto ofan initially small, but growing band of dedicated supporters - many ofwhom are featured in this publication to promote and drive forwardthat market. One of those is associated with producing this report: theClimate Bonds Initiative (CBI), which has been at the front ofencouraging interest and overseeing environmental quality. The CBIsinvolvement has been especially important in galvanizing supportwithin the responsible investment community that has been amongthe major buyers of green bonds since they first came to market. Thatfinancial backing by responsible investors also needs to be saluted.

On a personal basis, it is particularly satisfying to have tracked thismarket since its inception back in 2007/8 from the beginnings ofResponsible Investor as a publication and to have covered itsemergence from baby to adolescent steps; overcoming initialscepticism from many. The multilateral institutions notably the WorldBank - and the investment banks that have backed the concept withproduct and sales dynamism have been potent in their efforts. As havethe organisations that incubated discussion and development on greenbonds, and the corporate issuers that have deepened the market.

Predictions are that the international green bonds market could rise to

$100bn by the time of next years United Nations conference onclimate change in Paris. Showing that kind of a growth spurt, greenbonds will be firmly on the political agenda of attending governmentsby the time Paris comes around, and support should rise dramatically.If governments step into the green bond space in a big way viaissuance and tax incentives the development possibilities could behuge. Cities and regions are already looking closely at how they canfinance infrastructure such as environmentally friendly transportationvia green bonds.

But, as with all fledgling markets, it takes time to hone the rules,particularly in a hotly debated field such as environmental impact. Thisreport looks at the initiatives that are taking place to put standardsaround green bonds to ensure they dont fall foul of damagingaccusations of greenwashing or opacity, some of which have alreadybeen aired.

Weve tried to make this report as comprehensive as possible, both forreaders who may be relatively new to the asset type, and those whowant to understand where the latest discussions are at on standards,use of proceeds, verification/reporting and public/governmentunderstanding and adoption.

Getting these key, outstanding questions answered and broadlyaccepted will be vital to continued development.

If they are, then all the ingredients are there for a truly influential,environmentally orientated debt market: large developmentorganizations, corporate green bond issuance, keen investors (notablythose with RI/sustainability interest), interest rates akin to traditionalpaper, government interest and green/sustainable credentials!

We hope this report is a valuable snapshot of the rise of green bondsfrom birth to maturity.

Hugh Wheelan, Managing Editor

Response Global Media LtdManaging EditorHugh WheelanTel: +44 (0) 20 3640 9153Email: [email protected]

EditorDaniel Brooksbank, LondonTel: +44 (0) 20 8694 6390Email: [email protected]

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GREENBONDSThe future ofsustainabilityfinancing


In association with:

Lead Sponsor:

Green Bonds: the future of sustainability financing

Green Bonds

Transparency Open communication

Traceability Earmarking of proceeds

Governance Good governance and high standards for projects

Vetting of Green Verification of the Green Framework

Following the key principle of

Simplicity

A concept developed with investors for investors aiming to establish

a transparent and prudent way for mainstream financial mandates to

participate in climate financing.

As the underwriter of the first World Bank Green Bonds in 2008 and

the market leader, SEB is committed to continue our dedicated work

in close cooperation with investors and issuers to obtain:

For further informationseb.se/greenbonds

Bloomberg SRIB

This is for information purposes only

OCTOBER 2014

4


At Bank of America Merrill Lynch, we haveoften said that the environment sits atthe inflection point between business andcorporate social responsibility. It is where therubber hits the road in terms of focusing financeon externalities. For the debt markets, greenbonds are a perfect example of such an inflection point.

In the last six months, we have seen more greenbonds issued than in the previous six years, with morethan $20 billion of new transactions taking place this year.Significant momentum is developing, driven by acombination of overlapping factors that are just beginningto transform the narrative around green investing.

The seeds were sown a few years ago by someleading multilateral development banks, which, to theircredit, wanted to build a market for environmentally

focused bonds. However, it is probablythe human ingredient - the desire tocompete - which has catalyzed thisgrowth. Investors compete to havemore environment social andgovernance (ESG) money undermanagement. Issuers compete to bethe first to market, to highlight andimprove their green credentials, and to

issue larger bonds to fund more green projects. The bankscompete to see who can bring more green bonds tomarket. The race is on.

However, as we round the bend and look down thenext stretch of road, we see a row of hurdles marked withbold lettering asking: What is green? and Who decideswhat is green? As the market continues to grow, we willcontinually seek to address and surmount these hurdles.

Its up to all market players to decide for ourselveshow hard we will train for the race and how muchresearch we will do to understand the nuances of themarket and formulate our own opinions. There is not likelyto ever be a singular green authority given the diversity ofinvestors interested in buying green bonds and the sheerrange of industries with interest in issuing them. Even theorganizations that seek to evaluate greenness are diversein their approach and opinion. But diversity makes aspecies robust; and multiple competing approaches makea market efficient.

Suzanne Buchta, Managing Director, Debt Capital Markets, Bank of America Merrill Lynch

The coming ofgreen bonds...

Even the organizationsthat seek to evaluategreenness are diversein their approach andopinion

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Recognizing the low likelihood that consensus will beachieved regarding which project categories qualify asgreen, but understanding the urgency of mobilizinginvestment dollars towards environmentally sustainableprojects, Bank of America Merrill Lynch and Citi consultedwith numerous European and U.S. investors and priorissuers of green bonds in 2013 and published the GreenBond Framework to provide a roadmap for disclosure andreporting. The Framework, which also includes anappendix of references from contemporary environmentalexperts, provides a platform to overcome the first hurdleof what is green.

Moving forward, with additional input from amultitude of supranationals and extensive help fromCredit Agricole and JPMorgan, the Framework wasrepublished in January 2014 as the Green BondPrinciples, providing potential green bond issuers withfour key pillars to follow. These four pillars describe the

disclosure, internal process and public reporting thatinvestors expect of green bonds. Now fully establishedindustry-wide issuance guidelines, the Green BondPrinciples are rapidly becoming a keyfoundation for the continued growth ofthe market. A current membership bodynow exists with 55 investors, issuers andunderwriters, and 18 observers toprovide feedback on the Principles. TheInternational Capital Markets Association(ICMA) has been named as Secretariatto aggregate feedback for review anddiscussion. We leap another hurdle.

With each barrier surmounted, thesuccess of the green bond marketgathers attention and new voices ask: Is it green? Thisquestion is layered and nuanced. We consider thisquestion in Is it green? Layers 1-5, below.

With each barriersurmounted, thesuccess of the greenbond market gathersattention and newvoices ask: Is itgreen?

Is it green? layer 1:

The issuer has listed several categories of eligible green projects in its pricing supplement.Are all those categories really green?

Ultimately it is the investors decision on whether the categories addressed in the Use of Proceeds are green. Opinionswill likely differ from investment house to investment house. However, given the disclosure in the Use of Proceeds sectionof the bonds official documents, each investing house can read the disclosure and decide for themselves.

For example, the Export-Import Bank of Korea (KEXIM), Iberdrola International B.V. (Iberdrola) and GDF Suez listhydro as a category. All three of these issuers provide optional additional assurance in the form of second-party opinions(KEXIMs from CICERO, Iberdrolas and GDF Suezs from Vigeo). But is large-scale hydro really green? Some greeninvestors would argue that it is; some, that its not. However, thanks to the Use of Proceeds disclosure (Pillar #1 of theGreen Bond Principles), the investor can see hydro as a category and decide for themselves whether to invest.

Another example, U.S.-based Regency Centres Corp lists construction of LEED-certified buildings as a category. Somecommentators have described LEED-certified building construction as pale green for Use of Proceeds even though only40% of new U.S. buildings are built to this energy efficiency and environmental design standard (for shopping centers,that 40% statistic drops even lower, making the hurdle for achieving LEED certification even higher). A number of activegreen-focused investors participated in Regencys recent green bond issue, the first by a US Real Estate Investment Trust(REIT) because they recognized the environmental rigor in the LEED third party standard and this Use of Proceeds,disclosed in the document, satisfied their internal green criteria for investing.

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2007 2008 2009 2010 2011 2012 2013 2014

Corporates FIG SSA

Evolution of the Green Bond Market

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Is it green? Layer 3:

Will the issuer actually report to the public on which projects received the proceeds?

Investors are choosing to target this sector because they want to see that their funds are driving environmental impact.This area is covered by the Pillar 4 of the Green Bond Principles, and most issuers of Use of Proceeds agree at the time ofpricing to provide follow-on reporting either via a section on the issuers website, in its Sustainability Report, or throughan investor newsletter. Some issuers, like the European Investment Bank, the World Bank, the International FinanceCorporation, and Bank of America Corp, have already created sections on their websites to report on the projectsreceiving proceeds from their Green Bonds. Others are likely to follow, but many of the bonds are still too new for thefirst annual reporting anniversary date.


Does the issuer have a second party opinion?

While outside of the four pillars of the Green Bond Principles, second-party opinions are highlighted as a type of optionaladditional assurance. So far, a number of organizations have stepped up to provide second-party opinions. All second-party opinion providers currently deliver their opinion once, before an issuer embarks on a program of issuing greenbonds. To date, they have not provided opinions on a bond-by-bond basis. Consequently, the assurance is less about thegreenness of the individual bonds and the projects that receive funding from those bonds and more about the processthe issuer plans to use to select projects for the specific green categories it has chosen. Sometimes, the second-partyopinion provider also gives an opinion on whether or not those categories are green, dark green, pale green or notgreen. These opinion providers vary significantly in their process and approach, but competing approaches can make fora more robust market and provide investors with additional background on the issuers.


Will the issuer really spend the money on green projects? Are the proceeds really ring-fenced?

The funds received from Use of Proceeds are not ring-fenced, but rather ear-marked; that is, tracked internally on thebooks and records of the issuer. The money is fungible and consequently the focus at the time a green bond is broughtto market is on whether the issuer actually has enough green projects (either recently executed or in the pipeline) toconsume the notional of the bond. The issuer should select projects that fall within the categories specified in the Use ofProceeds and track the proceeds allocated to those projects on their internal books and records: pillars 2 and 3 of theGreen Bond Principles.

To provide additional, but optional, assurance, there is value in corporate green bond issuers providing (or promisingto provide) attestation letters from their auditors to demonstrate that the green bond proceeds have been allocated to thetypes of projects the issuer names in the Use of Proceeds section of the official green bond documents. In addition, at leastone second party opinion provider, DNV GL, provides an attestation of the use of funds. These types of assurance can giveinvestors additional comfort and, in the future, could potentially be used as proof of broader third-party verification.

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2007 2008 2009 2010 2011 2012 2013 2014

Cumulative Total

Outstanding Notional of Green Bonds

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Suzanne Buchta is a Managing Director in Debt Capital Markets and a 14-year veteran at Bank of America Merrill Lynch. AsGlobal Co-Head of Green Bonds and Market Linked Notes, Suzanne's team works across industry lines to advise CapitalMarkets clients on these types of product specific financings.

Suzanne has been active in advising issuers and consulting investors on Green Bonds since 2010. Her team brought thefirst retail Green Bonds in 2011, held extensive dialogues with Green Bonds investors around the globe, and helped to garnermandates for a broad range of key Green Bond issuances.

Suzanne co-authored, with Citi, a White Paper on the Framework for Green Bonds, published in September 2013, whichhas formed the basis for the Green Bond Principles published on January 13, 2014. This paper is quickly becoming arecognized market standard guidance paper for transparency and disclosure for Green Bonds.

In April 2014, Suzanne was a Bloomberg New Energy Finance FiRe Finalist for her intervention on Catapulting GreenBonds from a Niche Market to a Mainstream Market. In May 2014, she spoke on Green Bonds at the UNs Abu DhabiAscent. She has also spoken on Green Bonds at a number of other conferences globally.

Suzanne holds a Masters in Mathematics from UNC Chapel Hill, a Fulbright Fellowship from Melbourne University and aBA from College of the Holy Cross.

The greenness discussion will continue to evolve asthe market expands and as new issuers and new investorsenter the market. So far, we have seen fewer than 45issuers. In addition, the geographic spread of issuers hasso far been limited, with the majority of corporateissuance coming from countries in northern Europe andNorth America. Considering the number of companiesglobally that are members of industry organizations whichpromote environmentally responsible business practices organizations such as the World Council for SustainableBusiness Development or the Global Compact there ispotential for increased corporate issuance.

There is also potential for increased issuance fromemerging markets entities. While most of the largestmultilateral development banks have begun to issue greenbonds, there is scope for green bond issuance from themany regional and national development banks thatoperate locally in the emerging markets and some of thepoorest economies. This could help accelerate capitalinflows to geographies and sectors where it can be difficultto attract direct private sector investment. In addition, theexpansion of credit enhancement and targeted insuranceproducts will also help attract institutional investment intosectors and geographies that currently struggle to raise thefunds needed to accelerate low carbon investment.

The development of green bond structures thatsupport the aggregation of smaller transactions into asset-backed issuance will give investors access to the risk andperformance of the underlying projects. We have alreadyseen the first green shoots of this market with the ToyotaABS transaction a hybrid of a Use of Proceeds greenbond and a true green ABS where the collateral pool iscomprised of all types of auto loans, but the proceeds areto be used for new auto loans to hybrids and other strictly

high gas efficiency vehicles and the SolarCity ABS privateplacement where the collateral pool is comprised strictly ofsolar leases, clearly a green bond even without a secondparty opinion, a specialized use of proceeds or a websitereporting process.

The green bond market is still very young. Ultimately,investors will be the final arbiters of what they considergreen enough for them. But all parties investors, issuers,underwriters, verifiers and other commentators have arole to play in collaboratively developing the structures,frameworks, guidelines, standards and incentives to allowthe market to develop with integrity. The establishment ofthe Green Bond Principles is one of the first steps increating a forum that promotes such collaboration. Its 55Members seem eager to work together to develop areasonable framework that has integrity and openness andthat promotes transparency and disclosure so thatinvestors can decide for themselves if a given bond isgreen enough for their standards. Above all, the GreenBond Principles encourages the sustainable growth of thisnascent but very important market.


Are bonds issued by a pure green company or project or pool of loans automatically green bonds?

The development of the green bond market has the potential to significantly accelerate the flow of investment by pure-play companies and developers into low carbon project finance since it drives investor appetite for this theme. Take, forexample, a solar-lease, asset-backed bond or a project bond to fund transmission lines to connect UK offshore wind tothe UK grid. Consensus would likely point to both projects being considered green. These two examples already exist inthe market and are considered green by most if not all investors. The use of proceeds is obvious, the ear-marking of thefunds is obvious, the project reporting requirement becomes moot and second party opinions were not necessary.

EUR $17.8bn 42%

USD $12.1bn 28%

Other $3.7bn 9%

GBP $1.3bn 3%

SEK $4.7bn 11%

AUD $1.9bn 5%

BRL $1.1bn 3%

Currency Breakdown

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The evolution of the green credit market tooktwo important steps forward with the launchof the World Bank Green Bond programinitially and the more recent development of theGreen Bond Principles. Continued evolution of thePrinciples, which focus primarily on the use ofproceeds to identify and define securities,together with increased transparency aroundreporting requirements, should pave the way foradditional types of securities from more issuers inthe green credit space.

Beyond these advances, there is scope for the greencredit market to expand further, in particular throughother types of issues that support environmentalinitiatives and projects. The optimal outcome for greenbonds will be their integration into the investingmainstream, providing investors with the opportunity tofinance environmental impact by investing across a broadspectrum fixed-income instruments and issuers.

I. Green bond issuance is rapidly expanding Historically, entities have accessed the bond markets tofund the development of new power plants andenvironmental projects. Today, climate change initiativesand legislation are proving to be a driver of public fixed-income issuance, as bonds are particularly well suited toprovide the capital for long-term environmental projects.Initially, the green credit market was limited to certain

geographies, issuers, issue size, and investment types. Butnow investment banks and issuers are using green bondsas a way to diversify their funding sources. These dealsprovide investors the opportunity to fund environmentalsolutions while realizing competitive returns.

The first green bond issued by the World Bank in2008, was driven by investor demand. Subsequentissuance of green bonds was initially the exclusive domainof the multilateral development banks like the World Bankor International Finance Corporation (IFC), but now agrowing variety of issuers are bringing deals to themarket. Within the past 18 months, we have seen anumber of firsts: the first municipal green bond, issued by

Massachusetts the first U.S. corporate green bond from Bank of

America the first asset-backed green bonds from Toyota

Financial Services and Solar City; and leveraged loan green bonds from Ex-Gen Renewables

and TerraForm Power. As of May 2014, green bond issuance exceeded

estimates and, in fact, exceeded total issuance from theprevious five years.

More and varied institutional investors have shown anappetite for green bonds, and issuers and sponsors haveresponded to the opportunity for a new pool of capital.According to Bloomberg New Energy Finance: if current

The future of green bonds

Stephen M. Liberatore, CFAManaging Director, Portfolio Manager,Social Choice Bond Portfolios, TIAA-CREF Asset Managment

Co-authors:Amy Muska OBrien, Managing Director,Head of Responsible Investment, TIAA-CREF Asset ManagmentandChristine Pishko, Director, Client Portfolio Management, TIAA-CREF Asset Managment

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trends are extrapolated for the full year 2014, the globalgreen bond market will be roughly 3.2% of the value theUS corporate bond market, up from 1% in 2013 and0.4% in 2012. 2

II. With such rapid adoption by issuers, theintroduction of guidelines and issuance protocolsare essential to the credibility of a future robustmarket. Recently there has been substantialdevelopment in this area and it continues to evolveand improve. In 2013, the World Bank held a Green Bond Symposium,with the objective of promoting industry dialogue amonginvestors, issuers, and intermediaries to share perspectivesand advance thinking on the evolving green bond market.With so many new participants in this market,establishing guidelines and benchmarks are essential tomaintaining credibility of the green bond designation.Moreover, clearly defined parameters provide guidance to

prospective issuers on thecharacteristics needed to satisfyinvestor demand (e.g., the appropriatelevel and quality of subsequentdisclosure related to the use ofproceeds, projects or securitizations).

In January 2014, a group of fourinvestment banks developed and issuedthe Green Bond Principles, with theobjective of providing clarity on theseissues as well as providing guidelines onpractices and procedures for issuingsecurities to improve overalltransparency for green bonds. Theseprinciples, which are voluntary anddesigned to be industry-wide, includeinput from a variety of stakeholders,including issuers, investors, banks, andother intermediaries. Support of theseprinciples has quickly expanded to 25institutions. The principles encourage aninstitution or sponsor to provide a levelof transparency around the use of abonds proceeds providing an investorthe opportunity to determine if thegreen aspects of the issue are

consistent with their view of green. Specifically, theprinciples define a process for designating, disclosing,managing, and reporting on the proceeds of a green bond.

Despite this progress, the definition of whatconstitutes a green bond is still very broad and largelyundefined. For example, green may refer to a variety ofprojects and initiatives relating to renewable energy,energy efficiency, transport, waste and water reduction,sustainability and adaptation to climate change. But thisis not a comprehensive list. While the Green BondPrinciples provide guidelines for issuers to disclose howthey apply the green criteria, the introduction ofadditional certifications may be beneficial or ultimatelynecessary depending upon the issuer to preserve theintegrity of the green classification. Of particular value,and introduced with the issuance of Bank of Americas

green bond, was the inclusion of an auditing process thatserves as third-party documentation for the use-of-proceeds process. Improved disclosure around howproceeds are utilized, along with subsequent informationon environmental impacts is critical to expanding thescope of the market. In addition to providing investors theability to evaluate the impact of their investments, suchdisclosure provides investors who lack expertise in theenvironment or climate change evidence that theinvestments environmental attributes align with thegreen bond classification system.

Additionally, the convergence of transparencyrequirements should help prevent potential mislabeling ofissues for the purposes of marketing a practice knownas greenwashing which could ultimately harm thevalue and credibility of the classification. The objective isto clarify the definitions and process to be as inclusive aspossible, thereby capturing a broad but appropriate arrayof issuer participants who can contribute to building thescope of the market across the yield curve, sectors,maturities, and credit quality.

III. TIAA-CREF Asset Managements (TCAM) early-market experience with the characterization ofProactive Social Investments both predates thedevelopment of green bonds and expands beyondtheir scope. In 2007, TCAM developed its own proprietary mechanismfor including publicly traded fixed-income instruments thatdirectly support green projects and initiatives. The SocialChoice Bond portfolios seek to identify securities supportingthe development, enhancement, or operations of renewableenergy and environmentally beneficial projects. Investmentsare in issues where the proceeds are directly and measurablytied to socially and/or environmentally beneficial projectssuch as green bonds. The Social Choice Bond portfolioshave invested over $500m to date in issues that meetTCAMs green bond criteria.

TCAMs proprietary term for this category ofinvestments is Proactive Social Investments (PSI). Theseare defined as fixed-income investments that providefunding for organizations or projects with direct andmeasurable social and environmental benefits in additionto competitive risk-adjusted returns. The Social ChoiceBond mandates are focused on four thematic areas ofPSI: affordable housing; community and economicdevelopment; renewable energy and climate change; andnatural resources. Green bond issues, as currentlydefined, typically fall within the renewable energy andclimate change theme, although the PSI NaturalResources category may also apply. The categories aredefined overleaf.1. Renewable energy and climate change: securities that

finance new or expand existing renewable energyprojects (including hydroelectric, solar and wind,geothermal, and energy from waste), smart grid andrelated projects designed to make power generationand transmission systems more efficient, and otherenergy efficiency projects that result in a reduction ofgreenhouse gas emissions.

TIAA-CREF AssetManagement is an earlymarket participant andactive leader in targetingpublic fixed-incomesecurities focused onenvironmental impact,evidenced by ourparticipation on theExecutive Committee for Green Bond Principles,the Ceres Working Groupfor Green Bonds, and ourown innovativeproprietary classificationof Proactive SocialInvestments. This puts usin a unique position tohelp shape the greencredit markets.

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2. Natural resources: investments that support landconservation, sustainable forestry and agriculture,remediation and redevelopment of polluted orcontaminated sites, sustainable waste managementprojects, water infrastructure (including improvementof clean drinking water supplies and/or sewersystems), and sustainable building projects.Currently, the defining characteristics of green bonds

according to the Green Bond Principles are the use of thebonds proceeds. By this definition, there are many moretypes of issues available in the market that supportenvironment and climate change initiatives but currentlylack a green bond label. For example, a corporate bondwhose proceeds support the construction of a solar farm,a CMBS security on a Platinum Leadership in Energy andEnvironmental Design (LEED) office building, and a

municipal security that funds aconservation land trust all support theenvironment. Expanding the definitionof the green credit market to includethese types of issues will provide abroader list of issuers from whichintuitions can choose to include in aportfolio with a green mandate.

As investors increasingly focus onenvironmentally themed mandates, it isessential that the supply of these issueskeeps up with demand. From a

mainstream investors perspective, green bonds should besubject to the same relative value framework as all otherpotential investments. Generating attractive long-termperformance will attract additional capital and allow forthe expansion of environmental investments. A key factorin generating outperformance is establishing and adheringto a robust and dynamic relative value framework.Broadening and diversifying the opportunity set for theseinvestments will help improve liquidity and provideinvestors flexibility to generate outperformance.

Moving forward, issuance of green bonds and thegreen credit market are continuing to evolve and expand,driven largely by investor demand. More issuers, larger and

more liquid opportunities, and expanding opportunitiesacross the yield curve will come to market in the future,facilitated by an acceptance of green guidelines amongissuers. Enhanced reporting requirements and additionaltransparency will be essential both to retaining thecredibility of the green classification and to making themarket accessible to a broader set of fixed-income issuersand investors; an outcome that will be beneficial to all.Disclosures:The material is for informational purposes only and should not be regarded as arecommendation or an offer to buy or sell any product or service to which thisinformation may relate. Certain products and services may not be available to allentities or persons.

TIAA-CREF Asset Management provides investment advice and portfoliomanagement services to the TIAA-CREF group of companies through the followingentities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, TIAA-CREF Alternatives Advisors, LLC and Teachers Insurance and Annuity Association(TIAA). TIAA-CREF Alternatives Advisors, LLC is a registered investment advisorand wholly owned subsidiary of Teachers Insurance and Annuity Association (TIAA).

Please note SRI strategies are subject to social criteria risk, namely the risk thatbecause social criteria excludes securities of certain issuers for nonfinancial reasons,investors may forgo some market opportunities available to those that dont usethese criteria.

Stephen M. Liberatore, CFA is a managing director and fixed-income portfolio manager for the TIAA-CREF organization. Mr. Liberatore is the lead portfolio managerfor the organizations Socially Responsible investment (SRI) fixed income mandates and holds responsibility for investment strategy and securities selection. He joined theTIAA-CREF organization in 2004.

Mr. Liberatore has 18 years of industry experience, including positions at Nationwide Mutual Insurance Co. and Protective Life Corporation, where he was responsiblefor portfolio management, credit research and trading for both total return and liability-driven assets.Mr. Liberatore is considered a subject matter expert on the managementof total return SRI fixed-income portfolios, and he frequently presents at both SRI and fixed-income conferences. His views on developments in these areas have been featuredin numerous industry publications.

Mr. Liberatore is a member of the initial executive committee of the Green Bond Principles and the CERES Green Bond Working Group. Mr. Liberatore holds a B.S. fromthe State University of New York at Buffalo and an MBA in finance and operations from Wake Forest Universitys Babcock Graduate School of Management. He holds theChartered Financial Analyst designation and is a member of the CFA Society North Carolina and the CFA Institute

Amy Muska OBrien is managing director and Head of TIAA-CREFs Responsible Investment team. She provides overall strategic leadership to Asset Management onthe implementation of TIAA-CREFs responsible investment commitments and environmental, social and governance (ESG) approaches, including ESG-focused funds, ESGintegration frameworks across asset classes, and the firms community and impact investing portfolios.

Ms. OBrien joined the firm as a Director in 2005 and has worked on a wide range of ESG and community investing initiatives across TIAA-CREF. Ms. OBrien has 18years of professional experience in the field of socially responsible investing. Prior to joining TIAA-CREF in 2005, Ms. OBrien served as Director of Corporate SocialResponsibility at the Pension Boards - United Church of Christ, where she developed and implemented socially responsible investment strategies. Previously, she was ResearchManager at the Council on Economic Priorities, the non-profit research firm that pioneered the field of corporate social and environmental responsibility ratings for investorsand consumers.

Ms. OBrien earned a B.S. in Biology from Boston College and an M.S. in Environmental Management and Policy from Rensselaer Polytechnic Institute. From 2006-2011she served on the Board of Directors of the Social Investment Forum (SIF), a national nonprofit membership association dedicated to advancing investment practices thatconsider environmental, social and corporate governance criteria. In 2008, Ms. OBrien joined the board of directors of The Investor Responsibility Research Center Institute forCorporate Responsibility (IRRCi), whose mission is to act as a catalyst for thought leaders, and to sponsor research on corporate governance and corporate responsibility. In2011 she was appointed to the Steering Committee of the Global Initiative for Sustainability Ratings. In 2014 she was named to the Principles for Responsible Investment(PRI) Initiatives Reporting and Assessment Steering Committee.

Since inception inSeptember 2012, theSocial Choice BondFund allocation togreen bonds has grownand is expected tocontinue to grow

30%

25%

20%

15%

10%

5%

0%Q3

2012Q4

2012Q1

2013Q2

2013Q3

2013Q4

2013Q1

2014Q2

2014

Growing allocation to green bonds

Total PSI* allocation withinSocial Choice Bond Fund

* Proactive Social Investments (PSI) is a TIAA-CREF proprietary classification of fixed-incomesecurities. The security descriptions included here are for informational, illustrative purposesonly and should not be views as an endorsement or guarantee of performance.

Renewable Energy & Climate Change+ Natural Resources as % of TotalPSI%

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Importantly, this implies that a Green Bond can bebought by any investor with a fiduciary mandate whootherwise would be able to take risk on the issuer. Wherethe Green Bond changes its character from a regularbond is, firstly, in the specification of how the proceedsshall be used - namely for climate related financing and, secondly, in transparency and reporting.

The birth and the growth of the Green Bond markethas, like any other new development, presented anumber of challenges. The single most importantchallenge has been to identify and share the values of aGreen Bond - what purpose does it have and how does itprovide business value for the stakeholders involved? Sohow have we approached that?

In the way we validate mandates and communicateperformance in financial markets we have created asystem where most values are explained by numbers andconsequently performance needs to be quantifiable.However, when we talk about transitions on a largerscale such as finding financial resources to alleviateclimate stress - we need to change the financialinfrastructure and organizations to facilitate thetransition. Organisations need to appreciate the newgoals and the infrastructure needs to be able to identifyand support the new objectives. There are various ways

to do this but the most efficient is to leverage existinginfrastructure.

Hence, the nature of the GreenBond is to enable mainstream fixedincome mandates to engage andaccess climate finance. The strength isthat it is enabling and engagingtraditional bond mandates for climatefinance, and thereby activates newpockets of money for Greeninvestments. So we see the mainpurpose of the Green Bond is to beused as an instrument for businessleaders to transform their organizations to be morecomprehensive and address society challenges throughtheir existing infrastructure.

What is agreen bond?

and why does it work?

The financial principle of a Green Bond is very simple - it is just a bond like any other. Thelender takes the same credit risk on the borrowers repayment capability as in the case of aregular bond and, hence, if the price of the Green Bond is in line with the price where theissuer normally gets their funding, the risk/return will be in line with regular bonds.

Christopher Flensborg, Head of Sustainable Products and Product Development, SEB

the nature of the GreenBond is to enablemainstream fixedincome mandates toengage and accessclimate finance

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The business value is found through theparticipation in this transition, understanding why ithappens and where it goes, identifying systemic andbusiness stress factors and being well prepared for newvaluations.

Theres been a big debate about standards; doesone size fit all, how dynamic shall these standards be,who will decide and what is their credibility andmotivation? And most importantly, why do we need thestandards, what are they good for? Lets start with thelast question since it will be difficult to create standardswithout a defined goal.

When looking at standards the key element will beframing the market in respect to rules and procedures.When that is done, various stakeholder groups can use

these frameworks to create their ownuniverse of Green Bonds. Some will bevery green, some will be light green,some will target mainstreammandates, some will target dedicatedGreen mandates. There will, like in allother markets, be a mainstreamsolution and a specialist solution, eachwith their own requirements.

The first step towards creatingthese rules and procedures has alreadybeen taken in the form of the GreenBond Principles which were created by13 banks of which SEB was one, inJanuary this year. The Green Bond

Principles create a common starting point and this willcontinuously be supervised and followed up by theGreen Bond Principle Governance and the secretariatoperated by the International Capital MarketsAssociation, ICMA. This initiative has the potential tocreate and lead the market development of rules andprocedures for Green Bonds.

The privileges we have through our work withvarious blue chip organizations have taught us that thechallenges are not alike. For instance, in Germanyinstitutions like KfW work on multiple tasks to addressclimate protection and the energy transition, in HollandNWB and the water authorities work on managing waterlevels. In Africa, Korea, Canada, Norway and many otherplaces, regional leaders like AfDB, KEXIM, EDC and KBNwork with their individual challenges and on a globallevel the UN and the World Bank Group work in an everchanging environment to aggregate knowledge and tofind and share solutions to climate stress. So, no, onesize doesn't fit all!!

Another important issue is that of what is Green andhow do we define the assets that can be financed byGreen Bonds? Is it up to banks and bureaucrats todefine, is it a business decision or do we need to go toacademia and Non-Governmental Organizations for ananswer? In our opinion, this is a very simple question - itis up to the investor to decide!

However, we need to assess how we - as a serviceinstitution - provide a product which is not only suitablebut also valuable for our investors.

Furthermore, a scalable, uniform, broadly labelledsystemized categorization of Green is required to allowinvestors to create their own strategiesand for the broader financial servicessector to provide solutions.

Normally, this is done throughindexes but these indexes need to bebacked by sufficient volume and aspecification of what is included. Indexes are slowly appearing. The WorldBank is doing a tremendous job inguiding the market, leveraging theirinfrastructure and long experience inmarket development. Also, pioneers likeSEB and CICERO (the Norwegian climatescience organization who is theinstitution that has verified most Green Bond issuersGreen bond frameworks) are working to create a globalnetwork of academic institutions; there are already

a scalable, uniform,broadly labelledsystemizedcategorization of Green is required toallow investors tocreate their ownstrategies

The Green BondPrinciples create acommon starting pointand this willcontinuously besupervised and followedup by the Green BondPrinciple Governance

Howgreen is yourbond?Christa Clapp, CICERO

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universities from Europe, NorthAmerica and Asia in the network.

By developing this platform, wehope to be able to create acomprehensive database which willenable stakeholders to use the rulesand procedures from the Green BondPrinciples, the guidance of the WorldBank and the context of the databaseto create an individual Green universereflecting their specific ambitions,

whether via an index or through a tailored model.Lastly, we have started a close cooperation with

HSBC on a joint terminology for determining how tovalidate and guide new strategies and we invite otherbanks to join in the dialogue.

We think this is a crucial next step in thedevelopment of the Green Bond market. We think it isnot only good business but also a way for us and ourpartners to drive the financial world towards bettersolutions and provide clarity for all to develop andimplement green strategies.

Christopher Flensborg has been active in the financial market since 1988 and is one of the key founders of the Green Bondmarket. Over the last years Christopher has been active in advising a number of financial investors, financial borrowers,governments, international institutions and NGOs on how mainstream money mandates can be activated towards climateinvestments. Christopher Flensborg was awarded personality of the year by the Environmental Finance magazine in 2012and has been invited as key note speaker for a number of sessions on climate finance. Christopher is employed by the Swedishbank SEB where he heads the Sustainable Products and Product Development unit.

we have started a closecooperation with HSBCon a joint terminologyfor determining how tovalidate and guide newstrategies and we inviteother banks to join inthe dialogue

With the onset of green bonds, investors have theopportunity to support a low-carbon and climate-resilient future. To date, only a fraction of a percent ofthe global bond market could be considered green but if this portion continues to grow, investments inlow-carbon infrastructure can facilitate the economicrestructuring necessary to meet a 2C climate changetarget.

Green bonds are a promising new trend in the bondmarket but the environmental foundation needs to be solidfor the market to realize its full potential. The most criticalchallenge that the growing green bonds market faces isenvironmental integrity.

The financial community is becoming more aware ofenvironmental risks to their investments. Climate change drivesmore extreme weather patterns and events that can pose aphysical risk to assets (e.g. water stress can negatively impactinfrastructure projects). Investors also face an additional policyrisk: impending climate policy could eventually result instranded assets that support fossil fuel infrastructure. Bothphysical and policy risks can translate into real economicimpacts on investments.

Investors should have a full understanding of the potentialenvironmental impacts and risks on their investments. Thisbecomes even more important as the green bond marketshifts towards corporate issuers. Understanding thegreenness of a bond goes beyond transparency on whatproject types a bond invests in, to disclosure of environmentalrisks of investments. The possibility of a headline risk from alarge negative environmental impact or disaster poses a risk ofshare price losses to issuers and investors.

Independent environmental reviews of green bondsprovide the necessary due diligence for investors tounderstand the environmental impacts of their financialdecisions. The Green Bond Principles, developed by a

consortium of investment banks, also note that theenvironmental integrity of investments is enhanced by externalexpert reviews.

As an independent, not-for-profit research institute,CICERO provides environmental reviews (called secondopinions) on green bond investment frameworks by applyinghigh-quality climate change research and expertise. Ourresearchers review the issuing institutions' frameworks foreligible project selection and assess the frameworksrobustness in meeting the green bonds environmentalobjectives. In doing so, we emphasise avoiding lock-ins andlong-term irreversible damage to the climate. We alsoemphasise the need for transparent and regular reporting onimpacts of green bond projects to investors.

CICERO has been the leading market provider of greenbond second opinions since the markets inception in 2007,but we recognize the need to scale-up and broaden ourgeographical reach as the market evolves. CICERO recentlyestablished the Expert Network on Second Opinions (ENSO), aglobal network of trusted research institutions on climatechange and other environmental issues, covering a range oftechnical expertise and regional experience. Building on thetrusted CICERO approach, ENSO will offer a one-stop windowfor second opinions to the financial market operatingindependently from the financial sector and other stakeholdersto preserve the unbiased nature and high quality of secondopinions.

As climate change impacts become a reality, andtransparency on environmental impacts increases, investorsshould look for independent reviews as a sign ofenvironmental due diligence on green bonds. Investors needfull disclosure of risk before they can make informedinvestment decisions. As the market continues to grow andevolve, both investors and the environment would benefitfrom a standard practice to ensure the greenness of bonds.

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Green bond market origins supranationalcatalysts and benchmarksThe inception of an active green bond market wascatalyzed by multilateral development banks (MDBs).They were responding to climate policy imperatives andthe need to scale up market involvement. Financing forclimate action projects was gaining momentum, but the

shortage of market financing for theenormous global climate challenge ledMDBs to promote capital marketsolutions and awareness.

The EIB is particularly attentive tothe meaning of public policies forcapital markets. When in March 2007the EU-Council adopted an ambitiousAction Plan for a sustainable integratedEuropean climate and energy policy,EIB was already working on a greenbond pilot.

In July 2007, EIB launched themarkets first green bond with

transparent use of proceeds, including audited reporting.It was branded a Climate Awareness Bond (CAB). Atthe time EIB explained: The EU has taken a leading rolein tackling climate change. With this bond EIB is invitinginvestors and the banking community to join thatendeavour, further highlighting EIBs commitment topromoting EU objectives.

As the green bond market took shape, public sectorissuers set the pace. However, for roughly five yearsfollowing EIBs initial issue in 2007, during the depths ofthe financial crisis, the market was limited. Issuance wasdominated by small transactions in niche currencies bymultilateral development banks. Nonetheless, publicsector issuers used this time to develop and raiseawareness about standards.

Public sector issuers developed the popularity of ameanwhile familiar green bond model, with clearsegregation of funds and transparent reporting on use ofproceeds for green investment. As such, they werepioneers of accountability. This helped to address duediligence requirements of investors and generally cementconfidence in a fledgling market.

As advocates and users of high and transparentenvironmental standards, leading supranational banks,agencies and other public institutions were in a positionto provide a credible reference point for the market.

Investors were informed by their experience of SRI inequities. This led some investors to also take intoconsideration the overall environmental,and potentially also social andgovernance credentials of issuers, whenconsidering an investment. Public sectorissuers offered high standards in theseareas, including the focal area ofenvironment. As the EUs bank, the EIBproactively adheres to EU environmentalregulations, applying environmental considerations to allits projects, not only environmentally focused projects.

The public financial institutions continue to innovateand set precedents. EIB has shown leadership byincorporating an economic price of carbon, and one thatincentivizes green investments, into the assessment of itsprojects.

More recently public finance has added value formarket development by helping generate critical mass ingreen bond deal-flow, including delivery of liquidity.Together with the provision of models for transparencyand integrity, public sector issuers have helped give theGreen Bond market the strong momentum and positivenarrative that it now enjoys. This narrative presentsclimate solutions as established investment opportunities.

Greenbonds - the role ofpublic finance

Bertrand de Mazires, Director General,Finance, European Investment Bank

The EU has taken aleading role in tackling climatechange. With this bond EIB is invitinginvestors and thebanking community to join that endeavour . . .

As the EUs bank, theEIB proactively adheresto EU environmentalregulations

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Climate change - a defining challenge The most prominent global environmental challenge ofour time is climate change. Energy-related emissions are acentral driver of global warming, and so a key focus ofclimate action. This has been reflected in the dominanceof energy-related climate investments as beneficiaries of

green bond issuance. For EIB, climateaction projects in renewable energy andenergy efficiency have been theexclusive beneficiaries of proceeds fromEIB Climate Awareness Bonds.

It remains a significant challenge tosecure an adequate and equitabledistribution of efforts to meet theglobal emission pathway to a 2Cscenario. To have an 80 percent chanceof maintaining this 2C limit, the IEAestimates1 an additional $36 trillion in

clean energy investment is needed through 2050 or anaverage of $1 trillion more per year compared to abusiness as usual scenario over the next 36 years.

Given the huge additional volumes required, it is clearthat mobilisation of long-term capital at scale is going todepend on engaging institutional investors, who betweenthem own a pool of capital estimated at USD80 trillion.Institutional investors have, relative to their size, hadlimited exposure to low carbon assets. Green bonds arean essential tool in furthering their involvement.

In geographic terms, the European Commissionrecently argued that: we will need to move beyond the North-South paradigm, reflecting the world in the1990s, towards one based on mutual interdependenceand shared responsibility2. Any suitable climateagreement at the UNFCCC conference in Paris inDecember 2015 will need to attractparticipation from all major economies.

Furthermore, engaging the privatesector is a precondition for the requiredscale of mitigation investment publicmoney alone is far from sufficient. Publicfinanciers such as EIB can add value byhelping to bridge financing gaps andattracting other investors to strategicallyimportant areas.

The EIB therefore promotes low-carbon and climate resilient growthequally inside and outside the EU, and supports both thepublic and private sectors in achieving their climate goals.The EIBs lending and technical advisory services arehelping to bridge financing gaps and attract otherinvestors to strategically important sectors such asinfrastructure development, innovation and small andmedium-sized enterprises. EIBs active role in the greenbond market underlines the engagement with the crucialinstitutional investor audience.

the IEA estimates anadditional $36 trillionin clean energyinvestment is neededthrough 2050 or anaverage of $1 trillionmore per year

The European Investment Bank is committed to supporting long-term investmentthat reduces carbon emissions and improves the environment. The EU bank has aunique experience of evaluating and financing green investment both acrossEurope and around the world that benefits projects we work with. We recognise the strong investor interest in our Climate Awareness Bonds andlook forward to further developing the instrument to allow investors targetedinvestment in climate related projects.

Jonathan Taylor, European Investment Bank Vice PresidentResponsible for Environment and Climate Action

An important indicator of progress in climate finance isthe volume of clean energy investment. This has declined globally by 20% over the last two years.This underlines the need for concerted action.

Source: Bloomberg New Energy Finance

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$55bn$80bn

$116bn

$167bn

$195bn $196bn

$262bn

$318bn

$289bn

$245bn

46%

45%

44%

17%0.6%

34%

21%-9%

-12%

Clean Energy Investments 2004-2013

engaging the privatesector is a preconditionfor the required scaleof mitigationinvestment publicmoney alone is far from sufficient

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State of the market focus on public sector issuersThe green bond market started gaining substantialtraction in 2013, as a range of sizeable institutionalinvestors started voicing the need for liquidity in thesegment.

Growth was driven by landmark issuance in 2013 bythe IFC ($1bn) and EIB (EUR 650m, later increased to EUR2.6bn, making it the largest bond in the market at endH1 2014). The first large corporate green bond also camein 2013 from EDF, for EUR 1.4bn. This piqued the interestof issuers, underwriters and investors interested inbenchmark sized product.

The Green Bonds market had $35.8bn outstanding inmid-2014 (10 June), with issuance burgeoning in 2013($11bn) and 2014 ($18.3bn). So, issuance in just 18months accounted for over 80% of the totaloutstandings. (source: Climate Bond Initiative).

Since the first green bond issue back in 2007, thepublic sector, notably the supranationals, led the segmentin terms of volume through 2013. That changed this year -private sector borrowers currently account for around halfof the market, mostly thanks to the surge in corporateissuance. The growth in issuance by other players in 2013-14 has leveraged models for use of proceeds andreporting that supranationals helped to popularize.

To date, public sector environmental-themed bondissuance has reached almost USD27bn3, ranging across

the supranational, agency and local authority bonds. Sofar, supras, with over USD 20bn, have accounted for thebulk of public sector environmental-themed bondissuance. Supranational issuance typically accounted forover half the markets annual flows until last year. EIB,IBRD and IFC have been the largest public issuers. EIBaccounts for over 35% of total supraissuance and has been the marketslargest issuer in H1 2014.

2013 and 2014 saw the issuance ofgreen city and muni bonds, as well ascorporates. These are important area for future growth. Cities and sub-sovereign entities (also in emergingmarkets) raise finance to meet climateinfrastructure requirements. In thecorporate space, as reported byBloomberg Energy Finance, over USD9.7bn has been issued until June 2014,by 12 entities in Europe and the UnitedStates, including a EUR 2.5bn placed in 2 tranches by GDF Suez.Three government authorities first came tothe market in 2013: City of Gothenburg in Sweden,together with two regional German banks. The secondbond by Ile de France - governing authority of Paris and its environs - came in April 2014. This year other entrants include, the County of Stockholm and City of Johannesburg.

Agency 15%

Supra 77%Local authority 8%

Public sector environmental-themedbond issuance Total: USD 27bn*

*Source: Crdit Agricole, as of 8th July 2014

to date, public sectorenvironmental-themedbond issuance hasreached almostUSD27bn, rangingacross the supranational,agency and localauthority bonds

NGO opinion: The public sector has three key roles in the green bond market (Climate Bond Initiative)

Kick-starting markets with cornerstone issuance, for example through development banks.

Risk-bridging activities: Given the novelty, scale and policy risk involved in growing low-carbon solutions,public sector support is needed to lift investment ratings to levels that are attractive to investors. This willinclude guarantees, credit enhancement, subsidies and tax incentives.

Planning and regulatory steps are required to support the generation of investment opportunities. Mostinvestment will depend on enabling and supportive policy and regulation ranging from energy marketmanagement to financial regulation.

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Market outlook public sector angleMarket momentum is now considerable. While theprivate sector has rightfully started to lead in terms ofvolume, public sector issuers retain a significant role inthis segment - promoting high standards of integrity andtransparency; augmenting liquidity; as well as raising

awareness among market participants.An important challenge will be to

maintain quality and investorconfidence. A useful step forward inthis regard, was the publication in early2014 of the Green Bond Principles(GBPs), founded by a group ofinvestment banks in collaboration withother market participants, includingEIB. This has provided a governanceplatform, helping to bring clarity onthe types of product and practicefinding acceptance in the market, whilesupporting quality and integrity.Founding members of the ExecutiveCommittee leading the application ofthe GBPs include public sector issuers,

such as EIB, underlining the public sectors continuedcommitment to the development of the market.

A series of factors are likely to make issuers overallenvironmental credentials increasingly important. Certaininvestors are looking not only at the green credentials ofprojects linked to a green bond, but also placingincreased emphasis on overall environmental credentialsof the issuer. This is in part driven by concerns aboutreputational risk. Also, following the example offered byequities, some market participants look for ways to assessthe relative green merits of generic bonds, by assessingthe environmental merits of issuers. This has the merit ofgreatly widening the range of available investments, evenif it does not guarantee proceeds used purely for greenpurposes. Also, some issuers may eventually run short ofgreen assets against which to issue green bonds, or prefernot to segregate assets for ALM reasons leading issuersto promote the environmental merits of their standardbonds. However, obtaining adequate environmentalinformation on the issuer universe, and being able tomake relative judgments, is not yet straightforward.

Greater standardization and quality of reporting is aparticular challenge, and in this regard, multilateraldevelopment banks have been working on a climatefinance tracking methodology. However, the green bondmarket is still in the foothills, and for the market overall(and also EIB) there seems to be no shortage of greenassets to underpin green bond issuance.

Assets behind green bonds public climate finance Public sector players can be vital for meeting financinggaps or for providing credit enhancement, so as to liftproject quality to a level that other investors canaccommodate. They can also deliver exceptionally longtenors. Nonetheless, public financial firepower is finite, andpublic sector banks find ways of addingvalue in climate projects that are notsimply a matter of financial muscle.

Certain development banks havebuilt a reputation for high qualityfinancial and environmental duediligence, which may not be readilyreplicated in the private sector. Similarly,public banks knowledge of the policyand regulatory framework and goodrelations with public authorities can addvalue.

Public actors combination ofenvironmental and financing capacityhas often been a crucial trigger forothers to come onboard. It is especiallytrue for more challenging or cutting edge demonstrationprojects. In addition, development banks have beenamong those demonstrating how best to mainstreamclimate action into all business.

Case study EIBs Climate Action As the EU bank, the European Investment Bank (EIB) hasput climate action at the top of its agenda. Fightingclimate change is a transversal policy goal of the EIB aspart of its support for sustainable development. In doingso, EIB fosters growth, employment and competitiveness,in a way that promotes economic and social cohesion.

Among MDBs, EIB is the largest provider of climate

A useful step forwardin this regard, was thepublication in early2014 of the GreenBond Principles (GBPs), founded by a group of investmentbanks in collaborationwith other marketparticipants, including EIB

Among multilateraldevelopment banks, EIBis the largest providerof climate finance, . . .It has financed low-carbon and climate-resilient growth in over160 countries aroundthe world, includingemerging anddeveloping regions.

EIB builds out green bond yield curve

The meaningful development of the Green Bond market requires the build-up of a reference curve and thediversification of the investor base. In EUR, EIBs green benchmarks are issued in ECoop format, whichforesees a size of at least EUR 500m and EUR 250m minimum re-openings upon actual demand.In July 2013, EIB launched a EUR 650m ECoop CAB due 11/2019. Meanwhile increased to EUR 2.6bn, thisissue is currently the largest Green Bond outstanding in any currency. In September 2014, EIB created a second reference on its curve with a EUR 500m CAB due November2026. The issue is the first to extend the benchmark approach to maturities beyond ten years, in line withthe duration of the eligible Renewable Energy and Energy Efficiency projects. In spite of the low level of interest rates, the bond generated strong demand from a range of Europeaninvestors genuinely interested in the socially responsible features of the transaction. Fund managersaccounted for over 63% of distribution.

Eila Kreivi, Head of Capital Markets Department at the EIB, commented: The CAB 2026, which has brought total CAB issuance toover EUR 6bn ahead of the UNSG Climate Summit, will be increased strategically to meet actual investor demand.

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finance, lending EUR19bn in 2013, exceeding the targetof 25% of annual lending. It has financed low-carbon andclimate-resilient growth in over 160 countries around theworld, including emerging and developing regions.

EIB encourages others to match its long-terminvestment on average EIB finances around a third ofeach of its projects, although for climate action the EIBshare can go higher, in more challenging cases. Buildingon over fifty years experience and know-how, the Bankcomplements traditional lending with innovative financialproducts and a range of technical assistance tools. It also

leverages its impact by blending with public funds. The Bank has introduced a clear set of definitions as

to which projects could be recorded against the target.This covers both projects designed to avoid greenhousegas emissions (mitigation) as well as to increase theresilience of projects to climate change (adaptation).

A very significant part of the Banks activity involvesthe direct creation of long-term tangible assets in capitalintensive parts of the economy (energy, transport,industry) or R&D and innovation that will shape futureasset creation.

Examples of Innovative climate finance from EIB

Equity funds. The investments in equity funds are an efficient use of EIB capital through a catalytic effect. An EIB investmenttypically provides a "seal of approval" and helps the manager to raise additional public and private capital. To date, EIB hasinvested more than EUR 500m in 19 climate-related infrastructure funds in a diverse range of sectors including renewableenergy, energy efficiency, forestry, land decontamination and biodiversity. The total commitment to these funds is EUR 4bn.This represents a catalytic effect for the EIB investment of 6.5x. The multiplier effect, which is the ratio of total investmentsupported at final project level to the EIBs commitment, is 26.1x or more than EUR 13bn.

Layered risk funds. Layered-risk funds allow the issuance of different tranches of capital in the form of shares and notes tooffer investors different risk-return profiles, via a public-private partnership. Typically, the EIB acts as a cornerstone investorand sponsor, and structures the fund around public resources targeting a specific policy outcome, such as extending financialcoverage to new and/or under-banked markets, or to demonstrate innovative financial structures. For example, GGF is thefirst specialised fund to advance energy efficiency and renewable energy in South-Eastern Europe and EasternNeighbourhood regions. Initiated by the EIB and KfW Entwicklungsbank, GGF was established to reduce energy consumptionand CO2 emissions.

Credit enhancement. To address the need for investment in large EU infrastructure projects, the Project Bond Initiative aimsto provide partial credit enhancement to projects in order to attract capital market investors. It is based on a risk-sharingprogramme with the EC, which provides a first loss piece. A climate-relevant example is the support for the UK offshoretransmission link to the Greater Gabbard wind farm, where the credit enhancement lifted the rating to A3, making itattractive to a wider range of institutional investors.

1 International Energy Agency (IEA), Energy Technology Perspectives 2012: Pathways to a Clean Energy System, (Paris: OECD/IEA, 2012), 1,http://www.iea.org/Textbase/npsum/ETP2012SUM.pdf

2 European Commission: The 2015 International Climate Change Agreement: Shaping international climate policy beyond 2020. Consultative Communication3 Source: market data collected by Credit Agricole, as of 8 July 2014

After earning degrees in business (Ecole des Hautes Etudes Commerciales 1978) and in law (Universit de Paris 1979),Bertrand de Mazires joined the French Treasury on graduating from lEcole Nationale dAdministration in 1982. He wasFinancial Attach at the French Embassy in Washington from 1986 to 1988, Head of the banking division at the Treasuryfrom 1989 to 1993 and Deputy Secretary for debt and development from 1993 to 1996. In this latter capacity he was Vice-President of the Paris Club in charge of negotiating the restructuring of sovereign debt from 1993 to 1996.

Bertrand de Mazires was nominated General Secretary and Chief of staff of the Conseil des Marchs Financiers CMF inOctober 1996, when the CMF was founded as the regulatory agency responsible for the good conduct and theprofessional standards of the French investment services providers, for the supervision of both regulated and off-marketoperations in France, and for the authorisation of tender offers. He held this office until CMF and another regulatoryagency, the Commission des Oprations de Bourse COB, were merged into the Autorit des Marchs Financiers AMF inNovember 2003. In December 2003, he was appointed Chief Executive of Agence France Trsor, the division of the Ministryof Economy and Finance responsible for the management of the debt and treasury of the French Republic. He held thispost until August 2006 when he left to join the European Investment Bank as its Director General for Finance. In June2007, he was also elected President of AMTE (Euro Debt Market Association).

Bertrand de Mazires is married to an English wife. They have three children and live in Luxembourg.

Jonathan Taylor has been a Vice President of the European Investment Bank since January 2013. He is a member of theEIBs Management Committee which draws up the Bank's financial and lending policies, oversees its day-to-day business,and takes collective responsibility for the Banks performance.

Mr Taylor has particular responsibility for the Banks activities in Denmark, Finland, Ireland, Sweden, and the UnitedKingdom. He also leads the Banks work in climate action, and in other environmental lending policies. Internally, he isresponsible for a range of control functions, such as audit, compliance and related issues.

Mr Taylor was previously Director General of Financial Services and Stability at HM Treasury (the UK Finance Ministry).He has held a range of posts in both the private and public sectors. He is a graduate of the University of Oxford, inPhilosophy, Politics and Economics.

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SkanskaGreenBond

In April 2014, Skanska issued its first Green Bond,SEK850m (92.3m) with a five-year term. SEBacted as arranger. The bonds were issued underthe Skanska Financial Services Medium Term Noteprogram.

Skanska is one of the worlds leading constructiongroups with expertise in construction, development ofcommercial and residential projects and public-privatepartnerships. The company carries out all aspects of the

construction, development andinfrastructure process. It also aims toconduct business with respect toethics and sustainable development.

Buildings consume around 40% ofprimary energy consumption in mostInternational Energy Agency (IEA)member countries (IEA/UNDevelopment Programme, 2011).Energy efficiency improvements inbuildings are therefore necessary toreduce energy consumption and CO2exhaustion globally.

Sustainability is key to everythingSkanska does, and as a business it isstriving to reach a point whereconsiderations of economic,

environmental and social impacts underpin all itsoperations and customer offerings.

Financing considerations:The Skanska Group is to a certain degree financing itsdevelopment of commercial real estate through corporatebonds. Practically all the commercial projects of Skanskaare green and developed according to high standards with

regards to sustainability aspects such as energy efficiency.We see a growing demand from our clients to invest

in green projects. At the same time, pension funds andother institutional investors are increasingly demandinginvestment alternatives with a focus on environment andsustainability.

Against that backdrop, we found the developingGreen Bond market perfectly aligned with the Groupssustainability agenda. By tapping the Green Bond marketwe reach a broader investor-base, enabling us to grow ourgreen business. At the same time we offer the investorcommunity the possibility to allocate funds to truly greeninvestments.

The process leading to the first Green Bond Issuecontained some necessary activities

Establish a Green Bond framework addressingprimarily: Eligible project criteria:

- Projects are selected by Skanskas Green BusinessOfficer together with Skanska Financial Services.

- The projects financed should be certified or pre-certified by either of the following two greenbuilding certification-programs:- LEED -minimum level: Gold- BREEAM -minimum level: Very good

and use 25% less energy than required by applicable codesand regulations Transparency. To enable investors to follow projects.

Investor reporting available on Skanskas web pageincluding:- A list of projects financed- A selection of project examples - A link to the Skanska Group sustainability report.

Sustainability is key to everything Skanska does, and as a businessit is striving to reach a point whereconsiderations ofeconomic, environmentaland social impactsunderpin all itsoperations and customer offerings

Par Lageryd, Head of Treasury,Skanska Financial Services

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The investor report will be updated semi-annually. Designate a special account that will support

Skanskas lending for eligible projects- The proceeds from the SEK 850m bond were

credited to an account earmarked for SkanskaCommercial Development Nordic whose officeprojects all are eligible for Green Bond funding.

Obtain a second opinion: The Second Opinion is based on documentation of

rules and frameworks regarding the Energy andCarbon aspects of the Groups sustainability agenda

In cooperation with SEB we acquired a second opinionfrom CICERO, an independent research centreassociated with the University of Oslo.

During the process of obtaining the second opinion,Skanskas Green Business officer and the Groups headof Sustainability and Green Support providedinformation and discussed the Energy and Carbonaspects of Skanskas sustainability agenda withCICEROs researchers.

* The Second Opinion is now available on Skanskas webpage.

Findings:When the bond was launched, we saw that it attracted afair amount of attention and the issue was oversubscribedeven though we increased the amount to meet investordemands.

To our understanding, approximately 60% of demandcame from dedicated SRI funds of which some came from

investors that had previously invested in Skanska bondsthrough their ordinary funds.

As an unrated borrower, we also observed thatinvestors that traditionally require an official credit ratingwere able to make an exception to that rule wheninvesting in green.

With regards to pricing, we probably issued the bondsat a few basis points tighter than should we have issuedan ordinary bond. The likely reason for that is that investordemand for Green Bonds is growing faster than supply.

In the longer term perspective, there are variousreasons to whether or not Green Bonds would tradetighter than ordinary bonds

One way of seeing this is that as much as we as aborrower might like to be rewarded for borrowing moneyfor a good cause, the same is true for the investors forproviding the funds.

On the other hand, if you take into consideration thevalue persistence and profitability in the financed item, inthis case commercial real estate, we can already see thatgreen projects generally have lower vacancies, strongervalue-growth and generates higher rent levels comparedto traditional buildings.

Clearly one could argue that this should be reflected ina tighter credit spread.

Going forward, we are likely to continue issuing GreenBonds. There are enough projects developed by Skanska,eligible for Green Bond funding, to meet a substantial partof our total funding needs. This way we will broaden ourinvestor base since our traditional investors as well as thegreen accounts will be able to invest.

Buildings consume around 40% of primary energy consumption in most International Energy Agency (IEA) member countries

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The market for green bonds or sustainabilitybonds is still in its infancy, having beeninitiated by the European Investment Bank in2007. Today, the market stands at $35.8bnoutstanding (as of 10 June 2014), with issuances in2013 ($11bn) and 2014 ($18.3bn) accounting forover 80% of the total outstanding. Experts predictthis number to at least double, or even triple, in2014. During the first four years of its existence, thegreen bond market was dominated by a fewmultilateral institutions and development bankssuch as the World Bank, the European InvestmentBank, or the European Bank for Reconstruction andDevelopment. Corporate issuers have only recentlyentered the market, but have contributed in animpressive way to its exponential growth.Companies seem to have understood that suchissuances can help them to diversify their investorbase and more specifically address SRI investors.

Corporate issuances: a novelty in the green bond market Since Frances Air Liquide launched its social bond inOctober 2012, twenty-five corporate green orsustainability themed bonds (See Table 1) have been

issued, together amounting to over 11bn. Nineteen ofthese were issued until early September 2014, against onlyfive being issued in 2013 and only one in 2012 (see Figure1). This illustrates the acceleration of green bond issuanceswe are witnessing in 2014. If today corporate green bondsare still only a drop in the enormous global bond marketocean (estimated at $49tr in 2013 by IOSCO), they areexpected to represent 10 to 15% of that market by 2020,according to the Swedish bank SEB.

Corporategreen bonds: challenges for a real contribution to sustainability

Julia Haake, Director of the Paris office, oekom research

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18

16

14

12

10

8

6

4

2

01 0.5

5

2.0

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8.5

2012 2013 2014

Number of GB Amount (bn)

Figure 1: Growth of Green and SustainabilityCorporate Bonds 2012-2014

Figure 2: Geographical Origin of Corporate Green and Sustainability Bonds

USA 20%

Sweden 28%

Spain 4%

France 16%

Italy 4%

Canada 4%

UK 12%

Japan 4%

Taiwan 4%China 4%

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Average issuance size of these twenty-five bondshas been approximately 440m (402m in 2013 onaverage and 447m in 2014). However, issuance sizeranges from very small amounts like that of the Swedishcompany Rikshem in March 2014 (10.8m) up to largeones like the two massive French issuances, by EDF inlate 2013 (1.4bn) and GDF-Suez in May 2014(2.5bn), or that of Toyota in March 2014 (1.3bn).

Also, in addition to the increase in the number ofissuances, the corporate green bond market hasextended geographically (see Figure 2). While at firstcorporate green bonds came exclusively from WesternEurope (36%), Scandinavia (28%) and North America(24%), Asian investors have been taking a strongerinterest lately, with the example of the recent issuancesby Chinese corporation CGN Wind in June 2014 andTaiwanese corporation ASE in July 2014.

Corporate green bonds: a chance forclimate change and sustainability!The rapid development of a corporate green bondmarket will make many environmentalists hopeful thatthis new source of financing strengthens internationalefforts to fight climate change. This fits well with thecall by experts and institutions such as the OECD to shiftfrom fossil fuel intensive investments to renewableenergies and other infrastructures allowing for lowcarbon economic development. Over $1trn will beneeded annually in addition to the already invested$2trn in order for the 2C climate goal to be achieved.

So far, investors seem to have taken a liking forgreen bond issuances. Although it is not alwaysspecified whether a green bond was oversubscribed, thisoften appears to be the case. For instance, the recentgreen bond issued by Taiwanese ASE was six timesoversubscribed, whilst the one of GDF Suez in 2014 wasthree times oversubscribed. Similar to the issuers, investorshave overwhelmingly come from Western Europe,

Scandinavia and North America.Furthermore, they have predominantlybeen institutional investors with around60% being SRI investors. Green bondsoffer a way for issuers to diversify theirpool of investors and attract new ones.For example, in March 2014, half of thebuyers of Swedish Vasakronans greenbond were thought to be new investors.

The interest in green bonds isgrowing especially among responsibleinvestors, who seem to welcome this

new asset class. From a risk perspective, green bondsrepresent another opportunity in the less risky bond marketas compared to equity. And, with the bonds remaining onthe balance sheet of the issuer and thus allowing investors

ri insight green bonds 2014

Documents

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green bondsconcept

green bonds principles

corporate green bonds

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burgeoning green bond

comthe green bonds market

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