Sustainable Financing NewsletterEdition 5 – August 2017

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News RoundupRising Volumes

Volumes in the global green bond market continued to make promising progress in the first half of 2017. According to numbers published by the Climate Bonds Initiative (CBI), by mid-May issuance had reached $42 billion, compared with a full-year figure of $81 billion in 2016. CBI’s estimate for total issuance in 2017 is $150 billion.

This remains tiny relative to the size of the global bond market. It also remains modest compared to the potential size of the green bond sector. A 136-page report published earlier this year by the OECD, entitled “Mobilising Bond Markets for a Low-Carbon Transition”, forecast that by 2035, total annual issuance could reach $620 to $720 billion, with the outstanding volume of green bonds climbing to $4.7 to $5.6 trillion. It also projected that the 2020s have the potential to be the start of “golden years” for bond issuance in low-carbon sectors.

The same report cautioned, however, that plenty of barriers still need to be overcome if the market is to deliver on its potential. Foremost among these is the “lack of universal rules and standardisation” which the OECD says is a “shared and enduring source of concern” among market participants.

Asia-Pacific continues to lead the way

Nevertheless, the continued diversification of supply and demand in the green bond sector in the first half of 2017 has been encouraging for its longer-term growth prospects. Asia was again a key motor of issuance, with Chinese financial institutions such as Harbin Bank and Bank of Beijing both accessing the green bond market for the first time this year.

From a geographical perspective, Asia also continues to lead the way in terms of formalising guidelines on issuance. Following a series of important initiatives from China aimed at establishing clearer guidelines on green bonds, entities ranging from India’s Securities and Investment Board (SEBI) to Japan’s Environment Ministry have published detailed frameworks on the issuance of green bonds in recent months.

Among other Asian markets, Singapore has also begun to make notable progress in the green capital market, with City Developments Properties printing the Lion City’s first green bond in April. Perhaps more significant for Singapore’s longer term prospects as a regional hub for sustainable finance, however, was the announcement the same month by the Monetary Authority of Singapore (MAS) of a green bond grant scheme, enabling issuers to offset the cost of an external green bond review.

Elsewhere in the Asia-Pacific region, Australia’s green bond market has continued to expand and diversify. The first green bond from an Australian insurer (QBE Insurance), a debut transaction from Queensland Treasury Corporation (QTC) and issuance from borrowers such as Commonwealth Bank of Australia, the Investa Office REIT, have all helped to build Australia’s credentials for being what CBI described as “a best practice example for nascent green bond market development”.

ContentsNews Roundup 2

Editorial 4

Plugging the Infrastructure Gap in Latin America 5

Tower Transit: Business Beyond Normal 8

The Future of Green Energy 10

An Interview with ARUP 12

Transport sector tackles climate action 14

How green are your bonds? 18

The Green Bond Principles AGM 22

Key facts and figures 24

Progress in the Middle East, Africa and Latin America

In terms of the geographical diversification of the market, another highlight of the second quarter was the long-awaited maiden green bond from the Gulf, in the form of a $587 million transaction from National Bank of Abu Dhabi (NBAD). Proceeds from the five year issue are to be channelled into energy efficiency and infrastructure projects in the UAE and the United States.

Elsewhere in the emerging market universe, while the delay of a planned debut sovereign bond in Nigeria may have been regarded as a setback for green bonds in Africa, other countries have reaffirmed their commitment to develop their markets for sustainable finance. Most notably, Kenya has indicated that it will be issuing a green bond this year, building on its credentials as an innovative regional financial hub.

Latin America, meanwhile, where issuance has historically lagged behind other emerging market regions, has also seen several important milestones in the first half of 2017 including the first corporate issue from Chile (CMPC), the largest green bond from a Latin American private sector bank (Colombia’s Davivienda) and a highly successful benchmark from the Brazil’s development bank, BNDES.

North American Issuers remain committed

While there was disappointing news from President Trump about the planned withdrawal of the US from the Paris Agreement on Climate Change, a number of states have already re-emphasised their commitment to honouring the agreement. In recent months, debut transactions from borrowers such as San Francisco’s Bay Area Rapid Transit (BART), together with deals from infrastructure development banks in California and Rhode Island and a handful of municipal issues have kept issuance momentum on the right track. North of the border so too have transactions from borrowers such as Export Development Canada (EDC), which issued its third green bond in May.

Innovation and Expansion in Europe

In Europe, green securitisation continued to make notable headway in the first half of 2017, while innovative deals in the sustainable finance market included the world’s first green hybrid bond, structured by TenneT of the Netherlands. Elsewhere in Europe, borrowers ranging from Entra and Lyse of Norway to Atrium Ljunberg of Sweden demonstrated that Scandinavia remains at the forefront of the green bond movement in Europe. So is France, where the railway operator, SNCF, has said it intends to issue at least one green benchmark each year.

Also in Europe, following the successful launch of the government of Poland’s debut green bond in 2016, Bank Zachodni WBK became the first Polish commercial bank to issue in green format in May. Supported by the IFC, the processed of Bank Zachodni’s transaction will be used to finance climate-related projects.

While the continued diversification of the market for green bonds in Europe has been welcomed by investors, in some instances it has also met with a mixed response from industry observers. In May, for example, when Spain’s Repsol printed the first green bond from an oil and gas company, the Climate Bond Initiative (CBI) applauded the disclosure accompanying the issue. CBI added, however, that although it did not regard the issue as greenwashing, it was uncomfortable about the use of proceeds which, by making refineries more efficient would extend their lifetimes and “therefore indirectly increase emissions over time”.

An expanding Investor Base

Beyond the continued diversification of the new issue market for green bonds, an encouraging trend that was maintained in the first half of 2017 is the continuous broadening of investor demand for exposure to green issuance. The most eye-catching development in this respect was the announcement in April of the Green Cornerstone Fund by IFC and Amundi, which was described by GlobalCapital as a “quantum leap for green bonds”. This $2 billion fund will buy green bonds issued by banks in emerging economies in Africa, the Middle East, Latin America, Eastern Europe and Central Asia, effectively creating market where previously there was none, according to IFC chief executive Philippe Le Houérou.

Another initiative supporting the growth of the investor base was the launch in March of the VanEck Vectors Green Bond ETF (GRNB). This is the first ETF to focus exclusively on green bonds, and is aimed at broadening the investor base beyond dedicated ESG investors.

While borrowers have continued to add to the depth and breadth of the market, a number of institutions have also underscored their commitment to building the necessary infrastructure to support its longer-term expansion. In a report published in May, entitled “The Role of Exchanges in Accelerating the Growth of the Green Bond Market”, for example, the Luxembourg Stock Exchange presented six recommendations for ways in which stock exchanges can support enhanced liquidity, transparency and investor education. All these elements will have a key role to play in underpinning the evolution of the green bond market over the coming decade.

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Newsletter EditorialAmid the sometimes tumultuous political events which have surrounded the announcement that the US will withdraw from the Paris agreement, some interesting sub-plots have been developing across the world. These show that the void created by the US decision may be filled, at least partially, by other nations and by the mobilization of state and non-state actors.

In Europe, Mr Macron’s election in France is recognised by many as a positive for continuing action on climate change. Indeed, since hosting the successful COP21 and passing the pioneering Energy transition law, France has played a leadership role in climate change related policies. During his pre-election campaigning, the new President pledged to prioritise implementation of the Paris Agreement and to pursue sanctions against countries that break environmental clauses of EU trade agreements.

Interestingly, President Macron is also seeking to ensure the US fulfils its climate responsibilities, which would appear challenging. As noted in a recent ‘Climate Investment Update’ from HSBC, whilst President Trump ‘….left open the possibility of renegotiating the Agreement or an “entirely new transaction” if it were more favourable to the US’, this does seem an unlikely outcome, given that Germany, France and Italy made it clear at the beginning of June that: “We deem the momentum generated in Paris in December 2015 irreversible, and we firmly believe that the Paris agreement cannot be renegotiated, since it is a vital instrument for our planet, societies and economies.1”

The upcoming COP23 in Bonn may take on a slightly different shape, as discussions will need to be undertaken on how to offset the emissions targets which the US originally agreed to, in order to meet the 2°c target. On the positive side, according to HSBC Research, we do not envisage a huge upswing in US emissions because economics is rapidly becoming the main driver of the low-carbon transition. For example, “CO2 emissions from the energy sector fell by 9.5% from 2008 to 2015, while the economy grew by more than 10%.2” In addition, gas now makes up around a third of US electricity generation, is a cheaper fuel source than coal and has a lower emissions profile. Meanwhile the cost of renewables has also fallen substantially since 2008: 41% for wind, 54% for rooftop solar and 64% for utility-scale solar (according to the US Department of Energy).

At the same time, the recently launched United States Climate Alliance, suggests that not all of the US is so convinced about the administration’s change of heart.

The Alliance seeks to remain part of the Paris Agreement process, and has already received the support of 13 US States, many cities and businesses.3

Importantly, investors are continuing to push companies to report on the impact of climate change as illustrated by the recent vote by 62pct of Exxon shareholders to include Climate change disclosures in the company’s annual statements.4

Around the rest of the world we also see momentum continuing to build. For example the C40 initiative, which gathers 90 of the largest cities in the world, and the broader Global Covenant of Mayors for Climate and Energy, which represents almost 7,500 cities with 680 million inhabitants, have reaffirmed their commitment to meeting the targets set by the Paris Agreement. The support of these groups is particularly important as cities represent 70pct of global greenhouse gas emissions.5

Also, China, the world’s largest emitter of Greenhouse Gases, and the European Union reaffirmed their commitment under the Paris agreement via a joint statement with the aim of accelerating their joint efforts in the fight against climate change, despite the political upheavals and potential uncertainty.6 This is an important statement of intent and continues to demonstrate the commitment of China and Europe and indeed their potential leadership role in the fight against climate change.7

So, while the evolving political landscape is clearly impacting the broader climate change discussion, the overall impact of the changes, it is hoped, will be somewhat limited due to continued technological progress and to the determination of a diverse coalition of state and non-state actors, including shareholders and investors who are increasingly focusing on environmental issues. Perhaps, in the words of Mr Macron in a recent video with the former Governor of California, Arnold Schwarzenegger, “We will deliver together to make the planet great again.”8

1 https://www.theguardian.com/environment/2017/jun/01/trump-withdraw-paris-climate-deal-world-leaders-react

2 http://science.sciencemag.org/content/early/2017/01/06/science.aam6284.full 3 https://www.washingtonpost.com/news/volokh-conspiracy/wp/2017/06/02/states-climate-alliance-raises-questions-about-the-constitutions-interstate-compacts-clause/?utm_term=.09d31c691309

4 https://insideclimatenews.org/news/31052017/exxon-shareholder-climate-change-disclosure-resolution-approved

5 http://www.c40.org/ 6 https://www.theguardian.com/environment/2017/may/31/china-eu-climate-lead-paris-agreement

7 https://www.theguardian.com/world/2017/jan/19/chinas-xi-jinping-says-world-must

8 http://www.independent.co.uk/news/world/americas/us-politics/trump-macron-arnold-schwarzeneggar-climate-change-make-planet-great-again-a7806491.html

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Plugging the Infrastructure Gap in Latin America“We are confronting a serious climactic problem,” said Peru’s President, Pedro Kuczynski, in a broadcast following March’s floods, which were the worst in the country’s history. Vulnerability to climate change is an issue across Latin America, as the IDB observes in its most recent Sustainability Reporti. “Our research indicates that damages caused by the intensification of flooding, droughts and other natural disasters will likely approach $100 billion a year by 2050,” this notes.

The potential impact of unchecked climate change on the broader Latin economy is dramatic. According to the International Finance Corporation (IFC), the losses associated with climate change could amount to as much as 5% of the region’s gross domestic product (GDP) if global temperatures increase to 2.5 degrees Celsius in the second half of this centuryii.

The Latin American Infrastructure Gap

On the other hand, proactively addressing challenges presented by climate change through investment in green infrastructure has the potential to create extensive socioeconomic opportunities as the region continues to be hamstrung by its outdated and inefficient infrastructure. According to an IMF analysis published in June 2016iii, “in Latin America and the Caribbean, the level and quality of infrastructure is inadequate.” This, adds the IMF, has been identified as “one of the principal barriers to growth and development, despite upgrades to the region’s infrastructure network over the past decade.”

The Caracas-based development bank, CAF, puts the magnitude of the region’s infrastructure deficit into perspective, calculating that Latin America will need to invest at least 5% of its GDP annually over the next few years in order to take a “leap towards competitivenessiv.” This compares with an annual average of just 2.8% between 2008 and 2015.

The Leapfrog Opportunity

Duncan Caird, HSBC’s Head of the Infrastructure and Real Estate Group, Americas, says that by mobilising public and private sector finance to address the infrastructural challenges they face, governments throughout the region may be able to achieve three key objectives. Investment in infrastructure may simultaneously boost economic growth and living standards, arrest or reverse environmental damage and help deepen the region’s capital markets, says Caird. This, he adds, may allow Latin America to grasp what he describes as the “leapfrog” opportunity that China has embraced in by linking infrastructure investment with broader sustainable development and environmental goals. [See article on Page 12 on China’s One Belt, One Road initiative]

The good news, says Patrick White, HSBC’s Head of Public Sector, Americas, is that public sector stakeholders throughout the region are already responding constructively to the challenge. “Regional and national development finance institutions have issued green bonds to tap private investor demand for investment opportunities linked to green infrastructure. Central banks and finance ministries are also actively engaging in the dialog around catalysing private sector financing for sustainable development.”

For example, Mexico City (CDMX) became Latin America’s first city to issue a green bond in December

20161. The proceeds from this $50 million five-year deal from CDMX, which was oversubscribed by two and a half times, are earmarked for investment in climate-resilient infrastructure and transport. CDMX has also launched a Resilience Strategyv a holistic, proactive blueprint for sustainable urban development. Announced in September 2016, this Strategy – named “Resilient CDMX: Adaptive, Inclusive and Equitable Transformation” – is a five-pronged plan to “implement solutions that meet the challenges posed by globalization, urbanization and climate change, and their impacts at the social and economic level.”

Ambitious Targets

Over 30 countries in the region have submitted their Intended Nationally Determined Contributions (NDC) to the battle against climate change2. Moreover, cities throughout the region are enthusiastically embracing many of the principles enshrined in the C40 Agenda. Governments throughout the region have also underscored their commitment to addressing the infrastructure challenge via energy reform, promoting rising private sector investment in the sector. As part of the reform process, many have established ambitious targets aimed at increasing the share of renewables in energy generation. For example, Chile’s 2050 Energy Agenda sets a quota for renewables of 70% by 2050, while Mexico’s Estrategia

1https://www.climatebonds.net/2016/12/mexico-city-issues-1st-muni-bond-latin-america-mxn-1-bn-usd-50m-4th-mexico

2http://www4.unfccc.int/ndcregistry/Pages/All.aspx

3 http://www.iadb.org/en/news/news-releases/2015-10-08/double-financing-for-climate-change,11272.html

4 http://wind.cleantechnology-business-review.com/news/world-bank-approves-480m-investment-to-promote-clean-energy-in-argentina-020317-5753674

5 http://www.mexiconewsnetwork.com/news/mexico-ignite-latin-america-green-bond-market/

6 http://www.latinfinance.com/Article/3664882/How-two-Mexican-developments-could-catalyze-Latin-Americas-green-bond-market.html

7 https://www.environmental-finance.com/content/awards/green-bond-awards-2017/winners/initiative-of-the-year-brazils-green-bond-guidelines.html

8 https://www.climatebonds.net/files/files/Brazil%20Investor%20Statement%2020161021%20FINAL.pdf

9 http://www.bndes.gov.br/SiteBNDES/bndes/bndes_en/Institucional/Press/Destaques_Primeira_Pagina/20170509_green_bonds.html10 https://www.bloomberg.com/news/articles/2017-01-12/brazil-set-for-bond-sale-surge-after-petrobras-s-4-billion-haul

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Nacional de Energia has directed that 35% of energy should be derived from renewable sources by 2024. In Peru, the target is 60% by 2025, and in Brazil, the 10 Year Energy Plan for 2015 to 2024 calls for at least 23% of domestic energy supply to be contributed by wind, solar and biomass by the end of the period.

Pivotal to the achievement of these ambitious targets will be the availability of public and private sector funding from local as well as international sources. Among multilateral lenders, development banks such as the World Bank and IDB are spearheading the growth of a market for sustainable lending in the region. IDB has established a goal of increasing the financing of climate change-related projects in Latin America and the Caribbean to 30% of the IDB’s and IIC’s combined total approvals by 20203. In March 2017, the World Bank established a $480m 20-year guarantee to support Argentina’s Fund for the Development of Renewable Energy (FODER, in Spanish), which facilitates financing of projects under the RenovAr Program. Argentina has set a target to achieve 20% of domestic electricity consumption from wind, solar, biomass, biogas and small-scale hydro sources by 20254.

Latin America’s Green Capital Market

In the capital markets, meanwhile, an increasingly deep and diversified green bond market has been taking shape across the region. Mexico has led the way, with the sale of $2 billion of green bonds providing part of the funding for the capital city’s new airport widely regarded as a landmark for sustainable finance in Latin America. Aside from being the largest green bond ever placed by a Latin American borrower5, the Mexico City Airport Trust issue made

a notable contribution to the internationalisation of the region’s sustainable capital market, attracting significant demand from Asia. Mexico has also just seen the issuance of the first Sustainability Bond from a Latin American issuer. In June 2017, Grupo Rotoplas, a Mexican water solutions firm issued an MXN2bn dual tranche Sustainability Bond to finance projects that enhance access to water and sanitation such as drinking water fountains in public schools and rainwater harvesting systems.

The recent green bonds from Latin American issuers built on the precedent set in December 2014 by Energia Eolica, the owner and operator of Peru’s two largest wind farms, which was the first Latin American company to issue a green bond in the cross-border market with a $204 million 20 year transaction6. Sporadic issuance followed with bonds from borrowers ranging from Brazil’s BRF Foods and Suzano Papel e Celulose, to Banco Nacional de Costa Rica (BNCR) and the Mexican Development Bank, Nafin.

In 2016, however, a number of other significant initiatives were taken towards establishing a credible and durable framework for green bond issuance in the region, notably in Brazil. Having ratified the Paris Agreement on climate change in September, Brazil published its new Green Bond guidelines7 the following month, developed by the banking federation FEBRABAN, in conjunction with the Brazilian Business Council for Sustainable Development (CEBDS).

Also in October, a number of local and international investors, managing assets worth R$1.61 trillion, signed up to the Brazil Green Bond Statement8. This was an affirmation of their belief that “green bonds or other green asset classes can be a

new investment option to fulfil our fiduciary duty with our clients and beneficiaries in a responsible and sustainable manner.”

A third landmark passed in Brazil in 2016 was the announcement in December by the development bank, BNDES, of the establishment of a green energy fund, Fundo de Sustentavel9.

Green Bonds in 2017: Gathering Momentum

In 2017, a number of issuers have supported the development of a broader and more diversified green capital market in Latin America. Again, Brazil has led the way, with Fibria Overseas Finance issuing a $700 million five year bond10 in January, which was the largest green bond ever from a Brazilian corporate. Demand of $3.5 billion for the Fibria bond, with 40% of orders coming from dedicated green accounts, was a striking barometer of the strength of appetite for exposure to top quality Latin American corporates in green format.

So too was the response from investors to the passage of another landmark for Brazilian green bonds in May, when BNDES launched the first green issue from a Brazilian bank in the international capital market, which was the development bank’s first international issue since 2014. The proceeds of the seven year, $1 billion benchmark, which generated demand of $5 billion from more than 370 investors, are for investment in wind or solar projects. This builds on the bank’s pedigree as a key provider of finance for renewable energy in Brazil. According to BNDES, between 2003 and 2016, in the wind power sector alone, the Bank approved 87 loans worth R$ 28.5 billion, supporting an increase in installed capacity of about 10.7GWvi.

11 https://www.climatebonds.net/2016/12/colombias-first-cop-350bn-usd-115m-gb-issued-bancolombia-funding-renewable-energy-and

12 https://renewablesnow.com/news/colombias-davivienda-issues-cop-433bn-green-bond-to-ifc-566512/

13 https://www.climatebonds.net/2017/04/april-market-blog-inaugural-gbs-chile-uae-more-french-and-aussie-certified-bonds-us-munis

14 https://www.bnamericas.com/en/news/davivienda-issues-us150mn-green-bonds-with-ifc-as-sole-investor

iInter-American Development Bank (IDB) Sustainability Report 2016iiIFC Press release, June 14th 2016iiiwww.imf.org June 9th 2016ivwww.caf.com May 11th 2017vCDMX Resilience Strategy September 6, 2016vihttp://www.bndes.gov.br May 9th 2017viihttp://www.globalcapital.com, April 27th 2017viiiMexico Green Bond Investors Statement May 31, 2017

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Colombia has also seen some encouraging developments in the sustainable finance space. At the end of 2016, Bancolombia, the country’s largest commercial bank, issued its first green bond, raising COP350 – equivalent to $115 million – to expand financial services for private sector investments that help to address climate change. IFC was the sole investor in the Bancolombia transaction, which was the first green bond issued by a commercial bank in Latin America.11

Among other Colombian borrowers, Davivienda issued a 10 year green bond for COP$433 billion (approximately US$150 million) in April12. According to IFC, which again was the sole investor in the Davivienda issue, “this is the largest green bond issue by a private financial institution in Latin America, demonstrating Davivienda’s commitment to financing projects with a positive climate and environmental impact. The issuance responds to Colombia’s target of reducing its pollutant emissions 20 percent by 2030. The funds will be used to finance projects in the areas of sustainable construction, cleaner production, energy efficiency and renewable energies (water, biomass, wind and photovoltaic solar energy).”

Chile, meanwhile, saw its first corporate green bond in May, when the forestry, pulp and paper company, Inversiones CMPC, launched a $500 million 10 year transaction13. The proceeds from the CMPC issue are for investment in areas ranging from sustainable forestry to biodiversity preservation, sustainable water management, pollution prevention and energy efficiency.

Growth Potential

These deals are likely to represent the tip of an iceberg for green bond issuance in Latin America. IFC reports that it has identified more than US$1 trillion in climate financing opportunities in Latin America and the Caribbean through to 2040. More specifically, it estimates that in Colombia, there is an investment potential of $27.5 billion in renewable energy to 2030. In Brazil, that figure is around $152 billion and in Mexico, around $75 billion.14

While this financing will be raised from a number of public and private sources, several recently-announced initiatives are expected to underpin strengthening demand from local and international investors for Latin American green bonds. For example, Latin America and the Caribbean is likely to be among the main beneficiaries of the $2 billion Cornerstone Fund recently launched by IFC and Amundi, which is the largest green bond fund ever created. IFC explains that it is investing up to $325 million in the Green Cornerstone Bond Fund, which will buy green bonds issued by banks in developing countries. “Amundi will raise the rest of the $2 billion from institutional investors worldwide and provide its services in managing emerging market debt. The fund aims to be fully invested in green bonds within seven years,” IFC reports.

More significant than its size is the role the Cornerstone Fund will play in ensuring that investment is allowed to flow into projects that may not be suitable for backing from other private sector investors. As GlobalCapital put itvii, “there has remained a yawning gulf between the large pots of money managed with a view to greenness in the developed world and the tough, often risky and small-scale projects in the developing world that are most in need of funding for climate-minded investors.”

The Regional Investor Base

Among individual countries in the region, Mexico has taken a number of important steps towards supporting the growth of a local investor base for green issues. Mexico2, launched in 2013, was the second carbon platform in the region (following the opening of Costa Rica2 earlier the same year), while the Mexican Stock Exchange (BMV, in Spanish) has won international recognition for its state-of-the-art requirements for listing green bonds. In December 2016, the Mexican Stock Exchange and the non-profit Climate Bonds Initiative jointly convened a Consultative Board for Climate Finance (CCFC) in Mexico comprising representatives from major local pension funds, insurance companies, development banks and investment funds. More recently, in May 2017, 57 Mexican investors (including Afores, or local pension funds) with assets under management of almost $214 million, put their names to an agreementviii supporting Green Bonds.

With other countries in the region likely to explore similar initiatives to encourage the growth of domestic demand for green bonds, the longer term outlook for supply and demand is brightening.

“ The Consultative Board for Climate Finance (CCFC) works to integrate sustainability into the Mexican finance industry; and the good response from local institutional investors to date sends an important market signal – they want to see more green projects, long term climate solutions that will be the basis for creating a robust green bond market.”

Alba Aguilar Priego, New Markets Director, SIF ICAP, Grupo BMV

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Tower Transit: Business Beyond NormalUntil as recently as the late 1990s, the streets of Colombia’s capital city, Bogota, were among the most congested, dangerous and polluted in the world. The transformation that has been achieved since the opening of the city’s Transmilenio Bus Rapid Transit (BRT) in December 2000 has been impressive. By 2011, the system had reduced average travelling time by 32%, put more than 2000 public-service vehicles off the road and cut gas emissions by 40%. It had also decreased accident rates by 90% throughout the system, which by 2011 was serving some 1.4 million passengers per dayi.

The rapid transit system that has transformed the lives of commuters in Colombia’s capital city over the last two decades is by no means an isolated example of how creative and innovative public transportation systems can underpin sustainable development in the world’s most populous cities. According to one analysisii, in its first phase the economic returns of Johannesburg’s BRT reached $900 million, while in Buenos Aires travel time savings generated by the city’s BRT have been calculated to be as high as 50%. In the sprawling West African city of Lagos, meanwhile, it has been estimated that a 20% reduction in traffic congestion could inject some $1 billion into the local economy annually.

Adam Leishman believes that the progress that has already been made in cities like Bogota provides an exciting blueprint for what could be achieved in urban districts across the world. He is Chief Executive Officer of Tower Transit Group, a spin-off from Australia’s Transit Systems, which was established in 1997 and carries some 60 million passengers a year.

Tower Transit entered the UK market in 2013, when it acquired the London bus operations of FirstGroup. Today, the company – which takes its name from London’s iconic Tower Bridge – operates 25 franchised routes across the UK’s capital. These include route 25, which carried 19.4 million passengers in 2015/16, making it the busiest in the city.

Elsewhere in the UK, Tower Transit now operates Whippet coaches in Cambridgeshire, and Impact Group which

provides private bus services for schools, councils and corporates in West London.

Aside from bolstering efficiencies in the UK’s public transport system, Tower Transit is making a key contribution to environmental protection in the areas it serves. In London, for example, it operates 10 hydrogen fuel cell buses for Transport for London, all of which are maintained and serviced by Tower Transit’s in-house team. The group also runs three electric buses as part of project ZeEUS (Zero Emission Urban Bus System) funded by the European Commission, in partnership with the UITP and Transport for London. Tower Transit’s medium-term objective is to ensure that its entire London fleet is accounted for by a combination of hydrogen fuel cell and electric vehicles.

In May 2015, Tower Transit celebrated its first mandate outside the UK, winning the first competitively-tendered bus contract from the Singapore Government, in spite of submitting a bid that was more than US$100 million higher than the cheapest offer. This success was a reflection of the quality of the Tower Transit bid and the significant transformation the city desired, the true value of which was worth far more than the price differential to the Government.

All of its 450 new recruits1 were Singaporean citizens or residents, which was an incredible statistic in an industry struggling to recruit locals. This was due to an ambitious strategy to change poor perceptions of the bus driver (known as bus captain in Singapore) job by professionalising it.

1Those that did not transfer from the incumbent

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Today, Tower Transit operates 367 buses across 26 routes in Singapore, which contributed to some 35% of total group revenue in its first full year of service. Tower Transit Group now employs 3000 people and moves 200 million passengers a year.

Tower Transit’s Singapore operation has been a notable success, comfortably exceeding its contract obligations, delivering a level of service well beyond expectations and building a trusted and popular local brand. This is not purely anecdotal: when Tower Transit was recently named as Singapore’s best company for Workplace Culture & Engagement with 500 or more employees, the short-list for the award read like a who’s-who of internationally recognised names ranging from McDonalds and Unilever to FedEx, Bloomberg and Changi Airport. Just a few weeks later in London, Tower Transit was awarded ‘International Business of the Year’ – the highest honour at the British Expertise International Awards 2017.

Leishman is confident that the success Tower Transit has achieved in the UK and Singapore will be replicated elsewhere. The group has identified Santiago de Chile, which has established tough emission standards for its public transportation system, as its next target market. It is also looking to build on its credentials in Singapore as a springboard for exploring opportunities elsewhere in Asia, where urban traffic congestion is a recognised drag on sustainable economic development. “On the back of our success in Singapore there has been a lot of interest on how this could be replicated in other cities in Asia,” he says. “We are having an ongoing dialogue with several governments that are serious about improving the way public transport works in their cities and unlocking the massive potential this has.”

Leishman says, however, that the record of municipal authorities’ management of public transportation has been mixed. “Although urban congestion is an increasingly serious problem, too many models for delivering public transport are ineffective,” he says. “Many of the systems which are still operated purely by the public sector are highly cost-inefficient. They also lack innovation and are unsustainable from a climate change perspective. At the other extreme, in some cities public transport is now almost entirely in the hands of private sector operators. Their focus is not on unlocking the huge benefits a sustainable and innovative public transport system can bring to a city’s residents, rather on maximising profit, which is often mutually exclusive. This is a flawed model that you see in UK cities other than London.”

It is no coincidence, says Leishman, that the cities with some of the best and cleanest public transportation systems in the world – such as London and Perth – are those that have embraced a symbiotic balance of public ownership and private management. “Everyone in the industry benchmarks London as the best example in the world of a clean, efficient and user-friendly public transport system that is one of the drivers of London’s economic and social success,” he says. “This is because the system empowers Government to drive policy and strategy, set vision and harness the private sector’s power in meeting it. Aligning public and private sectors through the power of efficient and robust contracting models is the key ingredient and the city has thrived as a result.”

While Leishman says that London has probably been the most successful exponent of achieving a balance between public and private management of public transport, there is nothing to prevent the same model being applied in emerging markets. “By putting a competitive process in place, it is possible to generate cross-subsidies and unlock tremendous value, as well as act on clear and sustainable priorities, rather than be lost in years of negotiations, a problem rife in our industry” he says.

It is easy to see why initiatives of this kind need to be prioritised if the world is to reach the ambitious climate change targets agreed in Paris at the end of 2015. Cities, which are already home to half the planet’s population, produce around 75% of the world’s GDP and greenhouse gas emissions. Accelerated urbanization is expected to lift the share of the urban population to between 65% and 75% of the global total by 2050, with more than 40 million people projected to move to cities each yeariii.

With city buses estimated to have accounted for about 25% of black carbon from all passenger and commercial goods transport vehicles in 2015iv, it is essential that new models are explored to promote cleaner and more efficient urban mass transit systems.

There is certainly no shortage of funding available globally to support investment in low-emission public transportation infrastructure. Pension funds and other institutional investors remain hungry for long-dated assets offering a pick-up in yields over government bonds. To date, however, there has been a shortage of opportunities offering institutional investors sufficiently robust structures. “Structures need to be put in place that give institutions like the Green Climate Fund the confidence they need to invest in key infrastructure projects,” says Tower Transit’s Corporate Finance Director, Samuel Ribeiro, himself a former HSBC employee.

i C40 Cities Case Study, November 3 2011, http://www.c40.org/case_studies/brt-system-reduced-traveling-time-32-reduced-gas-emissions-40-and-reduced-accidents-90

iiNicholas Stern and Dimitri Zenghelis, The Guardian, November 19th 2015iiiStern and Zenghelis, ibidivwww.ccacoalition.org/en/file/2878/download?token=qPYCls3a

The future of green energyBy Robert Todd, Global Head, Renewables and Cleantech, Global Banking, HSBC

Working in HSBC’s Infrastructure and Real Estate Group, Robert Todd advises large organisations such as multinational companies on investing in renewables and clean technology. Here, he shares his views on the rising profile of green investment – and on some of the trends reshaping the low-carbon sector.

About 10 years ago, renewable energy was still a niche area, of interest primarily to specialist investors. The energy was typically more costly than traditional sources such as gas or coal and played a relatively small role in helping countries meet their needs.

Today, renewables are a growing part of the energy mix in dozens of countries. On a windy day, Germany can meet more than 100 per cent of its national electricity needs from renewables – while the UK broke its own national record in June 2017, with more than 50 per cent of electricity provided by renewable sources. The trend is set to continue, with renewables growing faster than any other energy source over the next 20 years, according to BP.

National governments around the world have made major commitments to reduce carbon emissions over the long term. Technology has also improved, with some forms of renewable energy now able to compete on price with fossil fuels. These improvements are bringing close the day where

renewables are viable without public subsidy. In fact, we have already seen the first zero-subsidy tender for an offshore wind project in Germany.

Thinking about renewable energy has become part of “business as usual” for most major companies. Technology firms, high street retailers and oil and gas companies are among those studying the sector and assessing the opportunities. Some have made such substantial investments in renewables that they have more energy than they can use themselves – and want to sell the surplus to consumers, subject to permission from regulators.

Clients often ask me about emerging technologies, new policies and changing legal requirements. Given the speed of change over the past decade, it would be unwise to make categorical claims about the future. Not all new technologies will succeed: some investors will see the products they have backed become obsolete before they even reach the market.

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With that said, there are some trends reshaping the sector today that we are looking at closely. These include:

Decentralised energy generation – a shift to more energy being generated on a small scale by individuals and communities. Many households have a solar panel on their roof or a wind turbine in their field. Some communities are investing in generation at a village or neighbourhood level, perhaps using a biomass generator to turn waste into heat and power. If this so-called “distributed generation” became the norm, it would raise questions: what if communities no longer wanted to be connected to a national transmission system? Governments would have to decide whether to require them to contribute to the cost of maintaining a national grid. Utility companies would need to adapt, too, to ensure they remained relevant as consumer needs and expectations changed. The debate on these questions is already underway in policy and industry circles as decentralisation gathers pace.

Storage – helping secure a steady supply of energy from renewable sources. One of the challenges of relying on small-scale renewable power is that it has peaks and troughs. A photovoltaic panel produces a lot of energy on a sunny afternoon, for example, then nothing at night. Finding methods of making renewable energy more dispatchable – that is, easier to control and transmit when needed – would make it more reliable and more useful to consumers. Some companies are investing to develop a battery that sits in your shed, attic or basement to capture the spare energy during the day and keep your home powered into the evening. There are different types being researched: “sprint” batteries for a short burst, and “marathon” batteries to store and distribute energy over a longer period. If this technology were to be embraced by consumers, it could accelerate the rise of distributed generation.

Smart meters – technology that helps power networks to operate more efficiently. A lot of policy debate today is about how to use less energy and use it more smartly, rather than generate more. Currently power stations in most countries produce energy based on what they think demand is likely to be, based on previous patterns of use. There is sometimes a mismatch between demand and supply, leading to waste. Regulators in some countries support the introduction of “smart meters” in homes and businesses. These smart meters transmit information to the grid, give a more accurate idea of likely demand in real time, helping to reduce the mismatch and carbon wasted.

Analytics – technology that makes it easier to produce renewable energy cost-effectively. Servicing offshore wind farms in person is tough and expensive, but a drone can fly at a safe distance and use thermal imaging to check that the blades are working properly. This helps engineers pinpoint problems and focus their efforts. Similarly, the software that helps owners to run renewable plants to best effect in any given weather conditions is constantly improving.

This list is far from exhaustive – and in many areas, the decisions of governments and regulators will have a profound impact on how new technologies develop and where private companies choose to invest.

Making the transition to a low-carbon economy means changing the way we do business, manage natural resources and use energy. Exactly what those changes will be, and when, where and how they will occur is the subject of a fast-moving debate. It is a fascinating moment in energy history.

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An Interview with ARUP: One Belt, One Road: China’s biggest Green Export?It has been called the biggest and most ambitious infrastructure project of all time1. It is certainly the most multinational. The One Belt, One Road initiative put forward in 2013 by China’s President Xi Jinping aims to revive global trade by rebuilding the Silk Road Economic Belt. This would create an economic corridor linking East and West which would underpin rising trade volumes and infrastructure investment across 65 countries covering about 60% of the world’s population and close to a third of its GDP.

Nor need it stop there. Speaking at the Opening Ceremony of The Belt and Road Forum for International Cooperation in May, President Xi said that “all countries, from either Asia, Europe, Africa or the Americas, can be international cooperation partners” of the initiative.

Small wonder that the potential of the Belt and Road project is concentrating the minds of companies likely to be involved in the programme, be it as lenders, investors, contractors or consultants. “I think One Belt, One Road will dominate the Asian infrastructure story for at least the next decade,” says James Kenny, Head of Global Affairs at the engineering consultancy group, Arup.

The Belt and Road project has not been free of controversy, with concerns raised in some quarters about rising Chinese economic hegemony in the region. But there is general agreement that at its heart, the ambitious One Belt, One Road initiative has the twin objective of raising living standards in recipient economies and strengthening trade flows between China and the countries along the route, while observing the highest environmental standards.

A Positive Impact on Trade

Already, the Belt and Road programme is having a palpable impact on trade and investment in many countries along the old Silk Road. “I was told that for Kazakhstan and other Central Asian countries alone, customs clearance time for agricultural produce exporting to China is cut by 90%,” said President Xi in May. “Total trade between China and other Belt and Road countries in 2014-2016 has exceeded US$3 trillion, and China’s investment in these countries has surpassed US$50 billion. Chinese companies have set up 56 economic cooperation zones in over 20 countries, generating some US$1.1 billion of tax revenue and 180,000 jobs for them.”

This is probably no more than the tip of the iceberg, with economists generally optimistic about the longer term potential impact of the Belt and Road initiative.

Green Finance for Asian Infrastructure

Ensuring that the infrastructure required to support this growth adheres to strict Environmental, Social and

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Governance (ESG) standards will be a challenge, with critics of the CPEC saying that with 7000 heavy trucks trundling down the corridor each day, emissions will increase by some 25% of the national totali. As Kenny says, however, there is an inextricable link between economic development and countering climate change. “Organisations such as the EU and the EC have reached the conclusion that it is impossible to view ESG issues in isolation,” he says. “Greater connectivity and understanding between nations can only be positive for longer term economic growth and development.”

This echoes the message transmitted by President Xi Jinping in May when he insisted that “there will be short-term pains, but such pains will create a new life. The Belt and Road Initiative should be an open one that will achieve both economic growth and balanced development.”

More broadly, Kenny says that the notion that infrastructure is by definition a source of pollution is apocryphal. “As the price of renewables falls, and as we continue to develop a better understanding of how infrastructure can be green, it is possible to decouple economic growth from carbon emissions,” he says. “By applying this understanding to the construction of airports, mass transit systems, ports and roads, Asia can ensure that it skips many of the mistakes that were made in the West in areas such as air quality and traffic congestion.”

In the case of airports, for example, where Arup is an acknowledged global leader, Kenny says that green designs are fast becoming the new normal. “There is plenty of ways that green energy, heat efficiency and waste water treatment technology can be applied to airports and other transportation infrastructure that comply with LEED [Leadership in Energy and Environmental Design] principles,” he says.

The Role of Green Bonds

Another myth associated with infrastructure investment is that its financing can’t be structured in compliance with socially responsible guidelines. Although it currently accounts for about 0.13% of the global outstanding debt, the green bond market is rapidly expanding in terms of depth, diversity and liquidity. Kenny believes that the continued growth of the market will mean that it plays a key role in the financing of infrastructure in general and Asian projects such as those in the Belt and Road project in particular. “There is a growing recognition that green projects will have access to increasingly large streams of funding which will ultimately drive down the cost of capital,” says Kenny.

This is because an increasingly symbiotic relationship is being constructed between the way infrastructure projects are financed and the ESG standards they follow. As an increasingly demanding global investor base for sustainable bonds takes shape, issuers and intermediaries in the international capital market will come under more pressure to structure new issues that comply with tough green guidelines. Those that fail to do so may find themselves priced out of the market, as investors become increasingly sensitive to the danger of holding tainted assets that are difficult to sell in the secondary market.

Few, however, are under any illusion about the challenges that lie ahead for the use of green bonds as a financing tool for projects in general and for the Belt and Road programme in particular. One of these is defining what makes a project

green in the first place. “Most lenders still don’t really know what green infrastructure is,” says Rongrong Huo, Director, Government Sector, HSBC. “This is why it is so important for banks like HSBC to form partnerships with consultants such as Arup to ensure that the supply chain ecosystem and the project itself meets the required standards.”

This is all the more challenging in the case of cross-border issuance, which would make up the bulk of the finance supporting Belt and Road projects. Against this backdrop, says Huo, the international agreements reached among financiers in support of green financing are critical. She highlights initiatives such as the ICMA Green Bond Principles and the UN Principles for Responsible Investment (PRI), signed by 1600 of the world’s largest investors with combined assets of about $60 trillion, as examples of the collective global commitment to sustainable finance.

Huo says that there would also be a self-policing element to the observance of high ESG standards among top lenders. HSBC itself, for example, is acutely conscious of the reputational risk that would arise from any suggestion that financial institutions are allowing ESG standards to be compromised.

So too are other lenders such as multilateral development banks which are providing much of the seed and early stage funding for infrastructure projects in the Belt and Road programme. These include the Asian Infrastructure Investment Bank (AIIB), which opened for business in January 2016 and is committed to what it describes as a “lean, clean and green” approach to infrastructure financing. To date, AIIB has provided US$1.7 billion of loans for nine projects in Belt and Road participating countries. “One of the concerns that some people had when the AIIB was being set up was that its environmental and sustainability standards may be lower than the ADB’s,” says Kenny. “But the AIIB has made it very clear that it is committed to very high standards in this respect, which are fully supported by Beijing.”

Challenges for Project Finance

It is, however, essential that private sector finance is encouraged to flow into green projects in the Belt and Road programme without being crowded out by multilateral development banks. On the surface, this should be straightforward enough, because as HSBC’s Huo says, in today’s environment of subdued interest rates and low yields, there is no shortage of institutional money hunting for attractive long-dated assets. The problem, as Kenny explains, is that while there is a clear appetite for buying green infrastructure assets once they are operational, there is a smaller pool of investors willing to invest in the riskier upstream end of the pipeline. “Sovereign wealth funds, pension funds and insurers are all hungry for long-dated assets, which is driving demand for viable infrastructure projects,” he says. “The tricky part is generating institutional demand for the early stage risk from the pre-feasibility studies up until financial close, which is where much of the political risk sits.”

If a solution can be found to this particular dilemma, it will go a long way to ensuring that Asia is able to build much of the sustainable infrastructure it needs to underpin ambitious projects such as the Belt and Road initiative.

Note: The views of the interviewee, may not necessarily correspond with those of HSBC.

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Transport sector tackles climate actionBy Zoe Knight, Managing Director, Global Research

Transport contributes 15 per cent to annual greenhouse-gas emissions with traffic-congested cities a key contributor to pollution. It’s right, then, that the sector is looking at how it can decarbonise to provide sustainable mobility through innovation, artificial intelligence and by employing green finance.

More than 4,000 transport-sector participants from over 30 countries met in Montreal in June to consider the challenges of delivering safe and clean transport systems. The three-day Movin’ On summit heard 79 speakers and around 60 panel discussions while show-casing 40 different start-ups.

Climate emphasis at a top-down level was on electrification of transport systems and carbon pricing. There was also discussion on the technicalities of carbon reduction – a perspective that was particularly relevant in demonstrating the practical gains that can be achieved in the transport sector.

In addition, the Paris Process on Mobility – a platform established ahead of the Paris Agreement on climate-change being signed in December 2015 – used sessions at the Canadian summit to consult on their paper ‘An actionable vision of transport decarbonisation’. The paper looks at how to implement the Paris Agreement through a global macro-roadmap by aiming at net-zero emissions.

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Innovation has a key role in meeting the climate targets agreed in Paris, and also at Montreal was Bertrand Piccard, co-pilot of the Solar Impulse, the first solar-powered aircraft to circumnavigate the globe. He reminded the audience that nothing is impossible, noting that innovation means getting rid of old beliefs.

Panels devoted to discussing innovation included new thinking for transport in cities, biofuels in aviation, and new types of sustainable materials.

The role of non-state actors – business, civil society, investors, cities and states – was actively embraced in the discussions in the run up to the Paris Agreement negotiations. Now that the implementation phase has been reached, these parties’ actions are particularly important because they are key facilitators of the deal.

The Montreal summit demonstrated transport-sector commitment. Other non-state actors are also continuing to support the Paris deal and in many cases are going beyond the ambition levels within the INDC targets for reducing greenhouse gases.

The Non-State Actor Zone for Climate Action (NAZCA) is a global platform that brings together the commitments to action by companies, cities, subnational regions, investors and civil society organisations to address climate change. It aims to track the mobilisation and actions that are helping countries achieve and exceed their national commitments to address climate change. The NAZCA portal that records these actions shows that 2,508 cities, 209 regions, 2,138 companies and 479 investors have collectively made 12,549 pledges on a climate response.

Climate commitments have been made by 167 railway groups, 79 car and component businesses, 20 lorry firms, 18 airlines, 13 water-transport operators and 12 tyre companies. However, we expect the non-state community to be even more vocal on climate commitment in the run up to the next annual climate talks, known as COP 23, which takes place in Bonn in November 2017.

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Disclosure and disclaimer

Analyst Certification

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Zoe Knight.

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Green bonds – finance that supports environmentally-friendly projects – are increasingly sought by investors. We expect issues to total $90bn to $120bn in 2017 globally. But fund managers need to know not just whether a bond is green, but how green it is.

We have long argued that the green-bond market needs a single metric for evaluating ‘greenness’, such as tonnes of CO2 emission-reduction achieved per thousand dollars of bond outstanding.

Now, however, a new evaluation tool grades bonds for their greenness on a scale of E1 down to E4. The tool, designed by the Standard & Poor’s credit-rating agency, has a lot in common with the Climate Bond Initiative’s third-party certification method. That initiative is a testing form of accreditation with hurdles in different sectors that a bond must meet to be certified as green – but without any grading.

The new tool estimates a project’s expected net benefit, then overlays a hierarchy, placing the benefits ranking within the broader sector context. Combining mitigation, transparency and governance produces the E score, but it can also apply to loans or other non-bond financings.

One problem of judging green projects is that some can achieve high CO2 emission-reduction in the short-term but lock economies into non-green processes in the longer term. The new tool handicaps projects that trap countries into continuing emissions.

So a switch from coal-fired electricity generation to gas-fired is at the bottom of the carbon hierarchy because, while reducing emissions, it locks the economy into burning gas. The low hierarchy ranking prevents the project from receiving a very high score.

Large hydro projects in tropical areas are also low down in the carbon hierarchy because of the methane emissions from rotting vegetation in large reservoirs in such areas.

And location is important, as well as technology. Building a wind farm in China – where it may replace coal-fired power – can achieve more emission-reduction than in Denmark, where it is likely to replace gas-fired power or another renewable energy source.

Renewable energy projects are not the only schemes that can achieve E1 scores, but fossil fuels will be limited to no higher than E3 and nuclear and large hydro projects in tropical areas will be E2 or lower.

And while a bad score for transparency and governance can drag down a good project’s ranking, a good score on those aspects cannot lift a bad project.

However, the evaluation tool offers only a point-in-time analysis. Verifiers that are forward-looking provide an important service by checking that a green bond’s proceeds are actually used as the issuer promised.

It may be a year or more before there is any impact on the wider green-bond market. Only if investors have confidence in this metric and it becomes widely used by issuers, will it assist in the correct pricing of bonds.

How green are your bonds? Investors need a way to measure the degree of environmentally-friendlinessBy Michael Ridley, Green Bonds Analyst

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Disclosure Appendix

Analyst Certification

The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Michael Ridley.

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Fixed income: Basis for financial analysis

This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor’s decision to make an investment should depend on individual circumstances such as the investor’s existing holdings and other considerations.

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor’s existing holdings, risk tolerance and other considerations.

Given these differences, HSBC has three principal aims in its fixed income research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies in corporate credit and based on country-specific ideas or themes that may affect the performance of these bonds in the case of covered bonds, in both cases on a six-month time horizon; 2) to identify trade ideas on a time horizon of up to three months, relating to specific instruments and segments of the yield curve, which are predominantly derived from relative value considerations or driven by events and which may differ from our long-term credit opinion on an issuer. Buy or Sell refer to a trade call to buy or sell that given instrument; 3) to express views on the likely future performance of sectors, benchmark indices or markets in our fixed income strategy products. HSBC has assigned a fundamental recommendation structure, as described below, only for its long-term investment opportunities.

HSBC believes an investor’s decision to buy or sell a bond should depend on individual circumstances such as the investor’s existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems to describe their recommendations. Investors should carefully read the definitions of the

recommendations used in each research report. In addition, because research reports contain more complete information concerning the analysts’ views, investors should carefully read the entire research report and should not infer its contents from the recommendation. In any case, recommendations should not be used or relied on in isolation as investment advice.

HSBC Global Research is not and does not hold itself out to be a Credit Rating Agency as defined under the Hong Kong Securities and Futures Ordinance.

Definitions for fundamental credit and covered bond recommendations from 22 April 2016

Overweight: For corporate credit, the issuer’s fundamental credit profile is expected to improve over the next six months. For covered bonds, the bonds issued in this country are expected to outperform those of the other countries in our coverage over the next six months.

Neutral: For corporate credit, the issuer’s fundamental credit profile is expected to remain stable over the next six months. For covered bonds, the bonds issued in this country are expected to perform in line with those of the other countries in our coverage over the next six months.

Underweight: For corporate credit, the issuer’s fundamental credit profile is expected to deteriorate over the next six months.

For covered bonds, the bonds issued in this country are expected to underperform those of other countries in our coverage over the next six months.

Prior to this date, fundamental recommendations for corporate credit were applied on the following basis:

Overweight: The credits of the issuer were expected to outperform those of other issuers in the sector over the next six months.

Neutral: The credits of the issuer were expected to perform in line with those of other issuers in the sector over the next six months.

Underweight: The credits of the issuer were expected to underperform those of other issuers in the sector over the next six months.

Distribution of fundamental credit and covered bond recommendations

As of 08 May 2017, the distribution of all independent fundamental credit recommendations published by HSBC is as follows:

All Covered issuers Issuers to whom HSBC has provided Investment Banking in the past 12 months Count Percentage Count Percentage

Overweight: 76 23 18 24

Neutral: 171 52 65 38

Underweight: 83 25 17 20

Source: HSBC

For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures.

Recommendation changes for long-term investment opportunities

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This report does not constitute advice in relation to any securities issued by Russian SSI entities on or after July 16 2014 and as such, this report should not be construed as an inducement to transact in any sanctioned securities.

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Manager for queries regarding other research reports. In order to find out more about the proprietary models used to produce this report, please contact the authoring analyst.

Additional disclosures

1. This report is dated as at 10 May 2017.

2. All market data included in this report are dated as at close 08 May 2017, unless a different date and/or a specific time of day is indicated in the report.

3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC’s analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC’s Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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1. This report was produced and signed off by the author on 09 May 2017 15:15 GMT.

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The Green Bond Principles AGMThe Green Bond Principles (GBP) Annual General Meeting and newly released country specific guidelines confirmed the green bond market’s focus on increasing disclosure. Simultaneously, the GBP continued to evolve, encouraging new categories of issuers to come to market and to embrace Social & Sustainability Bond market participants.

Green Bond Principles Annual General Meeting

At the ICMA Green Bond Principles Annual General Meeting on 14th June in Paris, the 2017 version of the GBP1 was released. The updated version was designed to clarify and strengthen the Principles, by including:

• Detail on the objectives of the Green Bond Principles and their role in promoting the Green Bond market

• Expansion of the definition of green categories (notably re-separation of Green Buildings) and new impact reporting metrics (namely Water)

• Project and traceability language updated to facilitate issuance growth, especially from sovereigns and corporates

• Stronger guidance on issuer communication of environmental strategy and management of material environmental and social risk factors

Other significant developments include the release of the Social Bond Principles (SBP)2 (which were developed from the Social Bond Guidance, first written by HSBC together with two other banks in June 2015). The structure of the SBP is intentionally similar to the GBP, with the key distinction being the ‘Use of Proceeds’ which details examples of projects to support positive social outcomes; these include affordable housing, employment generation, food security and socioeconomic advancement and empowerment. The remaining three pillars follow that of the GBP.

New Sustainability Bond Guidelines3 have also been published to provide guidance for bonds combining green and social projects. These Guidelines focus on defining Sustainability Bonds, and then show issuers and investors that such bonds should have frameworks that are constructed in accordance with either the GBP or SBP, determinable by the Principles the issuer feels is most aligned to the desired output of the investments made.

Social and Sustainability bond market participants are now also eligible to become members of the Green Bond Principles and are fully integrated in its governance. This includes the opportunity to put themselves up for election to the Executive Committee.

An online Q&A4 has been made available to provide detailed guidance for participants in the Green, Social and Sustainability Bond markets.

HSBC’s involvement

HSBC is a member of the Green Bond Principles Executive Committee and has been working on the update of the Green Bond Principles for the past year. In addition HSBC was one of the founding writers of the Social Bond Principles (with two other banks), and continues to be heavily involved in its evolution.

We would be delighted to talk clients through the details of these three documents. Should you be interested please do not hesitate to get in touch with your HSBC contact and they will direct you to the Sustainable Bond team.

1 https://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/green-social-and-sustainability-bonds/green-bond-principles-gbp/2 https://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/green-social-and-sustainability-bonds/social-bond-principles-sbp/3 https://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/green-social-and-sustainability-bonds/sustainability-bond-guidelines-sbg/4 https://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/green-social-and-sustainability-bonds/questions-and-answers/

Country specific guidelines / announcements

Country specific guidelines continue to be developed, and this quarter has seen some significant ones:

China

• China gears up policy support for the development of the Green Bond Market:

– People’s Bank of China (PBoC) and NDRC look to standardise Green Bond and Green finance guidance published by different authorities

– China Securities Regulatory Commission (CSRC) released “Guidelines for Supporting the Green Bond Market Development”. A green channel will be established to accelerate the approval of bond issuance, and financial institutions will be encouraged to invest in green bonds

– PBoC is considering including financial institutions’ green credit performance evaluation into the Macro-Prudential Assessment (MPA) system

India

• Securities and Exchange Board for India (SEBI) released an updated circular regarding Disclosure Requirements for Issuance and Listing of Green Debt Securities:

– These regulations align well with the Green Bond Principles

– The CBI reports they believe the new guidance from SEBI will provide additional certainty for both issuers and investors, and expect that this announcement will catalyse further growth in the already significant Indian green bond market

– India was the 7th largest green bond market in 2016, and in 2017 has maintained its ranking in the Top 10 of global green bond issuer

Singapore

• Monetary Authority of Singapore (MAS) announced a Green Bond Grant scheme which will cover the costs of external reviews for green bond issuance

Cities

• City of Cape Town, Philippines, Bangladesh, Nigeria and Morocco have also all been reportedly planning to issue Green Bonds in the future… Watch this space

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Key facts & figuresIncluding deals and state of the market.

2017 Q2 to date (as at June 23), has once again shown consistent strong performance with 28% growth in terms of USD equivalent deal volume, from 13% increase in number of transactions. Average deal size creeps up to USD364 equivalent from 2016 Q2 of USD320 equivalent.

2017 1H HSBC has acted as Green Structuring Advisor and or Joint Lead Manager on 12 of these early 2017 deals, roughly 18% of the green, social, sustainability bond market.

Whilst we appreciate various green bond databases exist, our own HSBC Green Bond database (made from reconciling Dealogic, Bloomberg, CBI and Environmental Finance) as at 23 June reports the following statistics:

Deal Pricing Date by Time period

Deal Value $ (Proceeds) (m)

Number of dealsAverage deal size (USDm)

% rise (value of deals)

% rise (volume of deals)

2017 Q1 31,450 83 379 49% 113%

2016 Q1 21,085 39 541 101% 63%

2015 Q1 10,515 24 438 18% 100%

2014 Q1 8,911 12 743 - -

2017 Q2td 25,102 69 364 28% 13%

2016 Q2 19,536 61 320 51% 110%

2015 Q2 12,905 29 445 62% 71%

2014 Q2 7,951 17 468 - -

2016 Q3 29,569 65 455 280% 171%

2015 Q3 7,791 24 325 11% 26%

2014 Q3 7,013 19 369 - -

2016 Q4 29,581 71 417 67% 82%

2015 Q4 17,723 39 454 78% 44%

2014 Q4 9,977 27 370 - -

2017 1Htd 56,553 152 372 39% 52%

2016 2H 59,149 136 435 132% 202%

2016 1H 40,622 100 406 73% 89%

2015 2H 25,514 45 567 38% -2%

2015 1H 23,420 53 442 39% 4%

2014 2H 18,440 46 401

Notable deals this quarter include:

RATP – Régie Autonome des Transports Parisien - became the second state-owned public transport operator headquartered in Paris, France (behind SNCF) to issue a Green Bond in June with a EUR500m 10yr inaugural trade at OAT+30bps

As a State-owned public transport company, RATP supports the development of low-carbon and sustainable transport. The Group commits to be a major player in sustainable mobility and sustainable city infrastructure, to reduce its environmental footprint. In particular, RATP has set the objectives to reduce its greenhouse gases emissions (GHG) by 50% and its energy consumption by 20% between 2015 and 2025. Following a roadshow announcement on 6th June, the transaction attracted an impressive and granular orderbook of over EUR1,6bn (exc. JLM) within 2,5 hours of bookbuilding. The Use of Proceeds will fund RATP investments, located in France in order to finance, in whole or in part, “future projects” and/or refinance “existing projects” in the following categories: Public transport infrastructures maintenance and renovation, Public transport rolling stock renovation and renewal, Public transport station and spaces modernization and other public transport low-carbon vehicles. The second opinion was provided by Vigeo.

Intesa Sanpaolo inaugural green EUR 500m 5yr at MS +83bps, represents the first green bond issued by an Italian Financial Institution

The transaction marks Intesa Sanpaolo’s debut in green format and remarks their forefront position in the sustainability space.

Intesa Sanpaolo decided to open the books on Friday (post Corpus Christi holiday) with pricing guidance at MS+95 area for a EUR 500m “no grow” transaction. With a book over EUR 1.5bn revised guidance were released at MS+85a (+/-2bp) to set final price at MS+83bps, 5bps inside Intesa Sanpaolo interpolated secondary senior “conventional” curve.

The proceeds of any Intesa Sanpaolo Green Bond will be either dedicated to green projects directly from Intesa Sanpaolo or from any one of Intesa Sanpaolo’s subsidiaries dedicated to green financing (i.e. Mediocredito Italiano, Banca Prossima, etc.), which will be funded via intercompany loans specifically in the areas of: Renewable Energy, or Energy Efficiency in the infrastructure space (namely energy storage or green buildings). The second opinion was provided by Vigeo.

NWB EUR1500m Jun-24 & EUR500m Jun-32 ‘Affordable Housing’ Bond – Social Bond represents the largest transaction in the Social Bond format to date

With a successful track record in the Green Bond market since 2014, NWB Bank announced the mandate for their inaugural Affordable Housing Bond on 10 May 2017 with the intention to conduct a European roadshow introducing their new framework.

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Following positive investor feedback and with a constructive market backdrop, the mandate and IPTs were released on 30th May 2017 at MS-9a for a 7yr EUR benchmark and MS+11a for a 15yr EUR500m (no grow) transaction. Orderbooks closed by late morning London with orders in excess of EUR1.95bn on the 7yr and EUR875m on the 15yr (exc. JLM). Based on the size and quality of demand, the 7yr tranche was upsized to EUR1.5bn and final pricing for the 7yr was at MS-13, representing no new issue premium, and at MS+9 for the 15yr with only 1bp premium to fair value. Proceeds of the bond will be used for lending to Social Housing Organizations in The Netherlands according to NWB Bank’s affordable housing bond framework. The second opinion was provided by Sustainalytics.

QBE inaugural green USD300m 5.5yr – represents first green bond from the insurance sector

Trade brings an innovative approach to green bond investment, as is the first time the market has seen a green bond issuer use the proceeds to buy other green bonds – as per the QBE public Green Bond Framework, the proceeds will be used to finance or refinance the purchase of green bonds which have been assured either via the Climate Bonds Standards or which have received positive second opinions from sustainability experts and further have been reviewed under QBE’s own sustainability review process and in line with QBE’s premiums for good programme.

Thus the transaction not only brings fresh capital to fund investments across a range of key green sectors but also supports the adoption of best practice and improving standards in the green bond market.

Launched with IPTs of T+140a, the transaction received substantial interest from investors, with momentum continuing throughout the London morning. Supported by a high quality orderbook reaching over $867m, the decision was made to revise guidance to T+125bps area (+/3bps wpir).

The little price sensitivity showed by accounts allowed the issuer to set final pricing at T+125bps, allocating 59% of the bond to Green investors (including 33% Dark Green and 26% Light Green).

2017 Q2 represents great diversification of both new issuers and new types of Use of Proceeds, again reinforcing the markets exciting development pattern. Whilst we are mindful year-end figures will be unlikely to reach the USD200bn Moodys predicted at the start of the year (see last quarter note) we are confident that the HSBC Research estimate of USD120- 130bn equivalent remains very possible.

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