Project Finance course.

Lecture : How green is your asset?

Introducing on Green bonds and EU green
taxonomy

ACADEMIC YEAR 2022 - 2023

Lecturer: Sylvaine CHUBERT,
EDHEC Faculty member
Managing Director SC Training & Consulting Sarl
 Infrastructure assets: How to close the « green gap »?
In today’s world, energy, industry and buildings are responsible for more than 70%
of global greenhouse gasses (GHGs);

So the urgency of mobilising private finance to decarbonise infrastructure

worldwide is well understood.

But public funding alone will not be enough to pay for what is now estimated to be
a US$ 93.2 trillion transition at the scale and speed that is needed to meet the Paris
Agreement goals limiting global warming to 1.5°C by 2030.
Less clear is how private financiers, asset owners and policy-makers can work
together to move from the current position, in which private capital principally
flows to developed nations —largely into assets that are already generating
predictable revenues— to a future position in which money also flows to what is
often perceived as riskier opportunities in under-financed emerging markets.
Also market players need to build up transparent and effective reference
frameworks which can help all stakeholders to determine, label the “ greenness” of
their investment opportunities.
 Green investors tend to target saturated markets
As this 2022 PwC research shows, private capital continues to heavily favor mature markets, i.e. high-income
nations buttressed by membership in climate-conscious international organisations such as the OECD and the
European Union (EU). 
More encouraging is the fact that Investors are increasingly looking beyond purely financial data—the
environmental and social impact of investing is now actively considered. The environmental and social returns of
emerging market investment are inevitably higher than developed markets, but with risk.
Green financing opportunities to be found among a selective number of emerging markets. Here are two
examples

• By contrast, an analysis of Vietnam, which is not among the

highest-performing countries or territories in the overall index,
shows a +32% score for green financing opportunities. This
demonstrates the key finding that the value of projects in this
jurisdiction exceeds its relatively modest GDP, and far
outperforms its position against global heavyweights, where low
risk typically yields low return for investors. Indeed, in Vietnam
PwC witnessed the creation of a dynamic market for both local
and overseas investors in primary and secondary markets; and
government reforms have opened up opportunities in large-scale
solar and wind projects (both in hilly areas and offshore),
resulting in an increase in green financing opportunities.
• Another example, Chile, a country with economic characteristics
similar to those of Vietnam, is catapulted to the top of the index
by its green financing score of +41%—the highest score in PwC
study for this criterion.
• Political stability, a clear and consistent regulatory framework—
including a national policy to reach 100% renewable energy by
2050—and openness to international investors combine to create
an attractive environment in which to promote and invest in clean
energy projects. Currently, wind and solar make up the bulk of
power generation projects under construction—and the capital
city of Santiago already has the second-largest electric public bus
transportation fleet of any country in the world (although it is
surpassed by some cities in China).
 And now meet the….. EU Taxonomy on sustainable
investments! (1/4)
The Taxonomy Regulation entered into force in the E.U. on July 2020.

It establishes the basis for the EU taxonomy by setting out 4 overarching

conditions that an economic activity has to meet in order to qualify as
environmentally sustainable.
The Taxonomy Regulation establishes six environmental objectives
1. Climate change mitigation
2. Climate change adaptation
3. The sustainable use and protection of water and marine resources
4. The transition to a circular economy
5. Pollution prevention and control
6. The protection and restoration of biodiversity and ecosystems

Different means can be required for an activity to make a substantial contribution

to each objective.
How can your project be « taxonomy –aligned? »
Taxonomy-aligned activities are eligible economic activities that are making a
substantial contribution to at least one of the six environmental objectives
while “doing no significant harm” to the remaining objectives. For an activity
to be aligned with the taxonomy, it must meet the four overarching conditions
outlined in the framework.
1. Substantial Contribution: For an activity to be considered taxonomy
aligned, it must make a substantial contribution, as determined by the
technical screening criteria, to one of the six environmental objectives.
2. Technical Screening Criteria: The technical screening criteria use strict
thresholds to assess if an eligible activity is taxonomy-aligned. It is a
binary pass/fail system, so there are no shades of grey. For example,
carbon emissions from electricity generation must be less than 100g
CO2e/kWh to be taxonomy-aligned.
3.  Do No Significant Harm: An activity that makes a substantial
contribution to one objective is only considered sustainable if it does not do
significant harm to any of the other five environmental objectives. For an
activity to make a substantial contribution to climate change adaptation.
Example: it must reduce material physical climate risks without adversely
affecting other efforts, such as the protection and restoration of biodiversity
and ecosystems.
4. Minimum Safeguards: Taxonomy-aligned activities should be carried out in
alignment with the OECD Guidelines for Multinational Enterprises and UN Guiding
Principles on Business and Human Rights.
By meeting these conditions, the revenue, capital expenditures, and operating
expenses for an economic activity can be considered taxonomy aligned.
 The Sustainable Finance Disclosure Regulation (SFDR)
The SFDR sits at the core of the EU Action Plan and supplements the
current rules governing financial product manufacturers and financial
advisers in the European Union (such as MIFID) .

Aim : increase transparency and comparability of ESG information for end

investors and minimize greenwashing.

By setting strict minimum disclosure standards, the SFDR encourages

greater transparency from FMPs and financial advisors when it comes to
their sustainability-related policies and objectives and seeks to raise the
bar for investment products.

Principal Adverse Impacts

Also referred to as PAIs, Principal Adverse Impacts refer to the negative
sustainability effects that investments, decisions, or advice might have.
PAIs are central to the SFDR and are key to understanding its objectives.
Under the SFDR, financial market participants must disclose their
exposure to certain PAIs.
The EU Benchmarks Regulation (EBR)
The EBR was developed to implement a common framework to
ensure benchmarks are produced in a robust and reliable
manner.

It applies to benchmark administrators, contributors, and users of

benchmarks.

The EBR defines two climate benchmarks with similar objectives

but differing levels of ambition:

1. the EU Climate Transition Benchmark (EU CTB) and

2. the EU Paris-Aligned Benchmark (EU PAB).

Benchmark administrators are required to report on how key

elements of their methodology reflect ESG factors for each
benchmark or family of benchmarks. For benchmarks pursuing
ESG objectives, administrators must explain how ESG factors are
reflected in the benchmark’s characteristics
Now, about project bonds
A capital markets’ instrument designed to be sold to a
wide investor base
The potential investor base is typically composed of
“passive” investors
A so-called “offering memorandum” is used to market
the bond to potential investors
Enhanced liability in this offering document arises from
securities laws designed to protect investors (ex: MIFID
in Europe, AMF regulations in France, Bafin in
Germany, SEC in the US)
The level of scrutiny and diligence for an offering
document is much higher than for a bank information
memorandum
Liability attaches not only to the issuer of the bonds but
also to the underwriters selling the bonds
Due diligence process is extensive, involving attorneys,
accountants and various independent experts
 Why project bonds?
Additional source of funding, especially for large
projects with multisource financing
Potential source of pricing competition
Historically, the bond market has been willing to
buy long term project bonds
The tenor of the bond can be matched with the
life of the project or long-term offtake contracts
Increasingly seen as an instrument to de-lever
commercial banks from existing project
exposure
In such case, project bonds are used to refinance
bank lending once projects are operational and
cash flows are stabilized (ie post - Ramp up).
 At issuers level, the Bond Offering Document will have to
include
• Risk factors
• Guarantor/Sponsor disclosure
• Description of project documents
• Description of the bonds summarizing the terms of the bonds
• Description of the other finance documents
• Usually very limited SEC reporting for greenfield projects
• Expert reports for the relevant industry (including market and
technical reports); and
• Pro forma projections (both revenue and cost projections),prepared
by the industry expert, that include Base Case Debt Service
Coverage Ratios

Note: A Bond Offering Document has significantly more disclosure

than a bank Preliminary Information Memorandum (PIM).
 The emergence of Green bonds
• Green bonds are similar to traditional bonds, but the proceeds
are used exclusively for projects with environmental benefits.
• Examples of eligibility: renewable energy projects but also
energy-efficient buildings, corporates with a sustainable
development strategy, and wastewater treatment projects.
• Green bonds were first introduced in 2008 by the World
Bank.
• Initially supported by multilateral issuers and governmental
issuers (World Bank, IFC, EBRD, European Investment
Bank, Asian Infrastructure Investment Bank etc), recent
issuances are more and more initiated by private corporates,
many of them active in the renewable energy sector.
• In 2014, a consortium of internationally recognized global
banks outlined the so-called “Green bonds principles”
 How big is the green bond market today?
Source: Climate Bond initiative, NN Partners

Since the first green bonds were issued in

2007, the market literally exploded.
$269.5 billion by the end of 2020 and
could reach $400-$450 billion in 2021.
Around 1 trillion expected in 2022…..and
eventually $2 trillion achieved by Q3 2022!
Supporting factors for green bond
issuance this year include the U.S. return
to the international Paris Agreement to
fight climate change and investors and
policymakers’ growing focus on
decarbonising industrial sectors.
Green bonds are attracting attention
because the need to meet emissions-
reduction targets will need trillions of
dollars of capital from public and private
sectors.

The proceeds of green bonds were mainly

aimed at energy sector investments,
followed by low-carbon buildings and low-
carbon transport.
 There are clear advantages for green bonds
• Increased investor reach, the potential for slightly tighter pricing (i.e. a very modestly
reduced cost of capital), the ability for issuers to diversify their investor base,
introducing discipline in measuring and reporting on the social and environmental
impact of the use of proceeds, and brand and reputation benefits for issuers.
• The short-term additional costs of issuing green bonds compared to other bonds of an
issuer are modest, and are significantly outweighed by the benefits.
• The main costs are those associated with external review or verification, and
those associated with monitoring and reporting
• The additional transparency that is inherent to green bonds provides many benefits.
• For investors, it provides them with assurance that their money is being invested in
assets that provide specific environmental benefits, it creates an enhanced dialogue
with the issuer, it provides them with more insight into the issuer’s projects and
strategy, it helps with their reporting to their clients and it can reduce due diligence
costs when trying to identify green investment opportunities among other fixed income
securities.
• For issuers, it is an opportunity to communicate about its activities and provide
reassurance to investors, especially to investors that have not previously invested in the
issuer
Emergence of Green bonds labels
 What is the Climate Bond Initiative? How to be certified as climate
bond?

The Climate Bonds Initiative is an investor- The Climate Bonds Standard is a

focused not-for-profit working to mobilize screening tool for investors and
bond markets for climate change solutions. governments which allows them to
Climate change solutions involve a rapid easily prioritize climate and green
transition to a low-carbon and climate bonds with confidence that the funds
resilient economy. are being used to deliver climate
This initiative aims to reduce the cost of change solutions.
capital for climate related investments,
while at the same time seeing the creation of
The Standard is backed by
safe and secure investments suitable to the the Climate Bond Standards Board of
needs of pension and insurance funds.  investor representatives, which
collectively represent $34 trillion of
assets under management

See the Key CBI standards update

https://www.climatebonds.net/climate-bonds-standard-v3
 A new competitor to green bonds: SLB’s?
• Sustainability-linked bonds (SLBs), unlike green bonds, are not
issued for specific green or social projects
• but are linked to predefined sustainability or ESG
objectives.
• Such bond structure, where Issuers set their own key
performance indicators (KPIs) and targets linked with debt
– have also attracted criticism.
• This  relates to their structure, lack of focus on the most
material ESG metrics and level of investor compensation in the
form of a coupon step-up if issuers fail to meet their self-
imposed targets. 
• The same mechanism of pricing step up is now being used in
new Sustainability linked debt solutions where debt pricing is
linked to the borrower reaching (or failing to reach) certain pre-
defined KPI’s
 Innovation. May 27, 2022: France issues a new kind
of green bond indexed on inflation
• It's a world primer. France has issued a four billion euro green bond indexed to
inflation, Agence France Trésor (AFT) announced
• This is the third "green OAT", the name of the French bond, issued, bringing to
€49.4 billion since 2017 the funds raised to finance investments in favour of the
energy and ecological transition.
• In 2022, €15 billion of government expenditure is eligible for green debt.
• As this debt is indexed to inflation, its interest rate is not fixed but variable and
adjusted according to the harmonised European consumer price index.
• The base interest rate set by the AFT, the body responsible for placing France's
debt on the markets, is 0.1%, with a maturity date of July 2038.
• The operation has aroused strong interest from investors: total demand has
reached more than 27 billion euros, for only four billion available.

13/03/2023
 Regional & sectoral breakdowns
Climate Bonds’
. Market Intelligence has revealed that
USD2 trillion in green bonds have been issued to date.
Unlike other data sets on green bonds, Climate Bonds
screens self-labelled bonds issued globally and only
includes bond issuance demonstrating climate ambition
aligned with the Paris Agreement in its Green Bond
Database.
The news comes as Climate Bonds calls for the market
to scale labelled issuance to a volume of USD5trillion
per year by 2025 to fight climate collapse, which looms
large after years of inaction.
COP-27 highlighted the massive investment required to
tackle climate change in emerging markets including
those in the Middle East and Africa (MEA). As the host
country, Egypt’s location brought renewed focus to the
region which, having been hit particularly hard by the
ramifications of COVID-19, is also suffering the
economic impacts of the Russian invasion of Ukraine.
Climate Bonds had recorded USD33.2bn of thematic
debt originating from the region. While growth over the
last four years has been steady, cumulative volumes are
less than 1% of the global GSS+ market, indicating vast
potential for growth.
 Emerging markets:
Access Bank sells 5-year green bonds in Nigeria
source: IJ Global 29 Apr 2022

Nigerian commercial lender Access Bank has sold green bonds worth
$50 million for the financing of sustainable projects.
The senior unsecured debt instrument has a 5-year tenor.
The bank said in a disclosure to the Nigerian Exchange (NGX) that it
“has concluded the sale of a $50 million step-up green notes due 2027
under its $1.5 billion Global Medium Term Note Programme through a
private placement.”
The notes will be issued for 5 years with a settlement date of 3 May
2022.
The issuance of the notes will be used for the financing or refinancing
of greenfield and brownfield projects that fit with its green financing
framework, set out in November 2021.
“The notes will also be listed on the London Stock Exchange.
Moreover, the regulator, the Central Bank of Nigeria, has approved the
transaction.
The issue is denominated in USD rather than local currency. Previously,
Access bank sold N15 billion worth of green bonds in March 2019,
listed on the NGXX and Luxembourg Stock Exchange.

13/03/2023
How green is your asset?
Building green bonds common standards
The green bond taxonomy (1/2)
 Building green bonds common standards
The green bond taxonomy (2/2)

The systematic classification and definition

of qualifying items is called a ‘taxonomy’,
and in the case of classifying and defining
green assets and projects, it can be termed
‘climate-aligned’ or ‘green’ or ‘sustainable
finance’ taxonomy, whether it is identifying
assets that address climate change only,
broader environmental benefits or both social
and environmental impacts.
A taxonomy provides a list of eligible assets
with thresholds and metrics as necessary.
Harmonising eligible assets and metrics
across the markets is key for this taxonomy
to provide guidance to both issuers and
investors in the relevant jurisdiction.
How far are key industries in their certification process?
.
 Measuring and certifying the … »greenness » becomes a must!

The sector criteria used for

certification of green bonds
are developed through
extensive consultations with
technical expert, industry
practitioners and investor
groups, finally vetted through
a public consultation process
And for each bond issuance,
external second opinions and
independent verifications are
now systematically required
and published
Case study

EVN Finance green

bond issuance in
Vietnam

July 2022