Climate Bonds

CDC Climat on green bonds and amazing success of Ile-de-France’s €200m green bond / Tickets still going for NYC Env Bonds next Wed / +Berlin +Cologne

Posted on 18. May, 2012 by Sean Kidney in blog

CDC Climate has published a useful paper on green bonds. http://goo.gl/ht9Fu. They suggest that at a time when bank lending is squeezed, green bonds offer an alternative financing for initiatives with an environmental goal.

They also review Ile-de-France regional council’s recent 12 year, 3.625%, environmentally and socially responsible bond – essentially a “part” climate bond. It was an amazing success, 175% over-subscribed in the space of half-an-hour! This meant that the Region, which was expecting a €200 million loan, saw its order book swell to around €620 million. Ultimately, €350 million was raised for energy, low-energy social housing, and dedicated biodiversity as well as social and solidarity economy initiatives. Non-financial vetting of the bond was done by Video. Buyers were 84% French, 15% German and 1% Austrian. Full credit to Tanguy Claquin at underwriters Credit Agricole.

> I’ll be at the NYC Environmental Bonds conference next Wed – discount tickets are still available if you buy through Climate Bonds. http://goo.gl/k2sKx

> Or join me at the Global Unions Committee on Workers’ Capital in Berlin 30 May, or at Carbon Expo in Cologne 31 May.

Green Shoots of Recovery in the Securitisation Markets?

Posted on 16. May, 2012 by Sean Kidney in blog

Across Europe and a number of other regions bank recapitalisation pressures have led to a reduction in business and project lending – and thus reduced renewable energy lending.

This is a problem because the bulk of project finance (95% globally) comes from bank lending.

The development of a market for securitized renewable energy and energy efficiency assets and loans, allowing banks to quickly recycle limited loan capital, is going to be vital to ensuring banks deliver the project finance needed as we “green” energy systems.

This guest report by guest contributor Tadhg Molony explores the current state of the securitization market and its prospects going forward.

Introduction

Securitisation markets remain stubbornly subdued since the 2008 Lehman Brothers collapse, however speckled signs of recovery can be observed, for example increased residential mortgage backed securities (RMBS) are being issued in the UK.  This report reviews significant recent activity in the securitisation markets, identifies possible signs of recovery and potential implications for the clean energy sector and climate finance.  The analysis focuses on Europe and America – the two largest securitisation markets – which have been hit the most by the financial crisis and as a result, have seen significant changes to their structured finance market dynamics. Regulatory changes, which will generally place further restrictions on supply, are also examined.

New securitisations such as UK RMBS are being increasingly issued despite government led market intervention and it is speculated that these issues signal a thaw in the securitisation market or ‘green shoots of recovery’. Recovery at the established investment grade end of the market pre-empts an eventual recovery in the market dynamic of all asset classes, which would include climate finance /renewable energy assets.  Already recently issued Climate Bonds by public sector institutions, such as $500M by the IFC and $148M by the EIB (both in April 2012), have been snapped up by investors.

The Climate Bonds Initiative aims to further increase confidence in climate finance among both investors and originators through establishing a widely recognisable and reliable standard for clean energy assets, which investors are generally less familiar with.  The Climate Bond Standard identifies quality and environmentally sound investments, which can be used as part of an organisation’s Corporate Social Responsibility targets.  The Prime Collateralised Securities Initiative (PCSI), a similar standard for established investment grade assets, also hopes to benefit from introducing a recognisable standard and is campaigning to gain regulatory concessions such as a reduction in the ECB Repo haircut, concessions which possibly could also be claimed by the Climate Bond Standard.  However both supply and demand in the securitisation markets must continue to grow before the benefits of standardisation can be fully realised.

Market Developments

Europe

Europe did not suffer the same systematic problems of toxic sub-prime mortgage securitisation, as did the United States; between 2007 and 2010 only 0.95% of structured finance issues defaulted compared with 7.7% of those in the US.  However sovereign debt fears, investor caution surrounding regulatory reform and continuing uncertainty about the risk profile of certain assets led to a contraction in European securitisation markets by 4.3% to €367.2bn in 2011, compared with a peak of €481bn in 2006.

In the Eurozone new issues are being restrained, as highly rated banks access cheaper funding without securitisation and poorly rated banks in Italy, Spain etc. use their loan portfolios as collateral to access cheap ECB funding.  Figure 1 shows that 77% of 2010 overall European securitisation issuance was ‘retained’ by the banks i.e. held as ECB collateral and this only decreased to 76% in 2011.  Market analysts are cautious about the growth of private issue Eurozone securitisation in 2012 whilst ECB intervention continues.

Figure 1 European Securitisation Issuance 2002 – 2010 € bn (Source: AFME)

There are more recent positive signs of recovery and investment is returning to the secondary markets from the USA and Asia, as investors see that RMBS are outperforming other asset classes, whilst generating good yield, see Figure 2 below.  UK and Dutch markets are the most active and there is actually a shortage of new investment products.  In response, UK lenders such as Santander and more recently building societies such as Skipton, have announced additional RMBS issuances in the past three months, see Table 1 overleaf.  Additionally whole business securitisation (WBS) has picked up in the UK since 2010; Centre Parks’ recent holiday parks WBS was more than 2X oversubscribed.

Figure 2 Credit Spreads volatility by asset class, Jan – Oct 2011 (Source: AFME)

Table 1 Selected UK RMBS deals announced over the past three months

Another interesting development in Europe is the Prime Collateralised Securities Initiative (PCS), led by the Association for Financial Markets in Europe (afme) and the European Securitisation Forum, which is going to be launched later this year.  The PCS is not unlike the Climate Bonds Initiative, and it has been designed to boost investor confidence and market liquidity, through labelling high quality assets and therefore reducing adverse selection risks.

Rediscovered  investor’s appetite for securitised products at investment grade in Europe is a sign of recovery and increased normalisation in the market will eventually benefit all asset classes, including those climate finance related assets such as renewable energy.

United States

The American securitisation market continues to shrink and 2011’s $1,784.9bn issuance represented a contraction of 14.3% on 2010.  As Figure 3 shows the American market is heavily dependent on the federal mortgage agencies; 92% of US issuance originates from Fannie Mae, Freddie Mac etc.  Government backed agency intervention is crowding out private sector activity and there has only been one private issuer of RMBS in the past three years, California based ‘Redwood Trust’, which has made four issuances; most other non-agency loans have been confined to auto and student loans.

Activity in Q1 2012 has been more positive with RMBS deals attracting plenty of demand from investors and Q1 2012 issuance growing 4.4% on Q1 2011. The announcement made by the giant insurance AIG about being interested in returning to the MBS market later this year can be interpreted as another sign of a return of confidence. It is widely recognised that intervention by the federal agencies will have to be reduced before the US markets recover.  Only after private sector investment for investment grade asset classes occurs, will investment return for new asset classes, such as those related to climate finance.

 Figure 3 American Securitisation Issuance 2002 – 2010 US$ bn (Source; AFME)

Trade Finance

Recent dollar liquidity shortages, combined with Basel III changes related to the reclassification of short term loans as one year liabilities[1] , have made commodity / trade finance less attractive for banks.  French banks and other leading trade finance institutions are now seeking to reduce their trade finance exposure and asset securitisation is seen as a solution to maintain liquidity in the market.

Banks are already using securitisation to offload trade finance balance sheet liabilities.  Four out of five of Standard Chartered’s recently disclosed securitisations in Q2 2011 were trade finance related, see Table 2, and JP Morgan is exploring using more complex securitised products such as CDOs.  The success of trade finance securitisation shows that securitisation remains an option for banks to offload their balance sheets and also that there exists investor appetite for new asset classes.

Table 2 Standard Chartered Q2 2011 Securitisations

As it has been shown in the case of RMBS and trade finance, there is evidence of increased investor demand for securitised products and an appetite by Banks to issue newer asset classes. These are positive signs of recovery in the securitisation markets; a recovery in which Climate Finance could be expected to emerge as a mainstream asset class in the capital market.

Regulatory Developments

An overview of current and forthcoming regulatory changes is detailed in this section; these regulations impact most asset classes and not just those related to climate finance.

Banking Sector Capital Requirements – Basel & FAS160

Basel II amended the treatment of securitised investments in the calculation of bank’s regulatory reserve capital requirements: capital requirements on secured investment-grade transactions were reduced, but requirements for non-investment grade ones, which would include the cleantech / renewable energy sector, were increased.  The impact of increased capital requirements will be greater felt in Europe than in the US, as European banks generally hold more ABS on their books than US ones.

Basel III regulations, which are to be implemented from 2013 to 2019, will also serve to discourage banks from originating loans, as the calculation of a Bank’s Tier 1 capital will limit the inclusion of Mortgage Servicing Rights, and other specified indirect balance sheet assets to 10% of a bank’s common equity component.  When these defined assets combined exceed 15% of a bank’s common equity, the asset will be deducted from common equity Tier 1 capital.  This change will make issuing new securitisations less attractive for banks, which currently dominate securitisation markets, and will make it more attractive for other capital markets institutions to originate securitisations.

Additionally the US based Financial Accounting Standards Board has changed its rules related to off-balance sheet financing structures.  FAS160 requires many securitised structures; previously accounted for as sales, to be accounted for as secured financings.  This change makes securitisations less attractive for US banks, as impacted issuances will be subject to regulatory capital allocation.

Insurance Sector Capital Requirements – Solvency II

Under Solvency II the EU is currently revising insurance industry regulations to include minimum regulatory capital requirements.  The proposed regulations, published in February, would create a 7% capital requirement for securitisations, compared with 0.9% for corporate and 0.7% for covered bonds (discussed in next section).  These charges have been deemed excessive by the insurance industry, which claims the EU is using a flawed methodology as it currently takes into account US sub-prime RMBS and Europe did not have the same problem of RMBS defaults.

A recent ASME survey found that there would be a major withdrawal by insurance investors if Solvency II regulations were passed under their current form.  All asset sectors, including those related to climate finance, would suffer from any reduction in investment by the insurance sector; the insurance sector will also become more important for future market liquidity due to the other Basel III changes in the treatment of originators holdingMortgage Servicing Rights.  Due to the increased importance of the insurance industry to financing the future green economy, the EU has recently signalled it might not subject climate finance investments to Solvency II regulatory capital requirements.

Liquidity Requirements – Basel III, Covered Bonds

Under Basel III liquidity requirements, banks are required to hold enough liquid assets to meet cash flow needs for up to 30 days but securitised products have not been specifically designated as liquid assets.  Asset eligibility is subject to regional interpretation and the European Banking Authority has been tasked with reporting to the European Commission by mid-2013 to define liquid assets.  Banks are lobbying for the classification of these assets as liquid and if successful European banks could be expected to return as major RMBS buyers, but presently they remain cautious about holding these assets due to ongoing uncertainty about classification.

The extent to which demand is restrained due to this can be seen from the rush to issue ‘covered bonds’, which can be included in liquidity buffers.  In response to investor demand, a record £11bn worth of covered bonds was issued in Q1 2011, compared with £3bn the previous year.  Insurance companies are also attracted to covered bonds, as they will be treated more favourably under Solvency II.

Rating Agencies and Reporting Requirements

The role of rating agencies in assessing securitisations has been amended by recent Basel regulations and the 2010 US Dodd-Frank Act.  Under Dodd-Frank, US banks now rely solely on more complicated internal ratings which increase issuance costs for capital requirement calculations, while under Basel III the function of external rating agencies is retained, albeit reduced.

To avoid forthcoming increased capital requirements and as a cheaper alternative to capital raising, banks in some European countries, such as Spain which relies on internal ratings, have been exploring issuing securitisations using ‘optimistic’ internal ratings of structured products, whilst selling riskier chunks to outside investors. Regulators are scrutinising such deals closely and in the UK the FSA has introduced standardised models and retained the use of external regulators.

Increased reporting requirements have been adopted globally but are more demanding in the US, which has already adopted a more onerous supervisory formula approach. Further reporting requirements could be required in the US under an amended regulation AB, which would require greater securitisation disclosures such as:

• Disclosure of data points about the loan such as the security property, the loan underwriting standards and the performance of other loans from the same originator
• Computer based model of the securities cash flows
• Monthly loan-level performance data reports

Regardless of whether external or internal ratings are used, increased reporting requirements will not improve the attractiveness for originators of issuing securitisation in any asset class.

Originator Risk Retention

European and US issuers are being forced to retain capital of at least 5% of the assets they sell as securities to ensure quality investments are sold.  In Europe risk retention requirements are being set by the Capital Requirements Directive and in the US as part of the 2010 Dodd-Frank Framework.  As risk retention serves to mitigate against moral hazard, it is widely considered a good thing and should help encourage a return of investor confidence.

Repos

The European Central Bank (ECB) and the Bank of England have become stricter on the securitized products they accept as collateral for their repo operations and in recent years have increased both reporting requirements and the haircut applied.  However the ECB has been supportive of the Prime Collateral Securities Initiative (PCSI) and it is speculated that they could reward PCSI labelled assets with a less restrictive repo haircut (which currently stands at 16%).

Conclusion

Increased rates of activity during Q1 2012 have seen encouraging signs of recovery in securitisation markets.  However growing demand for securities is countered by reduced supply; increased regulation and the prospect of further increases, combined with government agency intervention such as those of the ECB (purchasing 76% of 2011 Eurozone issues), Freddie Mac etc. (purchasing 92% of 2011 US issues), is reducing banks willingness to issue new securitisations and should not be expected to continue as economic recovery gathers pace.

Whilst much regulation has been necessary to correct the mistakes of the past, care must be taken not to limit future prospects for returning to sustainable economic growth, to which securitisation can contribute.  Amendments to proposed regulations such as the classification of structured financings as liquid instruments for Basel III liquidity requirements and a reduction in the reserve capital requirements to be held for securitisations under Solvency II and Basel III will help reduce uncertainty in the market and will hasten the return of investors, as evidenced by the recent surge in demand for covered bonds.  The special treatment of climate finance assets held under Solvency II could be expected to similarly attract increased investment in emissions reductions.

The recent increase in UK RMBS securitisations and global Trade Finance issues shows not only that investor demand for securitisations remains, but also that banks retain an appetite to continue issuing new and old asset classes despite new reporting requirements etc. This momentum can be maintained as global economic recovery inevitably returns, if balanced decisions by regulators are made and if government sponsored banking sector stimulus is appropriately withdrawn. Increased privately led climate finance issuances and investments can be expected to follow market normalisation.

The rollout of the PCSI should be closely monitored, as investor responses, as well as regulatory allowances made for PCSI issued securities could serve as a model for Climate Bonds Standard securitisations and any successes could be replicated.  In the face of reduced attractiveness for banks of issuing securitisations and continuing uncertainty of the potential for overall market growth, issuers and investors must be convinced of the greater attraction of environmentally related investments, which are untainted by the financial crisis and offer greater returns, CSR credentials, as well as the security assurances for those that will be covered by the Climate Bonds Standard.

Painful truth from Jeffrey Sachs / Mongolia to Japan grid will halve Japanese energy prices / China $284m wind bond / MIGA needs a push / IEA supports climate bonds / Korea shoots for 2% of GDP going into green growth

Posted on 11. May, 2012 by Sean Kidney in blog

> In Korea, in the centre of dynamic Seoul, Jeffrey Sachs has just spelt out the painful truth in his speech to the Global Green Growth Summit:

“We are in deep trouble. Things are not working to fix the biggest problem we’ve had to fix. We have failed to do what, 20 years ago, we set out to do. We have squandered that 20 years.

This is an issue where you can feel good about a demonstration project here and there; but the scale of the impact is overwhelming us all.

Every successful economy has fossil fuels in its DNA. It can be hard to appreciate the nature of the challenge before us. To change direction is to deeply change the hardwiring of our economies.

We are on track for quadrupling of global GDP by 2050; yet keeping on emitting CO2 at current levels is suicide.

What do we do? We have to decarbonize our economies; a profoundly deep decarbonization of our energy systems.

Humanity has not yet taken on this problem. Almost no governments have even identified pathways to decarbonization.

We have left climate change to the lawyers for the past 20 years. This has been a failure. We need to bypass treaties and look for direct action. We need a new generation of problem solving – activism, expertise, energy. If we continue with our current game we are lost.

It’s leadership that’s missing. Leadership requires the capacity to explain why the future is now.

The public needs a roadmap of what the economy could look like: how power will be produced, what kind of cars they will drive, what cities will look like, what their lives will be like. That political visioning will become the driver.

> A couple of weeks ago I heard Ban Ki Moon echo this in Washington DC: “The extent of the climate change challenges before us mean that we need a new paradigm; a fundamental reset of the global development agenda. We have to use this chance to create an inclusive, green economy for the future.”

> At the Korean Summit, Japanese billionaire and renewables evangelist Masayoshi Son spelt out his proposal to connect renewable energy generation in Mongolia to Japan: wholesale power in Japan costs 20c KWh; solar and wind generation in Mongolia costs 3c KWh, with transport to Japan costing another 3c KWh. Bingo, clean energy plus big profit and Japan gets to keep its nuclear plants shut. The Mongolian Prime Minister was there, saying he supports the project. That’s the beginning of an East Asian Supergrid. We’re going to see a lot of climate bonds coming out of this.

> The Korean’s have big plans as well: the President has set a target of 2% of GDP going into Green Growth efforts. Makes me wish I was a Korean!

> At the same time we’re now seeing more renewable energy bonds in China: Yingli Green Energy, China’s third-biggest solar-energy equipment maker recently sold a record 1.5 billion Yuan ($238m) of bonds yielding as little as 5.78%, according to Bloomberg.

> Bloomberg discovered the MIGA story this week: “A World Bank Group agency providing insurance, including political-risk cover in developing nations, is being underutilized by 30% because of a lack of demand as the United Nations fights to protect the climate. They quoted me as well: “It’s a fantastic facility, but must be better utilized. If we are not using every cannon we have at this point, then there is something wrong.”

Bedtime reading: 

> At the recent Clean Energy Ministers meeting in London the IEA tabled a report on clean energy progress — and suggested governments consider climate or green bonds to finance climate change solutions. “Green bonds offer the largest potential to attract funding from institutional investors in the next decade”. See P68 on “Green and climate bonds”.

> Check out the chapter on Climate bonds – the investment case in Will Oulton’s upcoming 2nd edition of Investment Opportunities for a Low-Carbon World

IFC does $500m green bond / Pennsylvania setting up national EE loan warehouse / Korea SWF becomes climate bonds buyer / SA green bond is 14 yrs / Reuters on need for RE bonds in EU

Posted on 30. Apr, 2012 by Sean Kidney in blog

> The IFC on Friday issued a $500m Green Bond in the US market. Rated AAA, the three-year bonds was underwritten by JP Morgan. This is the first IFC green bond targeting US investors. All proceeds go to climate change related investments. Investors include BlackRock, TIAA-CREF, Climate Bond Standards Board member CalSTRS and the United Nations Joint Staff Pension Fund. The coupon is 0.5!

> The last few years have seen a range of government-sponsored energy efficiency loan programs. Where finance for loans has been provided by Governments, such as the US State of Pennsylvania, they have run up against budget ceilings as take-up exceeds expectation. The mortgage-backed securities market showed how loan portfolios could be securitized and a limited funding pool recycled back into more loans; but loan volume is needed to reach the minimum size deals the institutional investor market requires.

Pennsylvania is tackling this issue by setting up a “warehouse” facility that will take over loan portfolios from government and municipalities – starting with its own $35m “Keystone” portfolio – and securitize them. The aim is to generate a secondary market.

Penn Deputy Treasurer Keith Welks, speaking to me in Boston last week at the Ceres Conference, said they’ve been able to set up the warehouse with only a modest outlay for Penn, having successfully attracted private sector participation in the vehicle. The State is not providing any guarantees for the portfolio or the bonds.

The deal has been set up by Cisco de Vries at Renewable Funding. Cisco is famous for having come up with the original PACE (residential energy efficiency and clean energy lending) program in Berkeley, CA.

Pennsylvania deserve a Gold Star for this initiative.

> According to Responsible Investor Korea’s sovereign wealth fund, the KRW41.3trn ($36.2bn, €27.5bn) Korea Investment Corporation, is among the investors in the Swedish Krona Climate Awareness Bonds from the European Investment Bank I mentioned recently. While they only took 2% of the bond, it’s interesting that they’ve now joined European and North American investors in participating.

> More details on Sth Africa IDC green bond: that R5bn ($636m) IDC green bond I mentioned a couple of weeks ago will be, according to this week’s Budget, a 9% 14-year bond. Proceeds go to fund the department of energy’s green energy programme.

> Gerard Wynn of Reuters writes this week about how Europe needs to engage the multi-trillion-dollar bond market in financing renewable energy projects. He notes, however, that bonds can’t altogether replace bank loans, which are contracting sharply. Useful piece.

Mexico passes tough Climate Law: can you hear “nyah nyah USA”? / IaDB CC head argues for 2Gt p.c. C&C / China $476m wind bond / $25m WB Green Bond / DBSA gets Sth African green dvlpt fund job (climate bonds in mix?) / Adventures of a Climate Bonds actuary in Tajikistan

Posted on 20. Apr, 2012 by Sean Kidney in blog

> Sitting deep in Washington DC’s Inter-American Development Bank (IaDB) HQ this week, at a forum on national development banks and climate change, I heard the IaDB’s climate change head, Walter Vergara talking about Latin America’s huge adaptation as well as mitigation challenge. He noted that the world has to urgently get down to no more than to 2Gt emissions per capita quickly – and of course, that the US is still at 25Gt, and the EU at 15. “I subscribe to the view of contraction and convergence” he said. (My friend Aubrey Meyer, the lone wolf originator of the approach, will be pleased to hear that from a big bank.)

> In the same session Chantal Naidoo of the DBSA (Development Bank of South Africa) announced that the Bank has just been handed the mandate by its govt to manage the country’s ‘green development funds’. We’re hoping DBSA is going to look at climate bonds to fund some of this program, especially as the South African IDC has now done one – watch this space.

> The IaDB forum ended with the announcement that Mexico has just passed it’s Climate Law - requiring emission cuts of 30% by 2020 and 50% by 2050. It also mandates that 35% of the country’s electricity must come from renewables by 2024 and that subsidies for fossil fuels must be phased out (the OECD will be pleased; they’ve been complaining about subsidies).

> In last week’s email I neglected to mention the recent World Bank Green Bond: 5 year, 3.25%. SEK 175,000 000 ($25m).  Total outstanding amount of WB Green Bonds in Swedish Kroner is now 1,575,000,000 ($m). Underwriting again courtesy of SEB’s green bonds team.

> China wind giant Goldwind recently issued a CNY 3bn ($476m) corporate bond. Given they’re a pureplay wind company, we’d call that a climate bond. This is the first phase of a total of CNY 5bn bonds due out.

> At the Climate Bonds Initiative we’re as concerned with climate resilience as with mitigation. Initiative co-founder Nick Silver has been in Tajikistan looking at resilience issues for the World Bank. Have a look at his very entertaining “adventures of an actuary” report.

New EIB $148m Climate Bond / Climate Bond talks galore: London LSE 19 Apr; Oslo 2 May; NYC Env Bonds Conf 23 May; Toronto 25 May

Posted on 18. Apr, 2012 by Sean Kidney in blog

> The European Investment Bank issued a 7 year, 3%, SEK1 billion ($148m) Climate Awareness Bond last week. Underwriters were SEB (Christopher Flensborg is at it again) and Deutsche Bank. Looks like Swedish funds continue to have appetite for climate and green bonds.

> Climate Bond talks are everywhere this Spring:

• Nick Silver is running a private climate finance session at an LSE Grantham Institute seminar in London this week (19 Apr).
• I’m is speaking in Oslo on 2 May at a half day seminar on Climate Bonds and Standards hosted by DNV.
• Kirsten Spalding (Standards Board/INCR), Mike Wilkins (Standards Industry Working Group/S&P) and I are all speakers at the NYC Environmental Bonds Conference on 23 May. (25% discount for readers of this email).
• I’m speaking at a Climate Bonds breakfast event in Toronto on 25 May.

Let me know if you’d like to find out more.

Plus I’ll be in Washington DC this week and in Australia in mid-May. Let me know if you’d like to meet.

Sth Africa IDC issuing $700m green bond / WB does another $115m / China orders banks to assess enviro risks – Go China! / UK Chancellor urged to get serious / Enviro Bonds conf NYC 23 May: 25% off

Posted on 08. Apr, 2012 by Sean Kidney in blog

> According to BusinessDay and Responsible Investor, South Africa’s state-owned Industrial Development Corporation is issuing a R5.2 billion green bond to finance clean energy projects. Expected return is 9%. R1bn of the bond was bought by the USD115bn South African Government Employees’ Pension Fund (GEPF).

> The World Bank has issued a new Green Bond - SEK 175m/USD26m, 5 year, 3.2%. That takes total outstanding Swedish Kroner Green Bonds from the World Bank to SEK1,575m, or USD238m. SEB was, as usual, underwriter.

> Robust industry policy at work:  The Chinese government has recently introduced a “green credit” guideline for commercial lenders to facilitate economic restructuring in a manner that’s “environmentally friendly and saves energy”. The China Banking Regulatory Commission, the country’s top banking regulator, has ordered lenders to cut loans to industries with high-energy consumption and high levels of pollution or excessive capacity, and to strengthen financial support for green industries and projects. The regulator wants banks to rate the environmental and social risks inherent in their clients’ businesses and take the results as a key reference in their ratings and access to credit. That’s an AAA+ regulatory move! http://english.peopledaily.com.cn/90778/7739922.html

> Investors and NGOs (including Climate Bonds) are pressing UK Chancellor to get serious about supporting green industries, including relaxing borrowing restrictions on Green Investment Bank.

> An Environmental Bonds conference is being held in New York on 23 May 2012. Climate Bonds is a partner (CB Standards Board member Kirsten Spalding from INCR and I are both speakers). Lucky readers of this blog get a 25% discount on registration. Got to http://www.environmental-finance.com/file/437/eb12ny-climatebondsinitiative

Bond news: IRS provokes roaring laughter w. Destiny Green Bond ruling / Nice model w. Morris C. distrib. solar / Fitch rates wind bond A-! / $50m Swedish wind bond / Alert: NYC Env Bonds Conf 25 May

Posted on 26. Mar, 2012 by Sean Kidney in blog

>You have to hand it to the US IRS (Internal Revenue Service) – they seem to have a sense of humour.

In 2004, the US Congress created tax-credits for Green Bonds for large construction projects that would serve as demonstrations of alternative energy technologies. In 2007 Destiny USA issued $228m in Green Bonds under the program to finance a “green” expansion of a big shopping centre in Syracuse NY.

But they didn’t follow through. According to Syracuse.com, it seems Destiny didn’t go ahead and install the energy saving technologies promised in their tax credit application “because of a downturn in the economy” – and would “probably never do so”.

The IRS decided to do an audit – good idea! But to the surprise of many of us they’ve decided the bonds are still compliant.

This is apparently because the federal law creating the program only required Destiny to describe the energy efficiency, renewable energy and sustainable design features planned for the project. It and didn’t require that they actually follow through! Go figure.

Hmmm. Investors get to keep their tax credits (perhaps they didn’t really care about the green credentials); and the developer gets release of $2.3 million they’d been required to hold in reserve as surety – and claims they’ve been “vindicated”. Well, they did at least recycle demolition materials and use rainwater from the building’s roof to flush toilets; on the other hand everyone – even Destiny – agrees they didn’t do what they promised to in their Green Bonds tax credit application.

Perhaps it’s an argument for stronger Standards for green bonds.

> Fitch has awarded an A- to a wind energy bond! Ok, it’s small – $13m – but this has to be one of the higher ratings a renewable energy bond has received. The issuer made all the difference here, but it’d be nice to think Fitch’s were beginning to appreciate the asset type.

> A $33m “Renewable Energy Program Lease Revenue Bonds” has just been issued by Morris County Improvement Authority in New Jersey, USA. Wells Fargo Bank was the underwriter. Maturities ranged from 2 to 15 years. The bond supports the financing of 9.2MW of distributed solar photovoltaic projects across 27 sites throughout Morris County, including schools, libraries and other municipal buildings. It essentially aggregates a collection of smaller projects sop they can tap cheaper bond financing. Useful model for local authorities.

> A modest SEK 350m ($50m) corporate 3 year bond was issued by Swedish company Arise Windpower earlier this month. Floating interest rate is STIBOR (3 months) + 5.00 percentage points. Financial advisers were ABG Sundal Collier and Swedbank.

> An Environment Bonds NYC conference will be held on 23 May 2012, organised by Environmental Finance magazine — and yes I will be speaking. You get a 25% discount on registration (another special benefit of being a Climate Bonds fan!); registration details next week.

4 snippets: IEA’s Birol says we need new Churchills (i.e. ain’t any around at the moment) / EU raises 4°C warming / corporate leaders have light bulb moments / Kidney@BloombergNEFSummit

Posted on 21. Mar, 2012 by Sean Kidney in blog

1. The EU’s chief climate negotiator says the world is on track for around 4°C of global warming under current carbon emissions trends, a trajectory that some scientists say risks a planetary mass extinction event. Read the EurActiv story - http://goo.gl/yo8sn.

2. Last Friday in Istanbul IEA Chief Economist Fatih Birol said: “As each year passes without clear signals to drive investment in clean energy, the ‘lock-in’ of high-carbon infrastructure is making it harder and more expensive to meet our energy security and climate goals.”

As we got ready to have lunch by the amazing Bosporus, he then cheerily added: “On planned policies, rising fossil energy use will lead to irreversible and potentially catastrophic climate change.” Aaah.

Then he tells that “we now need leaders like Churchill”. He means we don’t have any.

Remember: this is the International Energy Agency the body in charge of managing the world’s oil reserves. This is not WWF.

3. Some of you will appreciate the CEO of major EU carbon emitting company in a recent conversation with OECD’s Simon Upton: “We made a major error in pushing for free carbon permits in the EU. We should have gone for auctions because we are better – we would have won.” Good that he finally gets it.

I heard a similar comment from a senior China Light & Power executive in Durban last Dec. She was talking about how they had responded to pressures to reduce power plant emission in Australia and Hong Kong

In Australia they had helped bankroll a campaign to kill an emissions trading scheme they thought would impose costs on existing operations; she thought they’d made the wrong call on that and should have worked with the government.

In Hong Kong the response was different because the government simply told them change was happening and called in the two power generators (it’s a duopoly) to discuss how it was going to happen, including ensuring power revenues covered the necessary cost of capital. No problem, job underway.

4. A possibly more positive note – the 5 minute Climate Bonds pitch at the NYC Bloomberg New Energy Finance Summit: http://www.bloomberg.com/video/88682858/. Suggestions for improvement greatly appreciated!

Next email: pure bonds!

Just released in NYC: OECD global enviro health check – wake up call for investors

Posted on 21. Mar, 2012 by Sean Kidney in blog

The OECD’s new Environmental Outlook to 2050 – the equivalent of a planetary health check – is, frankly, deeply disturbing. It has special implications for institutional investors like pension funds, for whom sustainability of value creation is central to their fiduciary duty.

The report has just been launched in New York at the Bloomberg New Summit by OECD director Simon Upton. It takes an “integrated approach”. Its sub-title is “The Consequences of Inaction”. Nice.

This is not a small environmental group making assertions; this is the world’s premier economic – and generally conservative – forecasting agency looking at water, health and economic growth implications of the environment outlook for the next 40 years.

It’s a medical check-up with a very serious health warning arising.

If institutional investors are to successfully match their assets to liabilities going forward, they cannot afford the grim economic disruption the OECD suggests if we fail to transform our policies and behaviour. The report therefore has major implications for the fiduciary duty of their trustees. With a very clear and authoritative exposition of the long-term threats to investment portfolios, it is now their responsibility to look at how they respond that portfolio threat in acting on behalf of their members and stakeholders.

The scale of the threat is systemic; it will demand co-operative responses able to address systemic issues – this is not something a fund can address in isolation, however big they are. On the other hand, this isn’t rocket science – industry groups in oil and gas, automotives and pharma have been doing this for 50 years. Investors have to step up.

Like a good doctor, the OECD outlines how we can head off the major risk of a heart attack.

Institutional investors are the planet’s guardians of long-term sustainable returns. They don’t have the option of sitting by and seeing the patient career into disaster; they need to get involved in making sure that heart attack headed off.

Simon Upton again: “The question now is whether we’ll get investment grade policy or junk policy? Junk policy, or no policy, will lead to a legion of stranded assets.”

“The report changes the ratio for everything! There are consequences for:

-       Interest rates

-       Investment returns

-       Discount rates

-       Credit spreads

-       Inflation

-       Catastrophe risk

-       Mortality and morbidity rates.”

But that’s all!

Strong stuff.