Green Bond Round-up, June 20: Three Gorges, Apple and GBPs top bumper week

The latest green bond developments

A bumper week has seen the launch of the latest version of the Green Bond Principles and major deals from computing giant Apple and Chinese hydro provider Three Gorges – the latter of which has faced accusations of ‘greenwashing’ from a leading industry player (see below).

In addition to the creation of Social Bond Principles and sustainability bond guidance, there were other key developments from the GBP’s annual meeting. Firstly, the document includes a significant addition to its introduction, alluding to the credentials of green bond issuers.

“With a focus on the use of proceeds, the GBPs aim to support issuers in transitioning their business model towards greater environmental sustainability through specific projects.” It comes after a bond from Spain’s Repsol has reignited the debate over issuer profile vs. use of proceeds.

Manuel Lewin, Head of Responsible Investment at Zurich, said: “Green bonds are not about … the overall environmental, social and governance rating of an issuer – they are about the use of proceeds. This means that even issuers who have not the most perfect sustainability credentials and who haven’t completed their sustainability journey, can participate in that journey and can learn about sustainability and evolve as an institution.” The new addition to the GBPs suggests its members overall still want to focus on the use of proceeds, but are cautious about issuers that don’t have a broader transition strategy in place.

The Bank of China also became the first Chinese member of the GBP’s executive committee, which comprises eight issuers, eight investors and eight intermediaries. On the investor side, Actiam and Standish Mellon were replaced by AXA and Amundi; while Natixis, KBN, EDF also joined. Other departures include Engie, Unibail, Unilever and Morgan Stanley.

The Rockefeller Foundation has funded the creation of a new methodology to measure the mitigation impacts of green bonds. The ‘Carbon Yield’ tool was created with Stuart Kinnersley’s Affirmative Investment Management along with climate analysis house South Pole Group and Lion’s Head Global Partners, a merchant bank focused on sub-Saharan Africa and emerging markets. The methodology, which measures avoided greenhouse gas emissions per $/€1000 of green bond investment, is publicly available here. Mats Andersson, former CEO of Swedish pension fund AP4, said Carbon Yield “could become an important tool for long-term investors”. In future, the tool is expected to cover other impact areas for green bonds, such as water.

The Luxembourg Finance Labelling Agency, otherwise known as LuxFlag, has launched a certification for green bonds. The agency, known for approving funds, will now provide “a rigorous assessment” of green bonds on a qualitative and quantitative basis. Pre- and post-issuance disclosure will be taken into consideration, exclusion policies must be applied and the Sustainable Development Goals must be considered in relation to the use of proceeds. Issuers will need to apply for the service and the label will be awarded quarterly. Finance Minister Pierre Gremegna endorsed the Green Bond Label, adding that it would allow investors “to be sure about their investments”.h6. Asia

Controversially, China’s Three Gorges Corporation issued its first offshore green bond last week. The state-owned firm, which issued the largest corporate green bond in China last year, builds large hydropower projects and has received much criticism for its ESG profile. The Three Gorges dam is the largest hydropower project in the world, flooding 13 cities and 140 towns and relocating more than 1.2m people.

This is the first time Three Gorges has issued an offshore green bond, and it roadshowed in Asia and Europe as part of the process. “China Three Gorges raised the bar in terms of presenting directly to green bond investors on an extended European roadshow,” said Nick Darrant, Executive Director of EMEA Syndicate at JP Morgan, which was a joint global coordinator on the deal, along with Bank of China and Deutsche Bank.

The seven-year deal came in at €650m with a coupon of 1.3%. “We were pleased with the results,” Darrant told RI. However, some European green bond investors did not buy the notes for ESG reasons. “China should be applauded for its commitment to ‘clean’ its energy sector,” said Affirmative’s Kinnersley, who added that Three Gorges is a key part of the national climate strategy. “But a Three Gorges ‘green bond’ should be strongly questioned,” he told RI, pointing to a series of environmental and social risks associated with the dam. These include its apparent contribution to earthquakes, methane emissions and changes to water regimes that harm the fishing industry and biodiversity; as well as the displacement of people. “Unless the green bond compellingly and specifically addresses [these] environmental and social problems… it is likely it is being issued to ‘up the green creds’ of the Three Gorges Corporation. OK. Call it greenwashing. This is why AIM will not buy the bond at this stage.”

Elsewhere in the region, Malaysia is reportedly preparing for its first green sukuk – an Islamic-compliant bond – which is slated to be issued by Quantum Solar. The firm runs Quantum Solar Park, a power producer in the country. According to local media, the bond will be RM1bn (€209m) and will be used to build three large solar plants.

Rest of the World

North America: Apple issued its second green bond, just weeks after President Trump pulled out of the Paris Agreement. “I think it’s a bit of a statement about the US leaving the Climate Agreement,” said Bram Bos, the Senior Portfolio Manager who heads up NN Investment Partners’ green bond fund, which bought the notes. “Apple is making a very clear sign that corporates in the US want to push ahead with their environmental agenda regardless.” Proceeds from the 10-year, 3% bond will finance renewables, energy and water efficiency, low-carbon buildings and – in an expansion of its original green bond framework – the development of ‘closed-loop’ supply chains, and the use of greener materials in Apple products. The second opinion was again provided by Sustainalytics.
LatAm: Closely following the GBP’s bid to define sustainability bonds, Mexican water solutions company, Grupo Rotoplas is preparing to tap the asset class. The firm, which was set up in Mexico but operates around the world, makes water storage, piping, purification and treatment products.

The bond will fund environmental and social projects including those that improve access to water and sanitation among vulnerable or underserved communities, and increase water efficiency, according to its framework. The framework has a second-party opinion from Sustainalytics, which says the proceeds contribute to SDG6 (water and sanitation for all), and SDG9 (resilient infrastructure).
Zurich Brasil, Zurich-Santander and Brasilprev have signed up to the existing green bonds statement organised by local investors, the Climate Bonds Initiative, the PRI and Brazilian ESG body SITAWI. Like the statement issued by Mexican investors two weeks ago, the Brazilian document calls for growth in the green bond market in the country, via issuance, increased discussion and government-led incentives.

Zurich already has massive investment in the green bond market globally, but its partnership with Santander in 2011 – creating Zurich Santander, the third largest life and pension firm – and its Brazilian arm, which has more than R$3.5bn under management, have now shown willingness to buy the asset class.Brasilprev is one of Brazil’s biggest pension companies, with more than R$200bn under management. Its president, Paulo Valle, said it was “imperative” to consider ESG risks and opportunities. “We are a company focused on long-term investments and in order to meet our fiduciary duty we have to ponder those issues.”

Africa: Cape Town is to issue a green bond to finance and refinance water, sanitation and transportation projects. The bond has a GB1 rating from Moody’s – the highest green bond score it offers – and is certified against the Climate Bond Initiative’s standards. KPMG has assured the bond. The tenor is 10 years and the size is up to R1bn (€69m).

Europe: Italy saw its first bank tap the market with a €500m, five-year green bond with a coupon of 0.875%. The transaction from Intesa Sanpaolo attracted €2bn of demand and priced as 83 basis points above mid swaps. Proceeds will provide loans for renewable energy and energy efficiency projects. It has a second-party opinion from Vigeo Eiris.