Green Bond as potential tool for fund raising

The European Union drives sustainable finance with consultation

On 12 June 2020, the European Commission published a consultation document on the establishment of an European Union (EU) Green Bond Standard (GBS). The purpose of the consultation is to gather technical input from stakeholders in the green bond market in order to take forward recommendations of the Technical Expert Group on sustainable finance (TEG), and then develop them into a finalized EU GBS.

Green Bond as a debt instrument

Green Bonds are debt securities where the proceeds are exclusively applied to finance or refinance, in part or in full, new and/or existing eligible green projects and assets, and which are designed in accordance with the conditions and standards set out in the respective international principles.

Any organization, which is entitled to issue bonds pursuant to its domestic law, is also entitled to issue green bonds . Funding environmental projects through green bonds may be of interest to any entity whether it is a private company, financial institution or a public entity.

Green Bond market

Green bond markets have grown fast in size and market coverage in the recent years, and represented by June 2019 a total of approximately EUR 550bn outstanding (EUR 100bn YTD). In the European bonds market, the green, social and sustainability bonds (excluding govermental issuances) already represented, on average, 4-5 % since 2017 and have risen constantly to reach approximately 10 % of the total amount of bonds issued by European issuers in the last quarter of 2018.

Green bonds enable mainstream capital markets to assess and map how sustainability and green trends in the public debate are reflected in the real economy’s investments and functions.

Aspects and incentives of the Green Bond market

• International organisations, public entities and central banks driving sustainable finance with legislation and support.
• Growing demand for green instruments, social and responsible business practices (ESG).
• Changing investor preferences, thus expansion in the investor pool (millenials and environmentally aware investors).
• Reputation and brand enhancement, marketing aspects, as green projects can also be mirrored in stock prices.
• Pricing advantage potential, created due to growing number of green investors.
• The ability to finance green projects without the sacrifice of liquidity or credit risk, as would be the case with direct standalone investment.
• Consolidation of investment and environmental objectives.
• Transparency to assets and projects.

Legislative background

The first “level” of standardisation of this market took place in 2014 when the Green Bond Principles (GBP) were published, developed by several banks and the International Capital Market Assocation (ICMA) and adopted by the vast majority of market participants.

Climate Bonds Initiative (CBI), an international investor-focused not-for-profit organization, promoting large-scale investments that will deliver a global low-carbon economy, also set out its framework criteria, the Climate Bonds Standards (CBS), and provides its own certifications based on these standards.
In June 2018, the European Commission set up the TEG to assist the development of (among others) the EU GBS. Finalization of the EU GBS is yet in process, recently the European Commission drives consultation with the market participants in order to receive technical opinions. Executive Vice-President Valdis Dombrovskis, responsible for Financial Stability, Financial Services and Capital Markets Union said: “Green bonds will help boost the wider private sector buy-in that we need to jumpstart a sustainable economic recovery that is in line with the European Green Deal. This consultation is about finding out what the EU and its Member States can do to support and incentivise the emergence of a large-scale and high quality green bond market.”

The EU GBS should be a voluntary standard proposed to issuers that wish to follow the best practices in the market, and will be relevant and accessible to issuers located both in and outside the EU. The EU GBS should also create a strong foundation to accelerate the flow of capital towards the EU’s environmental objectives.

In addition to the above, the European Parliament and Council has recently adopted (effective from 12 July 2020) the EU Regulation 2020/852 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (EU Taxonomy Regulation), which establishes the criteria for determining whether an economic activity qualifies as environmentally sustainable, for the purposes of establishing the degree to which an investment is environmentally sustainable. When finalising the EU GBS the standards shall be also aligned with provisions of the EU Taxonomy Regulation in order to provide a single framework in EU level.

Deloitte’s support throughout the issuance process

Currently, bonds can be verified – and can be considered green- or climate bonds - by the criteria set out in the GBP or the CBS. By the time of this summary the EU GBS is still under discussion and preparation, and expected to be effective from 2021.

Green Bond projects consist of four core components (resulting with the need of special assessment compared to vanilla bonds), such as: 1. use of proceeds (within the framework of the issuance documentation and the Green Bond Framework), 2. process for project evaluation and selection, 3. management of proceeds, 4. reporting. Our extensive expertise allows us to support you throughout the process, from the initial assessment phase, through the issuance and all the way to the post-issuance impact measurement and reporting. Throughout the process, we ensure that issuers follow the relevant standards.
Strong cross-department teams enable to provide complex services with one-stop approach in order to cover all the client’s needs.

Legal
Capital markets, finance, energy and corporate law experts, with extensive experience and knowledge in this field. The legal team of Deloitte Legal Hungary will support you throughout the whole transaction providing legal assistance and being responsible for the preparation of the issuance and listing documentation of the green bond.

Risk Advisory
Our risk advisory experts can help you either to identify assets that meet the relevant sector criteria for green bond issuance and create a Green Bond Framework for setting out the use of proceeds or conduct pre- and post-issuance cerfitication of the issuance as a number of Member Firms in our international network are approved Climate Bonds Initiative verifiers.

Financial Advisory
Financial advisory experts with experience in financial docuementation preparation.

Tax
National and international taxation laws, subsidies, transfer pricing.