Annual review 2017

How green is my bond?

The market for green bonds has taken off, with India and China emerging as major players. With that growth has come an increased emphasis on certification – to give certainty that capital raised is being put to work on truly green projects.

Tim Conduit

Partner, Allen & Overy

Amit Singh

Partner, Allen & Overy


It has been ten years since the European Investment Bank launched the first-ever green bond, followed a year later by the World Bank.

The idea, though ground-breaking, was relatively simple – to create an investment vehicle that would look like a conventional bond but with the express purpose of financing environmental projects, particularly those tackling climate change.

At the time, few could have predicted how quickly the market would grow, attracting an increasingly diverse range of issuers, investors and underwriters.

Estimated to be just USD800m in 2007, the market has surged ahead with Moody’s forecasting that it could reach USD206bn in 2017, more than double its 2016 level – which was itself a record-breaking year.

An important turning point came in 2013 with the issue of the first corporate green bond. Companies continue to embrace the market with some significant issuances, including record-breaking ones from Toyota (USD1.45bn) in 2014, Apple (USD1.5bn) in 2016 and Iberdrola (EUR2.4bn) in April this year.

Although a global market, the green bond segment is one that has been significantly boosted by the rapid growth of China and India as both countries look to overhaul their energy industries and invest heavily in renewable technologies, such as solar and wind. Moody’s estimates Chinese banks and companies accounted for a staggering 35% of the global green bond market in 2016.

The Paris Climate Change Treaty has also acted as a spur to growth in the market, with the U.S. decision to withdraw its support from the agreement showing no sign, so far, of having an impact on the green bond market.

As Amit Singh, an ICM partner in our Hong Kong office, observes: “The market has been growing in leaps and bounds and is driven, interestingly enough, by issuances from China and India, certainly in Asia. Both countries, which have traditionally been accused of being the worst polluters, have committed to sourcing their energy needs from green sources.”

As a firm, we’ve seen that growth at first hand, particularly in India, where A&O advised on the inaugural green bond issue from India in 2015 – a USD500m issuance by EXIM Bank. Since then, A&O has worked on the vast majority of green bond issuances out of India, including transactions for Indian banks such as IDBI and Axis Bank, and corporate issues such as India’s biggest power producer, NTPC Limited, and the renewable energy company, ReNew Power, among others.

In that short time there have been some significant developments in the market, not least growing moves to provide investors with certainty that these bonds are being put to work on truly green projects.

“The greatest stick remains reputational... But I’m hopeful that, as more hedge and pension funds set aside money to be specifically used to invest in green bonds and projects, we may see some pricing advantage down the line to further underpin growth.”


In the absence of any formal certification process, early issuances tended to be un-assured. But progressively issuers are now adopting the Green Bond Principles (GBPs), a set of voluntary guidelines developed by a representative group of issuers, investors and intermediaries in the green bond market and getting the issuance verified by independent third parties such as the Climate Bonds Initiative, a non-profit organisation working to mobilise debt capital markets for climate change solutions, which has developed assurance standards for the green bond market. The GBPs require issuers to identify how the proceeds will be spent, to evaluate how investment targets have been identified and how the project is subsequently managed and funds tracked, and finally setting out a programme of (usually annual) progress reporting.

“The reality is that initially there weren’t a lot of onerous restrictions placed on issuers and, if you think about it from a policy perspective, that makes sense,” argues Amit. “If you make it too restrictive people aren’t going to be incentivised to do it, particularly if there isn’t an obvious pricing advantage in issuing a green bond over a conventional one,” he adds.

“Despite the recent issuances being certified by independent reputed third parties, arguably the greatest stick remains reputational. Issuing green bonds often accords with the company’s good stance on corporate social responsibility. But I’m hopeful that, as more hedge and pension funds set aside money to be specifically used to invest in green bonds and projects (and we are increasingly seeing more of this), we may see some pricing advantage down the line to further underpin growth.”

Tim Conduit, ICM partner in London who this year advised on the first-ever green bond issue by a railway rolling stock company, the EUR250m fundraising by Alpha Trains, has seen similar developments in the European market.

The world of green bonds is, he notes, “a very broad church” with some issuers looking to have very transparent green credentials and others simply keen to label their transactions as green bonds with the minimum of effort.

He identifies another important reason for growth. “One of the key drivers for the growth of the sector is undoubtedly as a means of accessing a different investor base,” he says.

Recent issuers include Transport for London and Lloyds Bank, he observes, adding: “From a corporate perspective, there are CSR motivations and the views of stakeholders and shareholders are also important. But equally there are very pragmatic incentives and it always comes back to diversifying the investor base. Investors who wouldn’t normally buy a bond issued by a particular corporate or financial institution will buy the green bond because it’s green.”

Diversification is an issue for investors too, says Amit. The issuances from NTPC Limited and Axis Bank both attracted a very strong base of ‘dark green’ European investors, particularly Scandinavian funds, specifically interested in investing in certified green bonds. “But we’re also talking to insurance companies, pension funds and hedge funds that are required to, or have set aside a proportion of funds to invest in green bonds.”

Both partners predict that the market will become increasingly institutionalised and harmonised. They note that issuers looking for a listing for a green issuance can now choose the green segment of the London Stock Exchange or other exchanges, which typically require independent third party certification.

Both emphasise the continuing role that national governments and public policy will play in directing and incentivising this market in many, if not most, jurisdictions.

As Amit puts it: “I think there will be a growing role for corporates because governments alone simply can’t meet the energy demands – there has to be a public/private partnership. There is a huge role for government to play. Take India. One of the reasons we are seeing so many independent power producers in the renewable sector is because the government is encouraging them to participate through tax breaks and other incentives.”

Tim agrees. He notes that renewable energy is one segment of the European infrastructure market where the appetite to invest is matched by plenty of investment opportunities – elsewhere a surplus of capital is chasing a relative paucity of assets.

“Renewable energy is one of the few areas in Europe where we are seeing significant government-backed infrastructure investment through incentives or subsidies for the sector. And the investor base has grown in part because ‘green’ capital is also in play.”

With governments under pressure to meet their climate obligations, and with the private sector recognising that it has a key role to play, it is likely the green bond market will continue to grow strongly.

“Renewable energy is one of the few areas in Europe where we are seeing significant government-backed infrastructure investment through incentives or subsidies for the sector. And the investor base has grown in part because ‘green’ capital is also in play.”