Green Banks, Green Bonds, Green Principles: 3 New Paths for Renewable Project Financing

February 9, 2014 |

uncle-sam1Developers: is affordable project finance tough to find?

Lenders: want to support green projects, but find that traditional deal structures defeat your best intentions?

Help is on the way, via green bond principles and green bank formations that are expected to massively expand the pool of capital.

Who bears risk, who manages it? It’s the age-old question in the capitalization of large-scale projects — whether green projects or simply needed projects. The tension between the project developer, who can manage risk, and the investor, who can bear risk — well, if first-of-kind project lending isn’t the Oldest Profession, it probably is the Oldest Conundrum.

Scene. A tent near ancient Stonehenge.

Druid inventor: I have this great invention, the wheel. Everyone is going to want one.
Tribal Elder: Wonderful. What’s this unfinished, mysterious, circular stone structure behind us?

Druid inventor: Oh, that? I got half the factory built.
Tribal Elder: Yes, very impressive.

Druid inventor: Er, can you help me raise a bond to pay for the rest of the first project?
Tribal Elder: No, we’ll back your second factory. Much less risky. Have a nice day.

The big news drops, Green Bond Principles: The Big Banks begin to step in

Here’s perhaps the biggest project structure of all: a mechanism to raise enormous amounts of capital, and get the renewable energy industries back to balance sheet financing and management of project risks by the project sponsors, not the investors that might or might not have the capacity to manage said risks.

Just recently, a consortium of investment banks announced their support of the Green Bond Principles – Bank of America Merrill Lynch, Citi, Crédit Agricole Corporate and Investment Banking, JPMorgan Chase, BNP Paribas, Daiwa, Deutsche Bank, Goldman Sachs, HSBC, Mizuho Securities, Morgan Stanley, Rabobank and SEB.

These Principles were developed with guidance from issuers, investors and environmental groups and serve as voluntary guidelines on recommended process for the development and issuance of Green Bonds. They encourage transparency, disclosure and integrity in the development of the Green Bond market.

These Green Bond Principles suggest process for designating, disclosing, managing and reporting on the proceeds of a Green Bond. They are designed to provide issuers with guidance on the key components involved in launching a Green Bond, to aid investors by ensuring the availability of information necessary to evaluate the environmental impact of their Green Bond investments and to assist underwriters by moving the market towards standard disclosures which facilitate transactions.

These Principles build on first-to-market issuances by multilaterals and provide a platform for other future Green Bond issuers to direct funding to Green Projects. They are complemented by an appendix of established definitions of Green Project categories that were developed by multilaterals, non-profit and non-government organizations, and other relevant stakeholders. Read more about the Green Bond Principles here.

The four banks that served as a drafting committee for these Principles – Bank of America Merrill Lynch, Citi, Crédit Agricole Corporate and Investment Banking and JPMorgan Chase – will propose in 2014 a governance process that will allow for diverse stakeholder input into the Green Bond Principles. It is anticipated that an independent third party will be designated to serve as a secretariat whose administrative duties will include facilitating information exchange with issuers, investors, underwriters, and other stakeholders such as non-profit environmental organizations, non-government organizations, academics and other thought leaders.

The document was originally co-authored by Michael Eckhart, Citi’s Global Head of Environmental Finance, and Suzanne Buchta, a bond market specialist at Bank of America Merrill Lynch in May 2013.  It attracted immediate support by the World Bank, IFC and others, then led to a four-bank drafting/editing committee, which met the original target to have the Principles enacted in January 2014.  The committee is transitioning at this time to a governance committee and possibly forming the Green Bond Council.

What’s the activity at the major banks? Well, Bank of America Corporation announced back in late November that it has issued a “green bond” consisting of a three-year, fixed-rate bond that is $500 million in aggregate principal amount. This issuance of bonds is part of the company’s ongoing commitment to advance renewable energy initiatives and promote energy efficiency.

More on the Green Bond Principles here — a free download of the Principles.

Good news from New York

In New York, the $1 billion New York Green Bank initiative opened for business on February 5, 2014. The New York Green Bank, initially capitalized with $210 million in funding in December 2013, will partner with private-sector institutions to provide financing for qualifying clean energy projects and to accelerate clean energy deployment in the state of New York.

In its first request for proposal (RFP)1, the New York Green Bank invites clean energy industry participants—such as developers, energy service companies, owner/operators, and equipment manufacturers—as well as private-sector capital providers, including financial institutions or other third-party capital providers, to propose partnership arrangements with the Green Bank that would facilitate the financing of qualifying clean energy projects in New York.

Proposed projects, including those related to energy generation and energy savings, may include a wide range of commercially proven technologies, such as:

• solar PV and thermal
• onshore and offshore wind power
• fuel cells
• hydroelectric
• biomass
• biothermal energy
• biogas
• liquid biofuels
• tidal/ocean power

Nuclear, municipal solid waste combustion, and adulterated biomass or biofuels are excluded.

According to the RFP, the New York Green Bank may consider supporting the financing of projects using other technologies if the proposers “demonstrate a potential for increased deployment of energy efficiency or renewable energy and/or a potential for greenhouse gas reductions in New York State.”

In the energy efficiency sector, comprehensive projects that result in comprehensive energy consumption improvements will be emphasized.

The open, ongoing nature of this RFP and its broad range and flexibility present a unique opportunity to obtain financing for qualifying clean energy projects in New York State.

For more information about how you can take advantage of this RFP, a good place to start is Charlotte Kim, in the New York office of Wilson Sonsini Goodrich & Rosati – WSGR is is tracking all aspects of the New York Green Bank initiative. She’s at (212) 453-2888 or [email protected]

Over in the UK

Not to be outdone, the UK’s Green Investment Bank commenced operations in November 2012 and in its first five months Committed funds to 11 transactions with a total value of £2.3 billion, directly committing £635 million, resulting in a funding ratio that sees £1 from GIB leveraging almost £3 of private sector money.

With £3 billion of funding from the UK Government, it is the first bank of its kind in the world. It is a “for profit” bank, whose mission is to accelerate the UK’s transition to a greener economy, and to create an enduring institution, operating independently of Government.

The GIB has a focus on offshore wind, energy efficiency and waste and its first round of projects were scheduled to save over 2.5 million tonnes of greenhouse gas emissions per year; the equivalent today of taking around 1 million cars off UK roads; and generate around 10TWh of renewable electricity; the equivalent today of the annual domestic energy consumption of around 2.3m UK homes.

An investment alliance with Abu Dhabi backed clean energy firm, Masdar has been signed to bring in additional funding to support UK projects over the next seven years.

All about the UK Green Bank here.

Not to be outdone: World Bank Green Bonds

The World Bank Green Bond raises funds from fixed income investors to support World Bank lending for eligible projects that seek to mitigate climate change or help affected people adapt to it. The product was designed in partnership with Skandinaviska Enskilda Banken (SEB) to respond to specific investor demand for a triple-A rated fixed income product that supports projects that address the climate challenge. Since 2008, the World Bank has issued over USD 3 billion in Green Bonds.

Eligible projects are selected by World Bank environment specialists and meet specific criteria for low-carbon development. These criteria underwent an independent review with the Center for International Climate and Environmental Research at the University of Oslo (CICERO). CICERO concurred that, combined with the governance structure of the World Bank and safeguards for its projects, these activities provided a sound basis for selecting climate-friendly projects.

The World Bank develops products that meet investors’ specific demand. Many investors are concerned with the effects of climate change, and, with their investments, they want to specifically make a difference by supporting climate change related projects. The urgency of this issue has led to the emergence of a climate asset class to which institutional and retail investors are increasing allocations.

For investors, World Bank Green Bonds are an opportunity to invest in climate solutions through a triple-A rated fixed income product. The credit quality of the Green Bonds is the same as for any other World Bank bonds. Repayment of the bond is not linked to the credit or performance of the projects, and investors do not assume the specific project risk. Investors benefit from the AAA/Aaa credit of the World Bank, as well as from the due diligence process of the World Bank for its activities.

California State Treasurer’s Office
MMA Praxis Mutual Funds
New York Common Retirement Fund
SEB Ethos rantefund
SEB Trygg Liv
Second Swedish National Pension Fund (AP2)
Third Swedish National Pension Fund (AP3)
Trillium Asset Management
UN Joint Staff Pension Fund
Other currencies
Adlerbert Research Foundation
AP2 – Second Swedish National Pension Fund
AP3 – Third Swedish National Pension Fund
LF Liv
Nikko Asset Management
Skandia Liv

More on World Bank Green Bonds

The Bottom Line

The problems in project finance for renewables have been well understood for some time. Sovereign loan guarantees have proven to be tough to manage the politics therefrom. But the market has been doing that greedy, dynamic, interesting thing that markets do. Draw up some rules, so that lenders and developers can get back to the age-old tussle. So, the money’s getting smarter about the opportunities in green. Now, the new rules appear. Look at what smart rules did for the sport of boxing. The Marquess of Queensberry would be proud.

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