Bond issuers are increasingly building ‘green’ optionality into documentation for existing medium term notes (MTN) and global medium term notes (GMTN) to be able to issue green bonds and attract environment-friendly investors.
Swedish bank Svenksa Handelsbanken and Finnish pulp and paper manufacturer Stora Enso updated their programme documentation last year to be allowed to issue green bonds, and the trend seems to be catching on, according to a client note from law firm White & Case.
‘There are a number of advantages to building green bond capability into an MTN or GMTN Programme,’ said authors Karsten Wöckener, Debashis Dey, Mindy Hauman and Nikita Thakrar.
For the issuer, a green bond diversifies the investor pool as it attracts a greater number of investors and asset managers.
‘From a dealer/manager’s perspective, green bonds can be marketed as premium products to their clients as many investors are increasingly required to invest in social and sustainable products in order to meet their social and sustainability guidelines or criteria in their investment strategies,’ they added.
The Green Bond Principles, which set out transparency, reporting and disclosure guidelines, are the most widely accepted criteria for defining green bonds in the industry.
According to research firm Climate Bonds Initiative, certified and labelled green bond issuance hit $155.4 billion in 2017, up 78% from a year ago.
Issuers are updating their programme documentation by altering three key sections that are usually looked at when identifying green bonds: the use of proceeds, the applicable ‘final terms’ or ‘pricing supplement’ and the risk factors section.
Use of proceeds is the single most consistent identifier of a green bond, so the issuing firms are amending the section to state that net proceeds will be used for projects and activities that promote climate-friendly and other environmental or sustainable purposes.
The authors of the note said that issuers can change the ‘reasons for offer’ in the final terms or pricing supplement to guide investors to the use of proceeds section as well. However, they warned that not all stock exchanges accept such amendments.
Today, a growing number of venues are warming up to the idea of climate-friendly bonds, such as the London Stock Exchange, the Frankfurt Stock Exchange, the Shanghai Stock Exchange Social Responsibility Index and the FTSE4GOOD Index Series.
The law firm also advised that issuers lay out the specific ‘green risks’ that come with investing in green bonds in base prospectuses.
The European Union is set to introduce a new Prospectus Regulation in 2019, following which risk factors will be categorised according to type of risk and in order of materiality, making such risk declaration more important.
‘Issuers can include further features in the EMTN or GMTN base prospectus such as including details of the process for project evaluation and selection, management of proceeds and reporting in relation to the proceeds of any green bond issuances and appropriate disclaimers. These are not mandatory but may help raise interest from certain “dark green” investors,’ the experts said.