In Re (#01-02 January-February 2020)

Green Finance: What 2019 Brought Us

Stepanyda Badovska

Green finance remains one of the most dynamic fields of finance in the world. Rapidly increasing interest in green investments and portfolios as well as the widely spreading trend of implementation of sustainable goals makes the green finance domain grow at an exponential rate. The year 2019 was another promising one in terms of green finance news coming from various markets. This article provides an overview of some of the most important developments in the green finance area that took place in 2019.

What is green

The story of green began in 2007 when the European Investment Bank (EIB) issued the worlds first bond named the Climate Awareness Bond. A few years later, the Climate Bond Initiative (CBI), an international non-profit organisation working with bonds related to climate change solutions, launched the Climate Bond Standard providing for sector-specific criteria for defining assets and projects for green and climate bond purposes. In 2014, the International Capital Market Association (ICMA) established the Green Bond Principles (GBP), which became a market standard in designing green criteria for many other specialist organisations and professional communities.

GBP define green bonds as any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible green projects and which are aligned with the four core components of the GBP. Green project categories include renewable energy, energy efficiency, pollution prevention and control, green buildings and other types of projects. The four core components of the GBP are: (i) use of proceeds (for green projects), (ii) process for project evaluation and selection, (iii) management of proceeds, and (iv) reporting.

The ICMA also differentiates between social and sustainable bonds. A social bond is one whose proceeds are aimed, in particular, at affordable basic infrastructure, access to essential services and food security. Where the green element is combined with social, a green bond turns into a wider category, that of a sustainable bond1. Some specialists claim that blue bonds, aimed at the development of marine and ocean-based projects (which has become popular since the first issue of sovereign dolphin bonds in 2018), are a separate type of bond instrument.

From the legal structuring and implementation standpoint, the difference between the issuance of a green bond and the issuing of other types of bond (including grey or brown bonds) is insignificant, with the use of proceeds for green goals being a major point of differentiation.

Green bonds: trend-maker in Green Finance

In 2019, thegreen bondsmarket hit a new height by surpassing the USD 200 billion mark. According to CBI data, in December 2019, a total of USD 231.2 billion was earmarked for green bonds, which left way behind the 2018 record of USD 170.9 billion.2 According to Dealogic investigation, green bond issues in the Asia-Pacific region have also hit a record level as of October 2019, with USD 18.89 billion raised.3 By comparison, a total of USD 17.68 billion from 43 issues across the region was recorded in 2018.4

Among the top issuers of green bonds is the EIB, withover EUR 26.7 billion raised across 13 currencies as at December 2019.5 The World Bank (IBRD) is one of the leaders in the issue and promotion of so-called blue bonds and has grown its portfolio in 2019 with a number of significant issues, including the NOK 2.5 billion Sustainable Development Bond (theme of water and ocean resources and the pollution of oceans with plastic), two tranches totaling up to USD 225 million for losses from earthquakes and tropical cyclones (CAT bonds) to protect the Republic of the Philippines, and the CAD 66 million Sustainable Development Bond (theme of marine pollution)6. Interestingly enough, the number of sovereign issuers of green bonds continues to grow, with Dutch and Chilean governments joining the club.

One of the most important updates in the European green bonds market was the publication of theReport on EUGreen Bond Standard on 18June2019. In this Report, the Technical Expert Group on Sustainable Finance (TEG) proposed that the European Commission create a non-legislative EUGreen Bond Standard (EU-GBS) aimed, among other things, at encouraging market participants to issue and invest in EUgreen bonds. In line with the second recommendation of the TEG, the EU-GBS will encompass four key components: (1) alignment of green projects with the EU Taxonomy (discussed below in this article), (2) Green Bond Framework (key aspects of the proposed use of proceeds, green bond strategy and processes), (3) reporting, and (4) verification by accredited verifiers. Although generally these four criteria look similar to those of the GBP, the EU-GBS will attempt to close the existing gaps disadvantaging green bond investments. For instance, the EU-GBS will provide for the verification of green projects pursuant to standardised procedures for external review and for detailed guidelines on the use of proceeds element.

Green loans: green bonds younger relative

Green loans are a younger phenomenon (starting around 2014). Although it is difficult to measure the total volume of the green loan market, it remains inferior compared to the figure raised through green bond issues. Nonetheless, this is a growing market.

Although the Green Loan Principles (GLP) were launched by the Loan Market Association (LMA) a year before (in March 2018), on 20 March 2019 the LMA, the Asia Pacific Loan Market Association and the Loan Syndication and Trading Association published the Sustainability Linked Loan Principles (SLLP). The SLLP is seen as the next step in the development of green and sustainable target financing. Unlike the GLP (which are built on the GBP to ensure consistency across financial markets), the first two key components of the SLLP represent (i) the relationship to the borrowers overall corporate social responsibility, and (ii) measuring the borrowers sustainability.

Accordingly, the use of proceeds for sustainable purposes is not a key criterion in defining a loan as a sustainability-linked one. Moreover, the LMA clarified that, in most instances, sustainability-linked loans would be used for general corporate purposes7. This is mainly because the goal of a sustainability-linked loan is to achieve improvement in the borrowers sustainability profile. According to the SLLP, some green loans may be also categorised as sustainability-linked, so as to be aligned with both the GLP and the SLLP.

Allied green instruments to watch

Currently, classic bonds and loans remain the two major instruments which allow companies to realize their green goals. Hence, due to growing demand from investors for sustainable investment, green asset-backed securities may soon become widespread on the market. Among the best examples may be commercial mortgage-backed securities aimed at attaining sustainable development goals. Thus, real estate projects financed through the issuance of such securities may meet at least few sustainable development goals identified by the United Nations General Assembly in 2015, including those related to clean water and sanitation, and affordable and clean energy.

Some professionals remain skeptical as to the green securitisation due to a number of flaws, including the financial system stability risk (in view of the 2008 financial crisis).8 This opinion is further bolstered by the argument that issues of green asset-backed securities are rare and such issues occurred before 2019 (including Natixis first Green Bond commercial mortgage-backed securities in 2017,9 Crédit Agricole CIB Premium Green synthetic risk transfer related to the banks portfolio of certain loans10 in the same year, and Suzano Papel first green BRL1 billion issue of certificates of agribusiness receivables11 in 2016). Although sceptics claim that green securitisations may involve securitising existing brown assets to raise capital for green purposes, such structures may still remain as an alternative option for finansing low carbon transition.

Where financial institutions meet sustainable goals

Autumn 2019 saw important, landmark news for financial institutions setting their business goals in line with green and sustainable principles. Thus, on 23 September, the United Nations Principles for Responsible Banking werelaunchedby 130 banks from across 49 countries.12 The first principle of this document requires each undersigned institution to align its business strategy with and contribute to individuals needs and societys goals, as expressed in the Sustainable Development Goals, the Paris Climate Agreement and relevant national and regional frameworks. While this document is not a mandatory regulation, the sixth principle establishes the basis for identifying a reputational risk of non-compliance with the document demanding financial institutions to be transparent about, and accountable for, the positive and negative impacts of their activities.

On 29 October 2019, the Organisation for Economic Cooperation and Development (OECD) published13 its first framework Due Diligence for Responsible Corporate Lending and Securities Underwriting, earmarked for the management of environmental and social risk by financial institutions rendering corporate lending and underwriting services. This framework will help to identify and manage environmental and social risks of dealing with clients of such institutions. This OECD document elaborates on the OECD Guidelines for Multinational Enterprises to assist banks and other financial institutions in implementing due diligence recommendations with the focus on their lending and underwriting activities.

Another set of international recommendations on identification and management of environmental and social risk was improved on 18 November 2019 by the Equator Principles Association.14 The new (fourth) version of the Equator Principles (EPs) will continue serving as a benchmark for financial institutions which accepted the EPs and agreed, in particular, to respect human rights, support the objectives of the 2015 Paris Agreement and conservation of biodiversity when financing projects. The EPswill apply if projectsare financed via: (i) project finance advisory services, (ii) project finance, (iii) project-related corporate loans, (iv) bridge loans, and (v) project-related refinance and acquisition finance. As of December 2019, the EPs had been adopted by 101 financial institutions.15

From voluntary principles to mandatory rules: the legislative trend

All green and sustainable principles and guidelines discussed above are observed by market participants on a voluntary basis. At present it is uncommon for governments to introduce mandatory rules for the issue of green bonds. There are a few countries which are an exception, including China and India, where specific rules on issue of green bonds are in place. Save where non-compliance with green and sustainable guidelines is remedied either contractually or at the level of exchange rules, the only negative consequence which the violators may experience is the loss of a good reputation.

The European Union, however, sets a new trend. In June2019, the TEG published theTechnical report on EU Taxonomy the first document aimed at developing a unified classification system for the identification of sustainable (primarily environmental) activities and instruments. In December 2019, after numerous public and intra-governmental discussions (including those on the treatment of nuclear power and gas projects as green investments), the European Parliament and the Council reached an agreement on the taxonomy of green projects.16 The Regulation on the establishment of a framework to facilitate sustainable investment (Taxonomy Regulation) will (once effective) establish four criteria for environmentally sustainable activities, such as: (i) contribution to at least one of the defined environmental objectives, (ii) no harm to any environmental objectives, (iii) compliance with minimum safeguards, and (iv) compliance with technical screening criteria specified by the EU Commission.

The Taxonomy Regulation will become a very important piece of legislation as it will be the worlds first classification framework for sustainable economic activities. Importantly, it will oblige member states to set the rules on measures and penalties for infringement of its key provisions. The introduction of the Taxonomy Regulation will also result in amendments to EU disclosures in the financial services sector rules.

Ukraine: where we are at the start of 2020

2019 became a year when Ukraine made a significant leap towards implementation of modern sustainable practices. Major achievements included full-scale launch of the Energy Efficiency Fund.17 Starting from September 2019, Ukrainian households (cooperatives) may apply for financial support to carry out energy efficiency projects. In October 2019, Ukrgasbank became the first originally Ukrainian bank to sign the United Nations Principles for Responsible Banking (referred to above).18

November 2019 saw a landmark first-ever green bond of a Ukrainian business - the DTEK Renewables group. Also, certain authorities have been discussing the potential issuance of green municipal bonds by relevant Ukrainian cities.

Ukraine may become one of the few states in the world regulating the issue of green bonds. On 19 December, the Ukrainian Parliament adopted Draft Law No. 2284 in the first reading aimed at introducing the law On Capital Markets and Organised Commodity Markets. This law will include a pioneering article devoted to the issuance of domestic green bonds. The green bond rules will, in particular, define the general characteristics of environmentally sustainable projects, the entities eligible to issue such bonds, and requirements made of issuers regarding disclosure and reporting obligations.

Given the strong determination of the Ukrainian authorities and businesses, there is no doubt that 2020 will see futher remarkable developments in the green market area.

Stepanyda Badovska is an associate at Baker McKenzie

1ICMA, Sustainability Bond Guidelines


3Financial Times, Asia-Pacific issuance of green bonds hits record high of $18.9bn

4 Same source


6 Information is taken from the World Bank official web-site


8Securitisation is Back, and Green Finance Must Stray far Away, David Barmes

9Natixis Facilitates First Green Bond CMBS Deal, Gail Kalinoski

10Landmark $3 Billion Socially Responsible Synthetic Securitization


12UNEP Finance Initiative




16European Commission

17Governmental Portal


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