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News RoundupSustainability Finance Newsletter 1Q 2017 – Review
Record Green Bond Issuance in 2016
2016 was comfortably a record year for issuance in the global green
bond market. According to the most recent research published by
HSBC, issuance last year more than doubled to $90.2 billion1. Much of
this expansion was driven by rising issuance from Chinese borrowers
in general, which accounted for 35% of volume, and by Chinese
financial institutions in particular. A sizeable share of the Chinese total
was accounted for by the jumbo 30 billion yuan ($4.35 billion) two-
tranche bond issued by Bank of Communications in November 2016.
Whether or not Chinese issuers can maintain comparable growth
this year will be one of the key determinants of the overall pace of
expansion in the global green bond universe in 2017. Views on likely
issuance volumes this year are mixed. While Moody’s is expecting
2016’s growth to be matched in 2017, with total new issuance exceeding
$200 billion, others are more cautious. HSBC, for example, has forecast
new issue volume for this year of between $90 and $120 billion.
France: lifting the Bar
Counterbalancing the potentially negative impact of recent geopolitical
developments, the early weeks of 2017 saw a number of very positive
signals about the continued long-term growth potential of the global green
bond market. Foremost among these was the ground-breaking €7 billion,
22-year benchmark issued by France in January, which generated orders
of about €23 billion.
This was not the first green bond from a European government,
with Poland having printed an €750 million issue in December. But
as the largest and longest-dated green bond ever issued, France’s
transaction was regarded as a milestone for sustainable finance
which may encourage other governments to access the market.
Moody’s, for example, has identified Bangladesh, China, Luxembourg,
Morocco, Nigeria and Sweden as potential sovereign green bond
issuers2. Aside from enhancing the global diversity and liquidity of the
market, issues from all or any of these governments would support
the growth of local investor bases and provide a benchmark for other
public and private sector borrowers in their respective markets.
An increasingly diverse Community of Corporate Borrowers
Beyond the French milestone, there have been a number of other
ContentsReview of the quarter 2
Editorial 4
Renewable Energy’s increasingly Competitive Credentials 5
Best of Both Worlds 7
HSBC Sustainable Financing Survey 8
Smart Cities 9
Green bonds come of age 11
The Energy System in 2050 14
The Quarter in Review 17
Deal Review Q1 19
1 https://www.research.hsbc.com/R/10/Nz7CqPZNtfOK2 https://www.moodys.com/research/Moodys-Global-green-bond-issuance-could-rise-to-USD206B-in--PR_360880
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encouraging pointers for the green bond market in early
2017, both in terms of supply and demand. Corporate
borrowers in Europe continue to explore the potential
of the green capital market, with the region’s largest
private lessor of rolling stock, Alpha Trains, issuing a
€250 million private placement in January. Electricité de
France (EDF), meanwhile, has built on the diversity of the
market by becoming the first issuer to package a yen-
denominated green bond in Samurai format, accessing
Japanese investor demand for exposure to the European
sustainable finance space3. While ENEL’s EUR1.25bn
Green Bond was the first Italian corporate Green Bond.
European banks also continue to add to the supply of green
bonds. A notable recent debut was the €500 million issue
announced in February by SEB, a long-time champion of
the green bond market in its capacity as an intermediary.
Progress in North America and Emerging Markets
Supply has also continued to gather momentum in North
America. In Canada, Ontario announced its third and largest
green bond issue in January and Province of Quebec
launched their inaugural CAD500 million Green Bond,
while an important recent development in the US has been
the release of a report by John Chiang, State Treasurer of
California, expressing his unequivocal support for the green
capital market. “I am determined to boost green bond
issuance and acceptance both here in California and across
the country,” Chiang declares in this publication, which is an
encouraging commitment, given that less than one-tenth of
one per cent of US bonds are currently labelled as green.
Supply of green bonds has also continued to gather
momentum in emerging markets. New borrowers
accessing the market in India this year have included
Jain Irrigation, with a debut $200 million offering. In
China, meanwhile, press reports4 have suggested that
the government may accelerate approvals for green
bond issuance, and is looking at the possibility of
introducing tax incentives for investors in the market.
Elsewhere in the emerging market world, corporate borrowers
such as Brazil’s Fibria Celulosa have announced plans to add
to the growing roster of green bond issuers in Latin America.
Another significant trend in the supply of issuance in
the broader sustainable finance market has been its
continued expansion away from conventional, plain vanilla
bond issuance. Diversification in the global green capital
market has been supported by developments such as
the release by the Climate Bonds Initiative (CBI) of its
Climate Bonds Standard V2.1 which expands the range
of debt instruments certifiable under the standard.
The corporate sector, for its part, has also become
increasingly innovative in its use of the global green capital
market. January, for example, saw the first issue of a fixed
rate loan to finance a solar lease business model, from
Germany’s Strasser, which combines elements of a whole
business securitisation with traditional lease techniques.
Investor Initiatives
Given the magnitude of the financing that needs to be
raised if the world is to deliver on the pledges made at the
COP21 talks in Paris in December 2015 and reiterated at
COP22 in Marrakech, it is essential that innovative structures
such as these are encouraged and nurtured by borrowers,
intermediaries and investors. According to OECD studies5,
annual debt issuance to support Sustainable Financing
projects, will need to reach between $620 and $720 billion
by 2035 – more than 6-7 times total 2016 issuance – if the
two degree target agreed under COP21 is to be reached.
Against this backdrop, it is encouraging that there have been
a number of recent announcements of new ESG investment
initiatives from some of the world’s largest asset managers.
In January, PIMCO announced the launch of a dedicated
ESG investment platform globally, “offering a range of fixed
income solutions to investors seeking attractive return
potential while making a positive social impact6.” As part of
this programme, PIMCO said that it had enhanced two of its
socially responsible funds in the US to incorporate a wider
range of ESG considerations into the investment process.
Other notable recent initiatives from the buy-side have come
from Lombard Odier Investment Managers and Affirmative
Investment Management, which have jointly established a new
fund “designed to combat climate change in a verifiable way7.”
3 For details, see www.globalcapital.com January 26 20174 For example, Bloomberg, January 16 20175 Reuters, January 12 20176 www.pimco.com January 19 20177 http://www.affirmativeim.com/news/2017/1/19/aim-lombard-odier-investment-management-annouce-partnership January 19 2017
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Newsletter EditorialWill 2017 be the year that sustainable finance becomes more mainstream? It certainly seems that way, following recent growing trends such as: solar power development in the Middle East; oil companies acquiring windfarms; investors increasingly taking ESG factors into account in their investment decisions; and an increasing number of consumers prepared to pay more for ethically sourced goods. In short, the ‘green’ agenda’ could now be considered to be affect a wider group of corporates and investors from a wider group of countries.
At HSBC we see four main drivers
for this change.
First, public policy and regulation.
COP21 required countries to develop
their own national plans to meet
the global targets agreed there - the
‘Independent Nationally Determined
Contributions’. As these are developed,
we should expect to see policy and
regulatory change progress. To give
some examples, the UK is setting
out its Emissions Reduction Plan in
the Spring1, while China has already
published its guidelines for establishing
a “Green Financial System”2 and
plans for a carbon tax by 2020. At
the global level, the FSB Taskforce
on Climate Financial Disclosures3
has published its recommendations
on the information publicly-listed
companies should disclose on
climate risks and opportunities.
The second driver is change in business
and consumer behaviour. While this
differs from country to country some
common themes are emerging. Oil and
gas companies are seeking to diversify
in order to manage the “transition
risk” they face. For example, Absul
Latif Jameel recently entered the solar
industry with its purchase of Fotowatio
Renewable Ventures (FRV) in Australia4.
While a HSBC survey of consumer
opinion in the UK found that 72 per
cent of those buying ethical products
are willing to pay a premium for them.
The third driver is changes in investor
and public opinion. Companies cannot
ignore the increasing interest investors
are taking in the ESG agenda. 30 per
cent of investable assets globally –
or USD20 trillion – now incorporate
ESG factors into their investment
analysis5. These assets have grown
an estimated 33 per cent in the US
alone since 2014 according to the
Forum for Sustainable and Responsible
Investments6. A HSBC survey found
that 75 per cent of investors planned
to make low carbon or climate-related
investments. Public opinion is also
an important factor. A majority in
all 40 nations polled in 2015 by Pew
Research Centre found a majority saying
climate change is a serious problem
and a global median of 54 per cent
believing it is a very serious problem.
The fourth driver of change may well
be technology. Some of the advances
we have seen in recent years have been
phenomenal. The cost of utility-scale
solar power is down 85 per cent since
20097. The cost of wind power has fallen
by 66 per cent over the same. Electric
vehicles are expected to change the face
of the car industry. The development of
smart, sustainable cities could transform
the lives of millions in urban centres.
For all of these reasons, at HSBC we are
excited about the pace of change. Our
aim is to support our clients manage this
transition, allowing them to profit from
opportunities and manage the risk. At the
end of last year Samir Assaf, HSBC’s CEO
Global Banking and Markets decided
to create a new Sustainable Finance
Unit. Located within the business,
the SFU will work to support frontline
bankers and relationship managers in
their engagement with our clients on
this important topic. We believe, for the
reasons above, that the sustainability
agenda will become increasingly relevant
to more and more of our clients. We
plan to anticipate these trends and
provide the best support for them.
1https://www.desmog.uk/2017/01/23/uk-government-delays-publication-emissions-reduction-plan-again2http://www.unepfi.org/psi/establishing-chinas-green-financial-system/3https://www.fsb-tcfd.org/publications/recommendations-report/4http://reneweconomy.com.au/opec-nations-turn-to-sun-as-saudi-firm-buys-australia-big-solar-projects-87764/5http://www.gsi-alliance.org/members-resources/global-sustainable-investment-review-2014/6http://www.ussif.org/files/Infographics/Overview%20Infographic.pdf7https://www.bloomberg.com/news/articles/2015-11-17/lower-cost-wind-and-solar-will-drive-energy-storage-technology
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Renewable Energy’s increasingly Competitive Credentials“Given the installed costs and the performance of today’s
renewable technologies, and the costs of conventional
technologies, the fact is this: renewable power generation is
increasingly competing head-to-head with fossil fuels, without
financial support,” noted the UN Chronicle in late 20151.
The increasingly compelling economics of renewable
energy sources is becoming especially notable in the solar
power sector. According to a report published recently by
Germany’s Fraunhofer Institute for Solar Energy Systems,
the investment costs for PV power plants have fallen by
an average of 13% per year, or by a total of 75%, since
2006. The result is that solar energy has, for the first time,
become a cheaper source of new electricity than wind2.
The trend towards lower costs of electricity generation
from renewable energy was highlighted once again
in the most recent Levelized Cost of Energy Analysis
(LCOE 10.0) published by Lazard’s in December 20163.
The tenth version of the annual study, which compares
the cost of generating energy from conventional and
alternative technologies, found that over the last seven
years, wind and solar PV have become increasingly cost-
competitive with conventional generation technologies on
an unsubsidized basis. This has been driven principally by
“material declines in the pricing of system components
(e.g. panels, inverters, racking, turbines, etc) and other
dramatic improvements in efficiency, among other factors.”
While the general trend is clearly towards reduced costs
of alternative energy generation, Lazard’s observes that
in areas such as onshore wind, geothermal and biomass,
these declines are slowing, which is a reflection both of the
maturing of technology in these areas and a relatively low
level of investment. The Lazard’s analysis also reports that
some areas of renewable energy generation still have some
way to go to become competitive. For example, although
the median cost of generating energy from offshore wind
continues to fall, it remains “substantially more expensive
than onshore wind facilities, especially in the US.”
There are also a number of important local influences on the
competitiveness of alternative energy generation, with some
of the survey’s conclusions based on local tax regimes. In the
US, for example, tax subsidies are an important component of
the economics of alternative energy generation technologies.
The competitiveness of renewables also varies depending
on factors such as population density. “Setting aside
legislatively-mandated demand for solar and other
alternative energy resources, utility-scale solar is becoming
a more economically viable peaking energy product in
many key, high population areas of the US, and, as pricing
declines, could become economically competitive across
a broader array of geographies,” the study explains.
Globally, meanwhile, other key variables in assessing the
relative cost of energy include its sensitivity to fuel prices
together with the availability and cost of capital. Lazard’s
explains that its analysis primarily reflects an illustrative global
cost of capital of 8% for debt and 12% for equity. The study
recognises, however, that these costs may be “somewhat
elevated” relative to OECD and US figures currently
prevailing in the market for utility-scale assets/investment.
1 https://unchronicle.un.org/article/how-renewable-energy-can-be-cost-competitive 2 Bloomberg New Energy Finance (BNEF), December 15 20163 https://www.lazard.com/perspective/levelized-cost-of-energy-analysis-100/
“ Utility-scale solar is becoming a more economically viable peaking energy product in many key, high population areas of the US, and, as pricing declines, could become economically competitive across a broader array of geographies. ”
Although the trajectory of costs for alternative energy
generation is promising, Lazard’s points out that there
is no immediate prospect of traditional sources being
replaced by renewable energy, which will play an
increasingly complementary role in countries’ energy
mix. “Even though alternative energy is increasingly cost-
competitive and storage technology holds great promise,
alternative energy systems alone will not be capable of
meeting the baseload generation needs of a developed
economy for the foreseeable future,” the report concludes.
“Therefore, the optimal solution for many regions of the
world is to use complementary traditional and alternative
energy resources in a diversified generation fleet.”
Nevertheless, the increasingly competitive credentials of
alternative power sources are underpinning a long-term rise
in flows of investment into clean technology. Although total
inflows in 2016 were down from their record of almost $330bn
in 2015, much of this may have reflected declining demand
for power in China. Between 2004 and 2015, according to
numbers published by Bloomberg New Energy Finance4,
dollar investment in clean energy grew almost six-fold.
This suggests that many governments’ ambitious targets
for the share of renewable sources in their overall energy
mix may be well within their grasp. The EU, for one,
has said that it is on track to meet its target of ensuring
that 20% of gross final energy consumption comes
from renewables by 2020, up from 16.4% in 2015. The
Paris Agreement of 2015 calls for renewable energy to
account for 27% of the EU’s energy use by 20305.
The EU comments that its 2030 strategy for energy and
climate “sends a strong signal to the market, encouraging
private investment in new pipelines, electricity networks,
and low-carbon technology”. This, twinned with
empirical evidence in the Lazard’s study of the increased
competitiveness of alternative energy generation, also
has important, constructive implications for the long term
development of the global green capital market. According
to data published by Moody’s, allocations of green bond
proceeds to renewable energy and energy-efficient projects
accounted for more than 50% of total issuance in 2016.
More broadly, the increasing financial viability of alternative
energy sources is expected to lead to an expansion in
the global community of industrial and portfolio investors
channelling resources into technology aimed at countering
climate change. As Moody’s noted in a recent briefing
on the impact of US government policy on climate
change, “strong institutional investor demand for greater
sustainability and transparency, coupled with rising climate
awareness and changing consumer preferences and
technological change, will encourage more private sector
companies to pursue explicit climate change strategies6.”
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4 Bloomberg New Energy Finance (BNEF), January 14 20165 https://ec.europa.eu/energy/en/topics/renewable-energy6 www.moodys.com February 16 2017 “Future US climate policy shifts would not stall global
emissions reduction efforts”
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The Best of Both Worlds?A significant recent landmark for
the Environmental, Social and
Governance (ESG) movement
was the launch in November 2016
of a new initiative which is an
innovative fusion of two increasingly
popular investment techniques.
The first is the construction of indices
and portfolios that are compatible with
increasingly demanding environmental,
social and governance (ESG) standards.
Driven by a conviction that climate
change presents a formidable threat
to future generations, products that
invest in line with green principles have
been gaining traction for several years,
especially among younger savers.
The second factor is smart beta
investing, a transparent, rules-based
and generally low-cost means of
constructing portfolios based on the
identification of fundamental drivers of
value, which may include size, value,
momentum, quality and low volatility.
In November, HSBC Bank Pension Fund
Trustees, alongside Legal and General
Investment Management (LGIM), FTSE
Russell and the investment consultant,
Redington, announced the launch
of the Legal & General Future World
Fund, a factor-weighted, passive global
equity strategy. The four performance
measures used in the strategy are value,
quality, size and low volatility, while
climate change tilts are embedded
into the benchmark index [the FTSE
All World (ex Controversial Weapons)
Climate Balanced Factor Index] through
the exclusion of companies in
sectors contributing directly to global
warming, such as coal miners. The
component companies in this index
have 69% fewer carbon reserves,
28% fewer carbon emissions and
105% more green revenue than those
in the FTSE All World benchmark.
Investment performance does not
necessarily need to be negatively
impacted by any of these tilts. This is
critical, because although investors
are increasingly demanding that funds
are allocated responsibly, they are not
necessarily prepared to compromise
on performance as a trade-off for
sustainable investment. A recent
LGIM survey of savers found that
while most expressed a commitment
to support responsible companies
through their investments, 33% of
respondents indicated that they
were not prepared to sacrifice 1% of
annual returns in order to do so1.
Empirical evidence suggests that
factor-based strategies are capable
of delivering superior risk-adjusted
returns to passive index-tracking
products, but this is not guaranteed.
The FTSE All World (ex Controversial
Weapons) Balanced Factor Index on
which the LGIM strategy is based,
outperformed the FTSE All World
Index between September 2001 and
March 2016, returning 9.69% p.a.
gross, compared with 7.05% p.a.
gross and with lower volatility of
14.8% p.a. compared to 16.2% p.a.
of the traditional market capitalisation
index. N.b. Past Performance is not a
reliable indicator of Future returns.
HSBC Bank UK Pension Scheme
has transitioned the £1.85bn
equity component of its defined
contribution (DC) default
investment strategy to the new
LGIM Future World Fund.
Mark Thompson, the Chief
Investment Officer, of the HSBC
Bank UK Pension Scheme, was
a key driver in the creation of
the new indices and Fund.
Thompson said, “We believed that
investing in the Future World Fund
was in best long term interest of
our members for three reasons:
– It aims to provide a better
risk adjusted return than
for a conventional market
capitalisation index.
– The inclusion of the climate factor
tilts, which gives our members
greater exposure to companies
which could be at less risk from
climate change in the future. This
is especially important as 60%
of our members are under 40
years old and will be invested in
the fund for decades to come.
– Due to the enhanced company
engagement that LGIM will offer
through its climate impact pledge.”
LGIM’s commitment to engagement
with the corporate sector through
its climate impact pledge was
covered in FTfm in November
2016. “LGIM is planning to use
its clout as the UK’s largest
investment manager to vote against
the chairmen of companies that
perform poorly on its environmental
scores across all its funds.”1 www.pensions-expert.com, November 9 2016
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HSBC Sustainable Financing Survey
Key findings:
Corporate Issuers:
E Globally, nearly one in two corporate issuers already
possess an environmental impact reduction strategy –
48.7%. The figure is higher in Europe/UK issuers – 75.7%
and in the US – 52.8%, but lower in Asia – 36% and
MENA – 26.5%
E Disclosure limited to 37% worldwide, with UK leading
at 54%, Asia behind at 19.4% and MENA last at 15.4%.
Although 34.1% are aiming to disclose their strategy in
the coming year, however 52.9% remain unsure if they
will or not. Interestingly stakeholder pressure (86.6%) and
regulation (79.8%) are viewed as the underpinning reasons
for increases in disclosure
E Environmental requirements are infrequently extended
down the supply chain (only 34.1%), although it’s higher in
the US at 44.7%
Institutional Investors:
E 58.7% of investors affirmed that they had a strategy in place
for reducing the environmental impact of their operations
E Companies ESG performance is integrated as an investment
factor into the portfolio of 44.6% of investors globally
E 84.1% of investors view current disclosure of climate
related risks face by businesses as ‘highly inadequate’
or ‘inadequate’
E Sustainable financing momentum seems to be building
promisingly, with 65.2 percent of investors planning to
increase low carbon investments. Barriers to further
investment are noted as market depth/credible investment
opportunities, poor research, standardised sector definitions
Further Information:
E You can read an executive summary of the report and
press release on the HSBC Sustainable Financing Hub –
under latest news
E Based on the findings of the survey, two new thought
leadership pieces have been produced:
– Climate and ESG attitudes: Surveying Global Trends from our HSBC Research team – click here
– Sustainable Financing: Carrot or Stick for the Corporate World? – click here
In Q4 2016, HSBC commissioned a global survey of 593 issuers, investors and NGOs in over 20+ countries. Conducted anonymously by East & Partners, a leading banking research and advisory firm, the findings of the survey provided a strong indication of the growing appetite among investors and issuers to deepen their current engagement with the sustainable financing market. It did, however, also highlight the need for advice, knowledge and expertise to ensure that they are able to make the best decisions based on their own sustainable agendas and requirements.
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Smart Cities – at the forefront of the climate change battle?Graham Smith and Rongrong Huo are part of the new HSBC Sustainable Financing Unit (SFU) and are looking at smart and sustainable cities. They work with the public sector on how to plan and finance measures to make cities more environmentally sustainable, as well as working with key private sector suppliers of clean technology. Here, they answer questions on why and how cities need to be part of the fight against climate change.
Why are cities relevant to climate change?
Graham Smith (GS): Hundreds of millions of people
worldwide will move from the countryside to urban
areas over the next few decades. According the United
Nations, about 54 per cent of the global population
live in cities today: by 2050, 66 per cent will1.
So to create a low-carbon future, cities must be part of
the solution. Good urban design and the application of
green technology can help people to live more sustainably
and curb carbon emissions for years to come.
What can be done to make cities greener?
Rongrong Huo (RH): Because cities are dense
concentrations of businesses and households
consuming energy and goods, they tend to have a
big environmental footprint. There are many different
things that can be done to make cities greener – but
they need to be tailored to local circumstances.
Cities in developed countries are often well-established,
with infrastructure that has been in place for years. Parts of
London’s underground train system are more than 150 years
old, for example. The challenge is finding ways to upgrade
and improve existing systems to make them more efficient.
In emerging economies, by contrast, there are cities
that haven’t even been built yet where planners
are literally starting with a blank slate. This is an
opportunity to plan strategically and include high
environmental standards from the beginning.
While digital solutions are often front of mind, we
think cities need to make the most of both physical
infrastructure and soft infrastructure, and this is
especially relevant for emerging market countries.
What might a sustainable city look like in 20 years’ time?
GS: From water pipes and power cables, to vehicles and
streetlights, progress has meant that they can operate
more efficiently today than five years ago. Individual
technologies will continue to improve and to be adopted
more widely, which will likely see an ongoing trend of
change. For example, perhaps in developed markets,
local delivery vehicles carrying groceries and parcels will
use electric drives as standard, possibly leapfrogging
the adoption of electric vehicles by private users.
1 http://www.un.org/en/development/desa/news/population/world-urbanization-prospects-2014.html
1010
RH: Bringing different technologies together is often what
makes the biggest difference. A number of cities now run
bus systems which integrate several elements of advanced
hardware and software. A modern bus can have hybrid
engines that can run on diesel fuel or be battery-powered. A
GPS-linked programme automatically ensures that the engine
switches exclusively to electric in sensitive areas, such as
outside schools and hospitals. The same bus will have an
automatic payment system with travellers using radio-chip
smartcards to speed payment and so speed up the service.
GS: These are sophisticated solutions, but it’s important
to remember that gradual improvements can sometimes
make a valuable difference. If a city in an emerging market
doesn’t have the money to install hybrid engines in its
buses, it can still reduce harmful emissions and improve the
local environment by investing in better exhaust filters. Or
it can help operators invest in better engine management
software which allows different fuels to be blended together
to make them burn more cleanly. Realistically, in some
places, building green cities will be a staged process.
Who can make the changes that need to happen, happen?
GS: National governments give a lead and set a framework.
But because all cities are different, with their own
circumstances and challenges, city-level leadership is crucial.
Policymakers in many countries recognise this and are
starting to devolve powers and budgets to mayors or city
councils. There is a great deal of international cooperation
between cities, who share their experience and expertise.
And private business has a role to play supporting them.
What is the role of banks in building sustainable cities?
RH: Infrastructure and technology often require significant
amounts of capital. Banks can help public authorities
plan and evaluate the various risks and different ways
of raising funds, such as debt issuance or a public-
private partnership agreement. With public-private
agreements, it is vital that the risks and responsibilities
are well balanced so as to attract investors at the same
time as delivering the results that the city needs.
International banks have a further potential role to play. Broadly
speaking, the biggest opportunities to make cities greener
are in emerging markets, while innovative firms creating new
devices and software are often based in developed markets.
Bringing them together can deliver significant benefits for both.
Green Bonds come of ageAfter rapid expansion, slower growth should ensure a sounder marketBy Michael Ridley, Green Bonds Analyst
Green bond issuance more than doubled in 2016 to
a record $90.2bn. The market is now ten years old
and $166bn of green bonds are outstanding. But it
still needs to be substantially larger if it is to channel
significant funds towards climate-change mitigation.
At worst, issuance could be flat this year, at best
increase to $120bn, on our estimates. But although
we want the market to be many times larger, this
slower level of growth should be sufficient.
The market needs to grow in line with the verifiers’ ability
to assess environmental standards. Too rapid growth
might encourage ‘greenwash’ – bonds that fail to put
their proceeds into environmental projects. Or it could
embolden a wave of regulation that slows market growth.
If and when policy practitioners do want to speed
market growth, we proposed three measures in
our report: Global Green Bonds – Outlook for 2017:
The end of the beginning (11 January 2017. https://
www.research.hsbc.com/R/10/Nz7CqPZNtfOK)
E A single metric to measure the environmental impact
of green bonds. This should be tonnes of CO2 emission
reduction achieved per $1,000 of bond outstanding and it
should apply to both green and non-green bonds
E Incentivisation of green loans: accelerating issuance could
lead to more green bonds as the loans are refinanced in the
green-bond market
E Public authorities could pay credit-rating or green-bond
review fees
The largest green-bond issuers in 2016 were financials
(up from 22.9% to 41.8% of the total), corporates
(up from 22.1% to 28.2%) and multilaterals, despite
their share falling from 33.3% to 16.2%.
Some 55% of 2016’s issues had some form of verification
– less than the 61% of all green bonds outstanding
because only about 40% of the large number of emerging-
market issues were accompanied by any verification. By
comparison, 95.2% of European green bonds were verified.
China’s first green bond was issued as recently as July
2015 but a 33-fold increase last year lifted issuance
to $33.6bn, making that the most prolific region. It
was followed by Europe, with $23bn (up 27.9% on
2015), and North America on $13.5bn (up 8.8%).
Indian green-bond issuance commenced in February
2015 and is much smaller than China’s. Issues
totalled $2.1bn last year – $1bn higher than 2015.
Green bonds make sense for India, given its call for $1,500bn
of investment over the next decade and its plan to raise
its renewable-energy capacity from 37GW to 175GW
by 2020. India also wants to generate at least 40% of its
energy from clean power such as wind and solar by 2030.
But there has been little progress is ‘adaptation
bonds’, despite the green-bond principles’ categories
including adaptation – adjusting to climate change –
as well as reducing the effect through mitigation.
In theory, many green-building bonds are adaptation
bonds or combine mitigation and adaptation by focussing
on emission reduction and climate resilience. But the
appropriate modelling has not always accompanied these
projects: for example, many green buildings are in areas that
could be subject to flooding caused by climate change.
However, adaption is gaining support. For example, credit-
rating agency Standard & Poor’s is to evaluate adaptation
bonds as well as mitigation bonds, assessing the value of
damage avoided relative to the outstanding value of the bond.
11
12
Disclosure and disclaimerAnalyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Michael Ridley
Important disclosures
Fixed income: Basis for financial analysis
This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor’s decision to make an investment should depend on individual circumstances such as the investor’s existing holdings and other considerations.
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor’s existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has three principal aims in its fixed income research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies in corporate credit and based on country-specific ideas or themes that may affect the performance of these bonds in the case of covered bonds, in both cases on a six-month time horizon; 2) to identify trade ideas on a time horizon of up to three months, relating to specific instruments and segments of the yield curve, which are predominantly derived from relative value considerations or driven by events and which may differ from our long-term credit opinion on an issuer. Buy or Sell refer to a trade call to buy or sell that given instrument; 3) to express views on the likely future performance of sectors, benchmark indices or markets in our fixed income strategy products. HSBC has assigned a fundamental recommendation structure, as described below, only for its long-term investment opportunities.
HSBC believes an investor’s decision to buy or sell a bond should depend on individual circumstances such as the investor’s existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems to describe their recommendations. Investors should carefully read the definitions of the recommendations used in each research report. In addition, because research reports contain more complete information concerning the analysts’ views, investors should carefully read the entire research report and should not infer its contents from the recommendation. In any case, recommendations should not be used or relied on in isolation as investment advice.
HSBC Global Research is not and does not hold itself out to be a Credit Rating Agency as defined under the Hong Kong Securities and Futures Ordinance.
Definitions for fundamental credit and covered bond recommendations from 22 April 2016
Overweight: For corporate credit, the issuer’s fundamental credit profile is expected to improve over the next six months. For covered bonds, the bonds issued in this country are expected to outperform those of the other countries in our coverage over the next six months.
Neutral: For corporate credit, the issuer’s fundamental credit profile is expected to remain stable over the next six months. For covered bonds, the bonds issued in this country are expected to perform in line with those of the other countries in our coverage over the next six months.
Underweight: For corporate credit, the issuer’s fundamental credit profile is expected to deteriorate over the next six months.
For covered bonds, the bonds issued in this country are expected to underperform those of other countries in our coverage over the next six months.
Prior to this date, fundamental recommendations for corporate credit were applied on the following basis:
Overweight: The credits of the issuer were expected to outperform those of other issuers in the sector over the next six months.
Neutral: The credits of the issuer were expected to perform in line with those of other issuers in the sector over the next six months.
Underweight: The credits of the issuer were expected to underperform those of other issuers in the sector over the next six months.
Distribution of fundamental credit and covered bond recommendations
As of 09 January 2017, the distribution of all independent fundamental credit recommendations published by HSBC is as follows:
All Covered issuers Issuers to whom HSBC has provided Investment Banking in the past 12 months
Count Percentage Count Percentage
Overweight 77 23 18 23
Neutral 174 52 66 38
Underweight 84 25 17 20
Source: HSBC
For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at
http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures.
Recommendation changes for long-term investment opportunities
To view a list of all the independent fundamental recommendations disseminated by HSBC during the preceding 12-month period, and the location where we publish our quarterly distribution of non-fundamental recommendations, please see the disclosure page available at www.research.hsbc.com/A/Disclosures.
HSBC & Analyst disclosures
Disclosure checklist
Company Disclosure
APPLE INC 6, 7
EXPORT-IMPORT BANK OF IND 6
GOVERNMENT OF POLAND 1, 5, 6, 7, 11
INTERNATIONAL FINANCE CORPORAT 1, 5, 6
NEDERLANDSE WATERSCHAPSBANK 1, 5, 6
SUZANO 5
Source: HSBC
1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company.
4 As of 31 December 2016 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 30 November 2016, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services.
6 As of 30 November 2016, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking securities-related services.
7 As of 30 November 2016, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company
12 As of 04 January 2017, HSBC beneficially held a net long position of more than 0.5% of this company’s total issued share capital, calculated according to the SSR methodology.
13 As of 15 December 2016, HSBC beneficially held a net short position of more than 0.5% of this company’s total issued share capital, calculated according to the SSR methodology.
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenues.
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
Economic sanctions imposed by the EU and OFAC prohibit transacting or dealing in new debt or equity of Russian SSI entities.
This report does not constitute advice in relation to any securities issued by Russian SSI entities on or after July 16 2014 and as such, this report should not be construed as an inducement to transact in any sanctioned securities.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. In order to find out more about the proprietary models used to produce this report, please contact the authoring analyst.
13
Additional disclosures
1. This report is dated as at 11 January 2017.
2. All market data included in this report are dated as at close 06 January 2017, unless a different date and/or a specific time of day is indicated in the report.
3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC’s analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC’s Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
4. You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument.
5. As of 30 Dec 2016 HSBC owned a significant interest in the debt securities of the following company(ies): GOVERNMENT OF POLAND, INTERNATIONAL FINANCE CORPORAT, NEDERLANDSE WATERSCHAPSBANK
Production & distribution disclosures
1. This report was produced and signed off by the author on 10 Jan 2017 11:33 GMT.
2. In order to see when this report was first disseminated please see the disclosure page available at
https://www.research.hsbc.com/R/34/Nz7CqPZ
Legal entities as at 1 July 2016
‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; ‘CA’ HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai
Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch
Issuer of report
HSBC Bank plc
8 Canada Square
London, E14 5HQ, United Kingdom
Telephone: +44 20 7991 8888
Fax: +44 20 7992 4880
Website: www.research.hsbc.com
In the UK this document has been issued and approved by HSBC Bank plc (“HSBC”) for the information of its Clients (as defined in the Rules of FCA) and those of its affiliates only. It is not intended for Retail Clients in the UK. If this research is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report.
In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a “Hongkong and Shanghai Banking Corporation Limited, Singapore Branch” representative in respect of any matters arising from, or in connection with this report.
In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient.
This publication has been distributed in Japan by HSBC Securities (Japan) Limited. It may not be further distributed, in whole or in part, for any purpose. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch (“HBAP SLS”) for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR.
This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. From time to time research analysts conduct site visits of covered issuers. HSBC policies prohibit research analysts from accepting payment or reimbursement for travel expenses from the issuer for such visits.
Nothing herein excludes or restricts any duty or liability to a customer which HSBC has under the Financial Services and Markets Act 2000 or under the Rules of FCA and PRA. A recipient who chooses to deal with any person who is not a representative of HSBC in the UK will not enjoy the protections afforded by the UK regulatory regime. Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no recognised market it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it is exposed.
In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or “research”), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments).
HSBC Bank plc is registered in England No 14259, is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member of the London Stock Exchange. (070905)
© Copyright 2017, HSBC Bank plc, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank plc. MCI (P) 094/06/2016, MCI (P) 085/06/2016 and MICA (P) 021/01/2016
14
The Energy System in 2050Peak oil comes early and all cars are electric in our scenario for a 2°C worldBy Ashim Paun, Director, Climate Change Strategy
Could oil demand peak in 2030 – a decade earlier than
is commonly forecast? And might all cars be electric by
2050? Such potentially dramatic outcomes feature in
a new scenario analysis from HSBC’s Climate Change
Centre of Excellence using data generated by University
College London Energy Institute’s energy-system model
of how the world might meet climate-change targets
The 197 countries that ratified the Paris Agreement
last year have committed to cap the rise in global
temperatures at 2°C by 2100. Their current pledges
limit the increase only to between 2.7 and 3.4°C, so
our analysis assumes that global policy efforts will be
ratcheted up from 2030 to meet the 2°C target.
A multitude of factors will determine how energy systems
develop, including the age of existing energy infrastructure,
regional economics of energy sources and technology shifts,
economic output, population growth and regulation.
Our new scenario, called ACCEL21, looks forward to the
middle of the century. This is scenario analysis, not the
HSBC base case, but it looks at a cost-optimally re-aligned
energy system and so considers the future demand for
oil and power, and how costs for clean technologies –
solar, onshore and offshore wind, battery-storage and
electric vehicles – will fall, driving increased adoption.
When added together, the potential of these technologies
to lower emissions from the energy system as a whole is
substantial under ACCEL2. Our calculations suggest that
decarbonising power, cars and light-goods vehicles alone
would reduce total global emissions by almost two fifths.
In transport, the Paris country climate plans mean that overall
sectoral energy consumption could increase by 40% to
2030. However, the need to limit warming to 2°C before 2100
then sees the sector’s oil consumption quickly replaced by
low-carbon alternatives: oil is projected to fall from today’s
98% of transport fuel consumption to 31% by 2050, as gas
(20%), hydrogen (15%) and electricity (22%) take share.
For cars, our scenario analysis suggests that oil could
drop from 99% of the fuel feedstock to 85% in 2030
and then plunge to zero in an entirely electrified
fleet in 2050. This is despite the distances driven
expected to rise 2.5-fold by mid-century.
Total fossil fuels used in the economy grow 22% before
2030 in our scenario, but then fall back to 25% below
2015 levels by 2050 as a more constraining climate policy
and cheaper clean-technology make a greater impact.
Oil use increases by 18% before 2030 but drops back to
19% below current levels by 2050 – an important supply-
side feature of the low-carbon transition, in our view.
Coal, however, quickly exits power generation between
2030 and 2050, allowing the sector to be virtually
decarbonised as renewables take 60% of global 2050
generation capacity. By mid-century, coal may be used
only in industry, particularly in steel-making. New capacity
additions will be dominated by solar and gas in 2030,
followed by onshore wind and coal. And by 2050, the
scenario sees no new coal-fired power being built and very
little coal used in the generation mix, making a substantial
contribution to meeting emissions reduction targets.
1 ACCEL2 is a ‘scenario’ for Climate change, which has been developed by HSBC Research using University College London’s TIAM-UCL energy system model
15
Disclosure and disclaimerAnalyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Ashim Paun
Important disclosures
This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means.
This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice.
Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.
The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.
HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenues.
Whether, or in what time frame, an update of this analysis will be published is not determined in advance.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. In order to find out more about the proprietary models used to produce this report, please contact the authoring analyst.
Additional disclosures
1. This report is dated as at 07 February 2017.
2. All market data included in this report are dated as at close 02 February 2017, unless a different date and/or a specific time of day is indicated in the report.
3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC’s analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC’s Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
4. You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument.
Production & distribution disclosures
1. This report was produced and signed off by the author on 03 Feb 2017 15:38 GMT.
2. In order to see when this report was first disseminated please see the disclosure page available at
https://www.research.hsbc.com/R/34/CW9rCSt
Legal entities as at 1 July 2016
‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; ‘CA’ HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai
Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR; The Hongkong and Shanghai Banking Corporation Limited, Bangkok Branch
Issuer of report
HSBC Bank plc
8 Canada Square
London, E14 5HQ, United Kingdom
Telephone: +44 20 7991 8888
Fax: +44 20 7992 4880
Website: www.research.hsbc.com
In the UK this document has been issued and approved by HSBC Bank plc (“HSBC”) for the information of its Clients (as defined in the Rules of FCA) and those of its affiliates only. It is not intended for Retail Clients in the UK. If this research is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate.
HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report.
In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a “Hongkong and Shanghai Banking Corporation Limited, Singapore Branch” representative in respect of any matters arising from, or in connection with this report.
In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient.
This publication has been distributed in Japan by HSBC Securities (Japan) Limited. It may not be further distributed, in whole or in part, for any purpose. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any
particular person or appropriate in accordance with local law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch (“HBAP SLS”) for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR.
This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. From time to time research analysts conduct site visits of covered issuers. HSBC policies prohibit research analysts from accepting payment or reimbursement for travel expenses from the issuer for such visits.
Nothing herein excludes or restricts any duty or liability to a customer which HSBC has under the Financial Services and Markets Act 2000 or under the Rules of FCA and PRA. A recipient who chooses to deal with any person who is not a representative of HSBC in the UK will not enjoy the protections afforded by the UK regulatory regime. Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no recognised market it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it is exposed.
In Canada, this document has been distributed by HSBC Bank Canada and/or its affiliates. Where this document contains market updates/overviews, or similar materials (collectively deemed “Commentary” in Canada although other affiliate jurisdictions may term “Commentary” as either “macro-research” or “research”), the Commentary is not an offer to sell, or a solicitation of an offer to sell or subscribe for, any financial product or instrument (including, without limitation, any currencies, securities, commodities or other financial instruments).
HSBC Bank plc is registered in England No 14259, is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member of the London Stock Exchange. (070905)
© Copyright 2017, HSBC Bank plc, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank plc. MCI (P) 094/06/2016, MCI (P) 085/06/2016 and MCI (P) 062/02/2017
[549608]
16
17
The Quarter in Review Q1 20172017 has begun strongly with 50% year on year growth in terms of number of deals (44% in terms of USD volume)1, helped in part by the arrival of the French sovereign green bond. Impressively we now see over a dozen sovereigns developing green bond guidelines/regulation/ legislation and a similar number publicly declaring interest as issuers2.
Simultaneously, as the Green Bond market develops without
defined criteria or disclosure regulation, there are increasing
drives for improved quality of disclosure through e.g. the
FSB task force. This is also evident in the wider trends to
increase ESG/SRI investing, as seen by the Task Force on
Climate-related Financial Disclosure (TCFD), the London Stock
Exchange’s publication of its own ESG guidance. Growing
investor activism is also playing a part in the increased
pressure (most notably from members of sustainability
advocacy group Ceres) to increase environmental disclosures.
TCFD expected to bolster shareholder climate
resolutions in 2017 according to Environmental
Finance, Ceres and CalPERS pension fund3.
The Financial Stability Board’s (FSB) Task Force on
Climate-related Financial Disclosure (TCFD) is expected
to support shareholder resolutions on climate change in
2017 according to statements from CalPERS (California
Public Employees’ Retirement System’s) investment
director of sustainability Anne Simpson and data from
Ceres. The combination of greater support for climate
resolutions and the ratification of the Paris Agreement, as
of November 2016, creates strong potential to increase
the likelihood of resolutions associated with climate
reporting on a 2°C transition scenario being passed.
There have already been over 129 climate-related shareholder
resolutions to date this year according to the NGO Ceres4,
showing the significant potential to progress the transition
to carbon neutral economies through investor activism.
Last quarter TCFD members received and returned their
comments on the draft of the phase II report. As part
of the FSB’s 2017 workplan, this quarter updates to the
Phase II report are due to be presented to the meeting
of G20 finance ministers in the first quarter of 2017.
Last year’s Q4 update covered the progress of the TCFD
so far, please see: (The Quarter in Review Q4 2016)
In January, eighteen European institutional investors, with
assets totalling GBP2.07trn (USD2.6trn) (including the Church
of England Pensions Board & Swedish National Pension Fund
(AP4)) launched an initiative to support the TCFD’s call for
investors to assess whether their portfolio companies are
positioning themselves to transition to a low-carbon economy5.
London Stock Exchange Group publishes ESG guidance6
Reflecting the increasing involvement of shareholders in
fostering better disclosure from issuers, the London Stock
Exchange Group (LSEG) has launched a guide on company
ESG reporting to investors to encourage more consistent
reporting of data. The guide was released on the 9th February
with a launch event at the London Stock Exchange.
The report was produced by three of the Group’s
companies: London Stock Exchange, Borsa Italiana
and FTSE Russell, after consultation with their
listings, asset owners and asset managers.
This publication is a sign of the growing importance of
disclosure for ESG markets and LSEG’s ambitions to
lead the global harmonisation of ESG information with
guidance that can be replicated by indices across the
world and across asset classes held on the LSE.
1 Source: HSBC database: compiled from Dealogic, Bloomberg & the CBI (Climate Bonds Initiative)2 https://www.climatebonds.net/2017/02/lagos-conference-set-stage-nigeria-sovereign-green-bond3 https://www.environmental-finance.com/content/news/tcfd-to-bolster-shareholder-climate-resolutions.html4 Ceres shareholder resolutions database5 https://www.environmental-finance.com/content/news/investors-with-assets-worth-over-2trn-back-transition-to-low-carbon-economy.html6 http://www.lseg.com/resources/media-centre/press-releases/london-stock-exchange-group-launches-guidance-esg-reporting
18
Investor activism
Post the election of President Trump we have seen
increased investor activism in the US, calling for
improved disclosure and responsible investing.
Whilst President Trump’s administration continues with plans
of strengthening the US fossil fuel industry and reversing
recent leadership in international climate change initiatives
(plans to revitalise the US fossil fuel industry clearly outlined
in the President’s “America First Energy Plan”7 and Trump
advisor Myron Ebell’s statement that the US will change
course on climate policy are two of the commonly cited
contentious statements), US investor groups have made
increasing independent announcements to support a
swift transition to a low-carbon economy, these include:
E Framework for U.S. Stewardship and Governance. Under
the banner of the Investor Stewardship Group a group of
USD17trn of institutional investors including BlackRock,
CalSTRS, Florida State Board of Administration (SBA),
GIC) have unveiled the ‘Framework for U.S. Stewardship
and Governance’8. The goal is to “codify the fundamentals
of good corporate governance” and establish baseline
expectations for corporations and their institutional
shareholders.
The group is calling on “every institutional investor and
asset management firm” investing in the the USA to sign
up to the framework
E Eaton Vance Corp (AUM USD343bn) announced
acquisition of responsible investment firm Calvert (AUM
USD12.3bn) with the former’s CEO stating “It’s an entry
into one of the most attractive areas of investing today”9
E New York City Pension Funds Comptroller Scott Stringer,
in speaking to The Responsible Investor, affirmed that the
city’s pension fund will continue to use its investment to
respond “to the reality of climate change”10
To come after this publication/early next quarter we expect
to see greater involvement in the Green Bond market
from sovereigns, notably Nigeria has stated publically that
they could launch their Green Bond as early as March/
April 2017; this would be the first sovereign Green Bond
issuance from an African nation. Projected Use of Proceeds
could reportedly include a broad range of climate-related
initiatives such as mass transit, land re-afforestation,
remediation and solar projects . In fact, according to the CBI,
Governments could be expected to take up a 10% share of
Green Bonds issuance this year according to Bloomberg
New Energy Finance and the Climate Bonds Initiative ,
with the most common Use of Proceeds predicted to be
(government infrastructure projects supporting) renewable
energy, clean transportation and sustainable agriculture.
Notably, HSBC’s fixed income research has suggested
that they favour bonds (sovereign or otherwise)
funding adaptation projects in the developed Western
countries, where climate change impacts are already
being seen (ie. river flooding in low lying, densely
populated land has significant consequences) and
mitigation projects in high CO2/GDP countries, which
are typically less developed countries. (HSBC Global
Green Bonds: The end of the beginning, Jan2017).
7 https://www.whitehouse.gov/america-first-energy8 https://www.responsible-investor.com/home/article/us_stew_code9 http://www.reuters.com/article/us-calvert-m-a-eaton-vance-idUSKCN12L2IW10 https://www.responsible-investor.com/home/article/investor_groups_react_to_us_plans_to_become_worlds_largest_energy_producer/
19
Key facts & figuresIncluding deals and state of the market2017 Q1 to date (as at February 27th), issuance has easily surpassed the same point last year with c.USD17bn equivalent from 40 transactions compared to c.USD12bn from 25 transactions for the same period in 2016 (ie. 1st Jan - 27th Feb 2016) equating to a year on year increase of 43% in terms of volume1. HSBC has acted as Green Structuring Advisor and Joint Lead Manager on several of these early 2017 deals.
January 2017 was in fact the second largest month on
record in terms of issuance volume, with c.USD14bn
coming to market (from 21 transactions in 10 currencies,
notably including France’s inaugural green OAT); the largest
month on record remains November 2016 at cUSD16bn
(from 28 transactions in 6 different currencies).
Whilst we appreciate various green bond databases exist,
our own HSBC Green Bond database (made from reconciling
Dealogic, Bloomberg, CBI and Environmental Finance)
as at 27th February reports the following statistics:
Deal Pricing Date by
Time period
Deal Value $
(Proceeds) (m)
Number of deals % rise (value
of deals)
% rise (volume
of deals)
2017 Q1to date 17,356 40 -18% 3%
2016 Q1 21,085 39 101% 63%
2015 Q1 10,515 24 18% 100%
2014 Q1 8,911 12 - -
2016 Q2 19,536 61 51% 110%
2015 Q2 12,905 29 62% 71%
2014 Q2 7,951 17 - -
2016 Q3 29,569 65 280% 171%
2015 Q3 7,791 24 11% 26%
2014 Q3 7,013 19 - -
2016 Q4 29,581 71 67% 82%
2015 Q4 17,723 39 78% 44%
2014 Q4 9,977 27 - -
2016 2H 59,149 136 46% 36%
2016 1H 40,622 100 - -
2015 2H 25,514 45 9% -15%
2015 1H 23,420 53 - -
2014 2H 18,440 46 9% -10%
2014 1H 16,862 51 - -
1 Source: HSBC database: compiled from Dealogic, Bloomberg & the CBI (Climate Bonds Initiative)
20
The charts below2 show SRI bond issuance progress
across sectors, currencies and by region.
HSBC recorded 2016FY Green Bond issuance at an
impressive USD99.8bn, from 236 transactions, split 35%
corporate, 36% FIG, and 29% SSA respectively. 96% 2016FY
issuance was from USD, EUR, GBP, CNY, SEK combined.
2017 Q1 to date (as at February 27th) predominant currencies
are: USD (17%), EUR (62%) and SEK (5%), with issuance
from 15 different countries including: Brazil, China, France,
India, Italy, Spain, the Netherlands, Sweden and the
United States (all of which produced issuers in 2016).
2 HSBC Green, Social, Sustainability Bond database – based on Dealogic, CBI, Bloomberg, as of 27 Feb 2017
3%
14%
9%
4%
37%
33%
12
Corporate
2013
$80bn
$100bnUSD USD
$60bn
$40bn
$20bn
02014 2015 2016 2017 YTD
Financial SSAAfrica Americas Asia-Pacific Europe
Issuance progression by sector1
Green/Social issuance by sector1
Issuance progression by region1
Green/Social issuance by currency1
12
2013
$80bn
$100bn
$60bn
$40bn
$20bn
02014 2015 2016 2017 YTD
(includes Middle East)
Corporate
Financial
Multi-Lateral
Sovereign/Regional
Corporate
Financial
Multi-Lateral
Sovereign/Regional
All Green, Social, Sustainability Bonds YTD Green, Social, Sustainability Bonds
34%
24%
19%
23% 28%
8%
10%
55%
All Green, Social, Sustainability Bonds YTD Green, Social, Sustainability Bonds
17% 16%
62%
5%
USD
EUR
GBP
CNY
SEK
Other
USD
EUR
SEK
Other
21
We have seen a number of predictions for 2017FY issuance
volume varying between USD90bn and USD206bn;
consensus falls around the USD120bn mark. Moody’s lofty
expectations of USD206bn are largely driven their expectation
for China to continue to play a large role in this market.
Notable deals this quarter include:
France became the second sovereign to issue a Green
Bond in January with a EUR7bn 22yr OAT at FRTR+13bps
On 24th January 2017 France joined Poland as only the
second Sovereign to issue a Green Bond. The deal was
well prepared and included both a European and Asian
roadshow. Final orderbook of over EUR23.5bn permitted
price tightening from FRTR+15 area to FRTR+13bps. The
Use of Proceeds will fund climate related improvements
for project areas including Buildings, Transport, Energy,
Living resources, Adaptation, Pollution control and eco-
efficiency. France’s second opinion was provided by Vigeo.
Funding mechanisms range from conventional investment
to subsidies and tax credits, illustrating the broad potential
Use of Proceeds sovereigns can fund with a Green Bond.
SEB launches the tightest pricing Senior Unsecured 5yr
bond since the Global Financial Crisis
SEB issued a EUR500m 5yr Green Bond on the 10th February
2017. The Bank is an early promoter of the Green Bond market
with its own Green Bond fund (EUR105m as at Sept-16)
Proceeds will fund eligible projects targeting the mitigation
of and adaptation to climate change, environmental
and ecosystem improvements and investment in
dark green CICERO graded SSA green bonds.
HSBC was joint Bookrunner in the significantly oversubscribed
deal which attracted a final orderbook of EUR2.1bn and
saw price tension strong enough to warrant tightening from
initial guidance of MS+mid to high 20s to MS+20bps.
3 Moody’s Research - https://www.moodys.com/research/Moodys-Global green-bond-issuance-could-rise-to-USD206B-in--PR_360880?WT.mc-id=AM~WWFob29fRmluYW5jZV9TQl9SYXRpbmcgTmV3c19BbGxfRW5n~20170118_PR_360880
Predictions for 2017FY issuance volume
HSBC Fixed Income Research USD90bn-120bn
Bloomberg New Energy Finance USD123bn
ABN Amro USD90-USD110bn
Natixis USD144bn
Climate Bonds Initiative USD130-USD150bn
Credit Agricole USD100bn
Moody’s USD206bn
Environmental Finance (survey
of SRI market participants)
USD120bn-USD160bn
22
ReNew Power prices an innovative USD475m through
NEERG Energy SPV
On 6th February 2017, NEERG Energy Limited, an offshore
SPV issued a USD475m 5yr Green Bond following a
comprehensive global roadshow across Singapore, Hong
Kong, London, New York, Boston and Los Angeles.
The innovative structure creates an offshore SPV through
which ReNew Power can bypass Reserve Bank of India
rules restricting the sale of high yielding offshore debt by
local companies. The bond is the first of its kind in India and
allows ReNew to issue a USD denominated Green Bond for
the first time. Demand for this deal was shown by the peak
orderbook size of USD1.6bn and tightening of 37.5bps to
price with a reoffer yield of 6%. Proceeds will fund renewable
power business activities of Renew. This is in line with the
16 Indian Green Bonds issued since 2015, whose most
common Use of Proceed has been renewable energy.
Fibria Celulose issues largest Brazilian Green Bond to date
On 17th January Fibria Celulose priced an upsized USD700m
10yr Green Bond at T+335bps. Fibria is the world’s largest
market pulp producer and issued in the context of broader
initiatives to reinforce its commitment to environmental and
social sustainability. Strong investor demand saw the final
orderbook grow to over USD3.2bn and pricing tighten from
initial price thoughts of “very low 6% area” to 5.700% yield.
Use of Proceeds will be allocated to capital expenditures
necessary to sustainably manage eucalyptus forest
plantations that are certified by FSC or Cerflor (PEFC).
Enel issues the first Italian Corporate Green Bond
On 16th January Enel, a leading producer of energy and
one of the leaders of the continental European market
issued a EUR1.25bn 7yr Green Bond at MS+70bps.
Demonstrating its commitment to being a global leader in
the development of clean energy, Enel’s Green Bond was
highly sought after by SRI and general investors alike, allowing
the final orderbook to grow to an impressive EUR2.9bn
and generating enough price tension for the issuance to
tighten from MS+70/75bps guidance to MS+70bps.
Green Bond proceeds will be used to finance Eligible
Green Projects (Renewable Energy Projects and
Transmission, Distribution and Smart Grid Projects or
Other Projects which meet a set of environmental and
social criteria) or refinance Eligible Green Project
Given the successful start to 2017 and material signs
of governments utilising the powerful alignment
between Green Bond issuance and environmental
spending, there have been many reports suggesting
significant level of green bond issuance from
Sovereigns to bolster Green Bond volumes in 2017.
23
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