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Three new publications provide issuers with key guidance on Green, Social, and Sustainability Bonds.

By Paul A. Davies, Michael D. Green, and Aaron E. Franklin

The Executive Committee for the Green Bond Principles recently published three documents providing key guidance complementing the Green Bond Principles (GBPs), the Social Bond Principles (SBPs), and the Sustainability Bond Guidelines (SBGs). The guidance documents include the Green Project Mapping document, the Guidance Handbook, and the Impact Reporting Handbook.

The 2018 revisions of the GBPs, SBPs, and SBGs remain unchanged and applicable. However, the new publications offer complementary guidance, consolidating existing information and incorporating new information based on market feedback and information requests from market participants.

Latest iteration of popular guidelines continue with voluntary, market-driven approach.

By Paul A. Davies and Aaron E. Franklin

The annual update of the Green Bond Principles (now also including the Social Bond Principles, and the Sustainability Bond Guidelines, collectively, the Principles) on June 14, 2018 created few surprises. The Principles, highly influential in the sustainable finance space, are subject to annual revision by an executive committee comprised of a set of underwriters, issuers and investors (with the support of the International Capital Market Association (ICMA) as secretariat). Each year, members and observers of the Principles (including Latham & Watkins) submit proposals for amendments to the Principles, with the final amendments formally announced at an annual conference. This year’s conference was held in Hong Kong, in a move to highlight the importance of Asian markets for sustainable finance and the global reach of the Principles.

As has been the case since the inception of the Principles in 2014, the bedrock idea behind the Principles is that the market decides what counts as a green bond. Third-party assurance or review is “encouraged”, but the emphasis remains on issuer communication to enable informed decision-making by investors. This emphasis takes the form of four core components that an issuer should disclose as part of its offering documents: (i) the use of the bond’s proceeds (i.e., what are the eligible green projects?); (ii) the process for project evaluation and selection; (iii) management of proceeds and (iv) reporting. As they have in prior editions, the Principles continue to discourage the green bond label on green bonds that do not otherwise follow the core components (including “pure play” green bonds).

The action plan recommends leveraging London’s leading role in global green finance to grow green opportunities.

By Paul A. Davies

The Green Finance Taskforce’s first report, “Accelerating Green Finance,” advises the UK government on how to achieve important green finance goals, carbon targets in relation to the Paris Agreement. The report, published on 28 March, recommended the establishment of a Green Finance Institute, which would be a “one-stop-shop’ for all work relating to this sector. The report also advised:

  • Boosting investment in innovative clean technologies
  • Driving demand and supply for green lending products
  • Setting up Clean Growth Regeneration Zones
  • Improving climate risk management with advanced data
  • Building a green and resilient infrastructure pipeline
  • Issuing of a sovereign green bond for green projects, including flood defence

Sir Roger Gifford, Chairman of the Green Finance Institute, noted that “[t]he opportunities for green investment are plentiful — London’s deep pools of liquidity make it the natural choice for financing these initiatives.”[1]

The Green Loan Principles may help sustainable investment growth

By Paul A. Davies and Aaron E. Franklin

The Loan Market Association and the Asia Pacific Loan Market Association recently announced the “Green Loan Principles” joint project. This two-page document, announced on March 21, 2018, seeks to stimulate the de minimis green loan market by following in the footsteps of the highly influential Green Bond Principles.

There have been green loans for several years, but this market has not experienced anywhere near the outstanding levels of growth of the green bond market. The reasons behind this are not clear, but, undeniably, green loans could be an effective alternative to green bonds in many cases. This could include when the amount to be borrowed would not suffice for a benchmark-sized bond, or if the borrower does not wish to comply with public reporting standards applicable to bond issuers. And although loans are far less public than widely distributed bonds, borrowers could still obtain many of the benefits associated with green bond issuance in terms of demonstrating to their stakeholders their commitment to these issues.

Recommendations signal a major shift for Europe’s financial system through both legislative and non-legislative changes.

By Paul A. Davies and Aaron E. Franklin

The European Commission (EC) has revealed its action plan for mobilizing the financial system to encourage a “greener and cleaner economy.”[1] The plan, which was released on 8 March, states that it aims to facilitate the following, in conjunction with the Paris Agreement and the EU’s sustainable development agenda: i) improvements in the financial system’s contributions to sustainable and inclusive growth, and ii) stronger financial stability by incorporating environmental, social, and governance (ESG) factors into investment decision-making. The inescapable takeaway is that the EC strongly encourages a more active regulatory role in the sustainable investments market, through both legislative and non-legislative changes.

By Aaron Franklin

The United States has the deepest, most liquid capital markets in the world, attracting issuers from across the globe. To sell to US investors, these issuers must comply with US securities laws, entailing a more rigorous diligence and disclosure process. Issuers must weigh the benefits of increased demand against the additional costs, but the outcome should not depend on whether the bonds will be green or otherwise have sustainability credentials.

The US securities laws that apply to bond deals include a variety of rules on who can issue and purchase bonds, such as the registration requirements in the Securities Act of 1933, the Trust Indenture Act of 1939, and the Investment Company Act of 1940. But the real concern for bond issuers and underwriters is the threat of investors claiming securities fraud under the Securities Exchange Act of 1934, using “Rule 10b-5.” In general, a plaintiff is entitled to damages under Rule 10b-5 if a bond issuer or underwriter misrepresented or omitted a material fact in connection with the purchase or sale of the bond, with the intent to deceive or with recklessness, and the plaintiff lost money by relying on that misrepresentation or omission. This right to litigate for “material omissions” does not exist in most other jurisdictions, even where contractual fraud claims are possible. To avoid lawsuits under Rule 10b-5, issuers and underwriters (and their legal counsel) typically spend more time and effort (relative to deals not sold to US investors) investigating the affairs of the issuer and ensuring the offering disclosure is sufficiently robust.

By Paul Davies, Bridget Reineking, and Andrew Westgate

Since establishing the People’s Bank of China’s Green Finance Task Force in 2014, China has encouraged green financing mechanisms through a variety of pioneering initiatives. For example, the country has designated five green finance pilot zones, within which financial institutions are incentivised to provide credit and special funds for environmentally friendly industries.

However, investors have yet to take full advantage of these developments. The lack of uptake may in part relate to recommendations set out in the Green Task Force Final Report published in April 2015. In particular, recommendation 13 of the Report proposes imposing environmental lender liability on banks – the practical consequence of which is that banks and other financial institutions become liable for environmental pollution or damage caused by their borrowers. Although green projects are by nature less environmental risk-laden than other projects, they are not risk-free. As a result, investors have been hesitant to utilize the new financing mechanisms, and banks are equally hesitant to offer financing in the face of uncertain associated liabilities.

By Paul Davies, Aaron Franklin, and Andrew Westgate

The China Securities Regulatory Commission (CSRC) released new guidelines (the Guidelines) on the issuance of green bonds on March 2, 2017, marking an important step in the development of what is now the world’s largest green bond market, accounting for 39% of global issuances by principal amount issued during 2016 (after excluding green bonds that the Climate Bond Initiative considered did not qualify as green bonds).  Key policies in the Guidelines include CSRC adopting the categories of projects eligible for funding with green bonds that were promulgated by the People’s Bank of China (PBoC) (which we have previously covered), a requirement to deliver a “commitment letter” to CSRC relating to the green attributes of the issuance, and a prohibition in principle on issuances of green bonds by non-green issuers (e.g., oil companies).  Because this last prohibition is qualified by “in principle” in the text of the guidelines, the CSRC may grant exceptions in certain circumstances.

Regulation of green bonds in China is divided primarily on the basis of the type of issuer, with the PBoC regulating green bonds issued by financial entities and the National Development and Reform Commission (NDRC) regulating bonds issued by other corporates that do not have listed equity.  Both of these agencies have previously issued their own green bond guidelines (PBoC in 2015 and NDRC in 2016).  In addition, both the Shanghai and Shenzhen stock exchanges have issued pilot guidelines applying to bonds issued on their exchanges.  Until now, “green” private placements and other non-listed securities were only required to be notified to the National Association of Financial Market Institutional Investors.  Now, CSRC’s new Guidelines will apply to all green bonds other than those covered by the PBoC and NDRC guidelines, including those issued by non-financial corporate issuers with listed equity.