Green bond issuers guide.
Summary: As expectations grow that the UAE is soon to enter the green bond market, KPMG published a paper in March 2015 aimed at helping private and public sector organisations to overcome challenges commonly experienced when issuing green bonds
The paper, titled 'Gearing up for Green Bonds,' is published as part of KPMG's Sustainable Insight series. It addresses five key questions, including the question of labelling a bond 'green'.
According to the paper, the potential benefits of labelling a bond 'green' include giving issuers access to a broader range of investors than regular bonds or other asset classes. In the case of a green 'use of proceeds' bond, proceeds are raised for specific green projects, but repayment is tied to the issuer, not the success of the projects.
This means the risk of the project not performing stays with the issuer, rather than investor. This can attract new investors that would otherwise avoid investing in green projects due to the higher perceived risk of non-repayment.
Louise Venables, Sustainability Services Manager at KPMG in the UAE said, "The UAE has already taken a regional lead with 'green' projects such as the Mohammed bin Rashid Al Maktoum Solar Park and Masdar's Shams 1. To finance future projects, we are now seeing consideration of fixed income financial instruments such as a 'green -- Sukuk'.
"By issuing a green bond, the UAE would be entering a rapidly growing market with $100 billion of green bond issuances predicted for 2015 by the Climate Bonds Initiative. Perhaps inevitably in a new and fast-growing market, standards and ideas of best practice are still evolving. Challenges and confusion can arise as organisations assess whether issuing a green bond is the right course of action for them and seek to understand the process involved.
"KPMG member firms increasingly support clients on green bonds issuance in both advisory or assurance capacities. There are a number of questions that we are typically asked. We have addressed these in our new paper and hope this is a useful resource for any organisation in the UAE embarking on a green bond journey."
However, there can be drawbacks to the 'green' label. The issuance and ongoing costs associated with a green bond could be greater than those of a regular bond. These costs include additional tracking, monitoring and reporting processes, as well as up-front investment to define the bond's green criteria and sustainability objectives. Furthermore, investors may seek penalties for a green default, whereby a bond is paid in full but the issuer breaks agreed green clauses.
KPMG recommends that green bond issuers apply the most rigorous and transparent approach they can to the selection of green criteria within the guidance and standards that are currently available to them.
KPMG member firms have provided advice and independent third- party assurance to some of the first organisations to issue green bonds across the world including clients in Australia, India and the UK. KPMG was the first major accountancy firm certified to provide green bond verification to the Climate Bonds Standard and member firms continue to play a role in the development of market standards and guidance.
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