Sustainable Financing NewsletterEdition 2 – September 2016

2

Introduction & OverviewThe global green bond market has continued to make encouraging

headway in the first half of 2016. According to numbers published by

Bloomberg1, by early June, issuance was up 80% year-on-year. At

this rate of growth, Bloomberg calculates that issuance for the year

will reach close to $56 billion, compared with $46 billion in 2015.

Moody’s, meanwhile, has revised its February forecast upwards, and

now believe that issuance in 2016 could amount to $75 billion2, while

HSBC Research believes the figure will be between USD55 - 80bn.

In line with the forecasts made by many analysts at the start of 2016, China

has led the way, accounting for about a third of global issuance in the first

five months of this year and approving issuance of USD8.5bn in H1 20163.

Other leading emerging economies, however, have also re-emphasised

their commitment to building broader and more liquid markets for

sustainable financing. R Gandhi, Deputy Governor of the Reserve

Bank of India (RBI) has openly called for more green-based lending,

while the Securities and Exchange Board of India (SEBI) has developed

guidelines for green bond issuance back in January 20164. Among

issuers, Axis Bank launched India’s first internationally-certified green

bond in June, a $500m five year transaction listed on the London Stock

Exchange which was oversubscribed by 2.2 times. Many others are

likely to follow in Axis Bank’s footsteps. As the Climate Bond Initiative

(CBI) commented in a blog published in early May following a visit

to India, “it’s clear that momentum behind green finance in India is

rapidly growing and the size of the potential deal-flow is staggering.”

Turkey, meanwhile, celebrated its first green issue in May with a $300

million five year deal from the investment and development bank, Turkiye

Sinai Kalkinma (TSKB). HSBC was one of the lead managers of the TSKB

bond, which generated demand of $3.9 billion, making it the largest

book for a Turkish FIG issuer since 20145. It also signified the first ever

Green/Sustainable Bond out of both Turkey and CEEMEA region and

the biggest ever orderbook for a RegS Only transaction out of Turkey.

Elsewhere in the emerging market universe, Banco Nacional de Costa

Rica launched Latin America’s fourth green bond in April, while Mexico

has recently set up a Green Bonds Working Group, which could

pave the way for more than $2 billion of issuance over the next three

years, according to estimates from the Climate Bonds Initiative6.

CONTENTSINTRODUCTION & OVERVIEW 2

EDITORIAL 4

CHINA – RAISING THE BAR IN THE GREEN BOND MARKET 5

UK EMISSIONS TARGETS SET TO 2032 8

DOES BREXIT AFFECT CLIMATE CHANGE GOALS? 9

THE QUARTER IN REVIEW 10

HSBC’S SUSTAINABILITY LEADERSHIP PROGRAMME 14

3

In Europe and the US, there were a number of indications in

the first half of 2016 that the green bond market is maturing.

In May, for example, KfW extended its curve in green bonds to

eight years, with a very well-received 2024 transaction attesting

to the growing maturity of the market, while EIB also tested

demand at the longer end of the market with a $1.5 billion 10

year climate awareness bond (CAB) in April. With multinational

development banks such as the Asian Infrastructure Bank

(AIIB) also expected to issue in green format, an increasingly

diversified market for supranational green bonds is clearly

taking shape across the world. Sovereigns may also be

adding to liquidity at the highly-rated end of the market; a

notable recent milestone for sustainable finance has been

the indication from France that it could become the first

government in the Eurozone to issue a green bond.

In the credit space, one of the most striking indications of the

increasingly diverse range of issuance in the green market in

the second quarter of 2016 was the launch by Obvion of the

Netherlands of the first 100% green residential mortgage

backed security (RMBS). The $500 million Green Storm

structure, issued to refinance energy-efficient housing in the

Netherlands, generated demand of more than X1.2 billion.

Q2 also saw the BRICS New Development Bank come

to market. Not only was this the first green bond from

the newly formed development bank, but also its maiden

foray into the Debt Capital Markets. HSBC provided a

green structuring review and acted as Joint Lead Manager

on the trade. Other notable firsts from this transaction

were that it signifies the first onshore RMB bond issued

by a Supranational issuer since 2009, the first RMB

Green bond to be priced by a SSA in mainland China and

the largest onshore RMB bond printed by a MDB.

Issuance has also continued to gather momentum from

companies raising funding for key renewable projects.

Recent months have seen well-received green bonds

from borrowers such as Spain’s Iberdrola, Sweden’s

Wallenstam, and Netherland’s TenneT, all of which are

using the proceeds of their green issuance to support

investment in onshore or offshore wind energy projects.

In the US, San Francisco Public Utilities Commission (SPUC)

recently became the first entity to issue a bond certified

under the new Climate Bonds Water Criteria. This $240

million Wastewater Revenue bond is likely to be the first of

many, given that California alone has a funding gap in the

water sector of about $24 billion, according to Ceres7.

Encouraging Signals from the Buy-Side

On the demand side, there have also been a number of

encouraging indications recently pointing to increased

support for green issuance. For example, an inaugural

survey of 150 CIOs and heads of fixed income published

in June by FinanceAsia in association with HSBC and

S&P Global Ratings found that 55% of investors are

likely to invest in green bonds over the next year. Only

20% said they were unfamiliar with green bonds.

The consensus among market participants, however,

appears to be that more still needs to be done to encourage

a broader community of investors to support the growth

of the green bond market. As Jean-Marc Mercier, co-

head of debt capital markets at HSBC, told the Financial

Times in June8, depth and scale would be added to

the green bond universe if investors were offered tax

benefits as they are in the US municipal market.

1 www.bloomberg.com June 8 20162 https://www.moodys.com/research/Moodys-Q2-green-bond-issuance-shows-quarterly-high-market-to--PR_3527043 HSBC Research, ‘The Big Long’ report4 http://cleantechnica.com/2016/01/15/indian-regulator-approves-rules-issue-list-green-bonds/5 Reuters, May 13 20166 Climate Bonds Initiative blog, June 9 20167 http://www.ceres.org/press/press-releases/san-francisco-public-utilities-commission-issues-world2019s-first-certified-green-bond-for-water-infrastructure

8 FT, June 8 2016

4

Editorial CommentUlrik Ross, Global Head of Public Sector and Sustainable Financing, Capital Financing, HSBC

We are operating in uncertain and unprecedented times across

Europe driven by the UK’s decision to exit the European Union

(“EU”) on 23rd June. Uncertainty is no-ones friend, least of all

investors.

Despite the challenging macro environment, Governments in

Europe and across the globe still need to come together and

step up implementation of solutions that will deliver on the

targets agreed at COP21. Two key points we must not forget:

that Greenhouse Gas (“GHG”) emissions need to peak in 2020

in order to deliver a 2 degree world; and $90 trillion needs

to be invested globally in infrastructure in the next 15 years.

These are not small asks.

Delivering the transition to a low carbon economy will require

transparent national planning. So far there have only been a

smaller number of sovereign commitments to green financing

solutions. As an example, China of course has been at the

forefront, but France has similarly shown strong commitment

with actions covering regulations, investor labels and the

expected Eur 9.2bn Ircantec green bond fund to be established

by the end of the year. The Hong Kong Financial Services

Development Council (“FSDC”) published a report in May

which includes recommendations for green bond issuance

by the Hong Kong governments and other public entities, the

establishment of a Green Finance and Advisory Council and

the foundation of a green labelling scheme covering projects

and securities to attract new issuers and investors. It is an

example many others could and perhaps should follow.

We expect to see increased communication and commitments

to green financing by sovereigns leading up to the G20 Summit

chaired by China in September in Hangzhou. The July G20

Finance Ministers Communiqué showed us how the issue is

growing in prominence with the text recognising the need to

scale up green finance.

On the investor side we are seeing a major uplift in

commitments to the green agenda from divestment in the

fossil fuel sector, launch of additional ETF funds by Blackrock

(now representing USD 1.2bn in assets), the announced plan

by IFC to establish a USD 1-2bn emerging market green bond

fund, and additional new green bond investment commitment

like the one recently launched by NIB. In our view one of the

key trends that will shape the future investment landscape is

the implementation of both positive and negative screening

of companies on environmental, social and governance (ESG)

criteria. This will set the stage for more Smart Beta funds,

such as the recently launched fund from AXA Investment

Managers. Most investors are now up to speed on negative

screening and green bonds, but the positive screening opens

up for more investment into climate aligned bonds, Moody’s

rated GB3-5 Green Bonds, “pure play” green bonds as

well as social bonds. At HSBC we believe it is increasingly

important, with more diversified products on offer, to continue

to distinguish between the different “shades of ESG” to best

align product offerings with investor demand.

On the product side we have seen new indices, new listing

opportunities by stock exchanges, new ETF investments

and Green Equity Index linked and other structured products.

These have been offered alongside the recently updated

Green Bond Principles (GBP) and the launch of the Social Bond

Guidance at the June ICMA GBP Annual General Meeting

hosted by the EBRD in London.

In addition according to Dealogic there has been an increase

in green bond issuance H1 2016 vs H1 2015 of around 50%

with around USD 40bn in volume. China has played a very

important role in the most recent evolution of the green bond

market including the largest ever issued green bond from

Bank of China (USD 3.03bn equivalent over 4 tranches lead

managed by HSBC). In India we saw the issuance of USD

500m from Axis Bank, as well an inaugural green bond from

TSKB in Turkey - all lead managed with structuring support

from HSBC. In H2 we expect to see the trend continuing.

Lastly, we hope to see Governments take bold and decisive

steps to deliver on their Nationally Determined Contributions

commitments at COP21. These will act as a catalyst for the

private sector - Brexit or not!

5

China – Raising the Bar in the Green Bond MarketThe speed with which the primary

market for green bonds is expanding

is graphically illustrated in the recent

revision by Moody’s of its forecast

for issuance in 2016. At the start of

this year, it projected forecast that

global issuance of would reach $50

billion in 2016, up from $42.4 billion

in 2015. The agency has recently

revised this number to $75 billion.

What has remained constant, however,

is the widely-shared conviction that

rising volumes from China and India

are underpinning much of the increase.

The view that China would a leading

source of new issuance this year was

widely echoed. As one commentator

confidently predicted in January, “there

is no doubt that 2016 will not only be

the Year of the Monkey—it will be the

year of the green bond market as well1.”

If activity in the first half of 2016

- especially in Q1 - is any guide,

China’s domestic and international

markets are already delivering on this

promise, contributing to much of the

rise in global supply of green bonds.

International issuance by Chinese

borrowers has continued to gather

notable momentum in recent months,

with a diverse range of borrowers

coming to the market. Most recently,

the Bank of China raised around

$3.03 billion by issuing multi-currency

green bonds, in US dollars, Euros, and

Chinese Yuan, and reportedly received

a spectacular response. Among other

leading Chinese banks, Industrial Bank

of China has also issued its inaugural

RMB10bn ($1.5 billion) green bond.

In the corporate sector, meanwhile, in

May, Zhejiang Geely Holdings Group

(ZGH) priced the first ever green bond

by a Chinese automobile company

in the offshore market. This was a

$400 million five year transaction,

the proceeds of which will support

the roll-out of zero-emission black

cabs by ZGH’s UK-based subsidiary,

the London Taxi Company. Demand

for this landmark issue was such

that it was oversubscribed by close

to six times, with pricing of 2.75%

representing the tightest ever in

the dollar market for an automobile

company from Greater China.

The expansion of China’s market for

sustainable finance is a by-product

of the government’s increasingly

strong commitment to addressing

the environmental damage caused

by the breathless expansion of the

country’s energy-intensive economic

boom of the last 10 years. Already,

much has been done to arrest and

even reverse some of this damage.

Perhaps surprisingly, given international

press coverage about China’s pollution

problem, concentrations of sulphur

dioxide, nitrogen dioxide and inhalable

particulate matter in Beijing all declined

between 1998 and 2013, according

to a recent UNEP report. This advises

that the trend has been driven by a

decrease in coal consumption in the

power sector and a drop in vehicle

emissions resulting from stricter

pollution control measures. According

to the same report, coal use in China fell

from a peak of 9 million tonnes in 2005

to 6.44 million tonnes in 2013, while

the 2013 levels of carbon monoxide

dropped by 76% compared to 19982.

Nevertheless, it is estimated that China

needs an annual investment of at least

RMB2-4 trillion ($320-640 billion) to

address environmental degradation

and climate change3. According to

the People’s Bank of China (PBoC),

public investment will only be able to

meet 10% to 15% of this total. The

shortfall, which could be as much

as $576 billion, will need to come

from private sector investment.

Small wonder, against this backdrop,

that the development of China’s

green capital market has enjoyed

the full and co-ordinated support

of the government, in the form of

green bond guidelines issued by

the PBoC and the Green Finance

Committee (GFC) in December 2015.

6

The first issuers to respond to these

guidelines were Shanghai Pudong

Development Bank and Industrial Bank

Co, which printed green bonds raising

20 and 10 billion yuan respectively in

early 2016. The success of these deals

twinned with the clear push by the

government to support the development

of the market has prompted some analysts

to predict that issuance of green bonds

in China could reach 300 billion yuan

per year between now and 20204. It

has also encouraged other jurisdictions

to strengthen their efforts to build their

credentials in green finance, with Hong

Kong a notable example (see below).

Initiatives to support Growth of the

Green Bond Market

A number of other important measures

have been implemented in the first half

of 2016 to support the growth of China’s

green capital market. These include the

Shanghai Stock Exchange’s Green Bond

Pilot Initiative, launched in March, which

was a key step towards promoting trading

of green bonds on the Exchange. As part

of this programme, the Shanghai Exchange

will encourage firms to secure independent

professional assessments on whether

their projects qualify as green. It will also

encourage financial institutions, brokerages,

pension funds and other institutional

investors to invest in the securities5.

Another important landmark in the evolution

of the Chinese green bond market was

the announcement that Zhongcai Green

Financing had won approval to certify

bonds against the climate bond standard.

Zhongcai is the commercial arm of the

Research Centre for Climate and Energy

Finance based at the Central University

of Finance and Economics in Beijing.

Wai Shin Chai, Climate Change Strategist

at HSBC in Hong Kong, says that the

series of initiatives designed to strengthen

China’s green financial market dovetails

neatly with the government’s broader

strategy of instilling some much-needed

discipline into the country’s rapidly evolving

domestic capital market. “By ensuring

that the appropriate infrastructure is

in place to support a market based on

legitimate investment principles, the

government is successfully addressing a

number of challenges at the same time,”

he says. “As well as helping to tackle

environmental problems and enhancing

the country’s international profile, it is

supporting the growth of China’s bond

market and promoting a move away

from speculative investment in the local

stock market. By emphasising to local

investors that they are contributing to

the public good by supporting the green

bond market, they are encouraging what

may be described as duty investing.”

In April, the Hong Kong-listed wind and

solar power company, Concord New

Energy Group, created a notable landmark

when it became the first non-financial

entity to issue a green bond in the domestic

debt market. This privately-placed RMB200

million ($30 million) three year transaction

was priced at 6.2%, and came soon after

Concord New Energy’s announcement

that it had registered an RMB500 million

green bond Programme with NAFMII6.

Another important first was registered the

following month, when Beijing Motors

Corporation (BAIC) became the inaugural

state-owned enterprise (SOE) in China

to issue a green bond. Like the Concord

transaction, the RMB2.5 billion ($387.5

million) transaction is part of a broader

green issuance programme of RMB4.8

billion7. 60% of the proceeds of the BAIC

issue will fund the construction of facilities

for upgrading and manufacturing energy

efficient cars and electric vehicles, with

the remaining 40% set aside for working

capital supporting R&D. As the Climate

Bonds Initiative (CBI) noted following the

announcement of the BAIC transaction,

“in a large country like China, where over

20 million vehicles are produced each

year, low emission cars will be crucial

to achieving climate mitigation goals.”

Analysts believe that an increasingly

broad range of borrowers will continue

to add liquidity as well as diversity to

China’s green bond market. Following

the release of the corporate guidelines by

NAFMII, it is expected that the next step

will be the release of local government

or “municipal” green bond guidance.

ANALYSTS HAVE PREDICTED THAT ISSUANCE OF

GREEN BONDS IN CHINA COULD REACH

300 BILLION YUAN PER YEAR BETWEEN NOW

AND 2020

7

Opportunities in Hong Kong

China’s commitment to the development and expansion of its green capital market – encompassing green IPOs

and more sustainable bank lending practices as well as green bonds – is likely to have a conspicuous ripple

effect in North Asia as other regions recognise the importance of championing green finance. Hong Kong is

perhaps the most notable example. A report published in May8 by the HK Financial Services Development

Council (FSDC) cautions that Hong Kong may be in danger of missing a critical opportunity if it does not act now

to maximise its potential as a regional leader in green finance. “The green bond market will receive enormous

impetus from China’s green finance requirements, much of which will need to be raised in international

markets,” notes the FSDC. “Because of Hong Kong’s special relationship with China and its role as the

principal market for offshore RMB, Hong Kong is in a unique position to capture related opportunities.”

The FSDC’s recommendations include the issuance of green bonds by the government and other public

sector entities, the establishment of a Green Finance and Advisory Council, and the foundation of a

Green Labelling Scheme covering projects and securities to attract new issuers and investors.

In the meantime, China will continue to provide an important blueprint for green capital markets across the world,

using its role as chair of the forthcoming G20 summit to promote sustainable financing in Asia and beyond.

Green finance is already on the agenda for September’s meeting in Hangzhou, which some commentators

have said may be as significant to green economic growth as December’s COP21 Paris Summit was to climate

change9. “The G20 meeting will be an ideal platform for China to showcase to the world what it is doing to

promote sustainable finance internally and to lead the way on climate change at a global level,” says Chan.

1http://www.wri.org/blog/2016/01/new-guidelines-china’s-green-bond-market-poised-take-year-monkey2http://www.unep.org/newscentre/default.aspx?DocumentID=27074&ArticleID=361883Roadmap for China: Scaling up Green Bond Market Issuance – Climate Bonds Initiative, International Institute for Sustainable Development (IISD) & Foreign & Commonwealth Office, April 20164Bloomberg, February 4 20165Bloomberg, March 17 20166Global Capital, April 12 20167For more details, see Climate Bond Initiative, May 6 20168Hong Kong as a Regional Green Finance Hub – HK Financial Services Development Council (FSDC) Paper No 239Huffington Post, June 6 2016

8

UK emissions targets set to 2032Ashim Paun, Director at Climate Change Centre of Excellence, HSBC Research

The UK legislated the 5th carbon

budget on 30 June 2016, requiring a

greenhouse gas emissions reduction of

57%, compared with 1990 levels. This

locks in the lowest cost pathway for

emissions cuts to 2032, covering the

period of the Paris Agreement (2020-

30). Under the 2008 Climate Change

Act, the UK sets carbon budgets over

five-year periods to reach its long-term

target of an 80% emissions reduction in

2050. We are currently in the 2nd budget

period (2013-17), when emissions

must be 27% lower than 1990.

The UK has already made good progress.

It has achieved a 38.8% reduction

in its emissions since 1990, which

is ahead even of the 3rd budget and

also substantial when compared with

cuts achieved by global peers. Over

half of this cut was achieved over the

first eight years of carbon budgeting

(2008-15), pointing to the success

of the UK’s legislative approach.

Other factors, however, have also

helped bring emissions down. First,

GDP underperformance since the UK

Treasury’s 2008 Budget, driven by the

financial crisis, has led to less emissions

than expected, meaning targets were

easier to achieve from the point of view

of decarbonising the energy system –

our calculations suggest that almost half

the cut over this period is attributable

to lower GDP, (accounting for the 31%

reduction in the carbon intensity of

GDP since 2008). Second, European

legislation has driven emissions down

in the UK power sector – the Large

Combustion Plant Directive 2001 (LCPD)

led to the retirement of nine UK coal and

oil fired power generation facilities and

emissions reductions from others. By our

calculations, 49% of emissions removed

from power generation were attributable

to the LCPD over 2008-2014. Third,

carbon pricing legislation has given an

economic incentive to reduce emissions

(and thus cut costs) – the European

Emissions Trading System covers

emissions from power and a number of

industrial activities (currently EUR 4.55,

c.GBP 3.75), while the UK’s Carbon Price

Support adds an additional GBP 18 to the

price of each tonne of carbon emitted

from power generation. Fourth, the UK

has also driven emissions down through

greater energy efficiency, supported by

the Climate Change Levy since 2001, a

tax on primary energy use and power.

Do targets translate directly to

performance? The Committee on

Climate Change, which recommends the

carbon budgets, has stated concerns that

the 4th and 5th budget targets (52% and

57% cuts) may be missed. To mitigate

this risk, the Committee has set out the

contribution required from sectors across

the economy. In the power sector,

emissions are expected to come down

as coal is phased out by 2025. However,

with construction of new nuclear

capacity yet to start, it seems likely that

gas rather than renewables will take

more share, supported by government

backing for gas and structural limitations

to renewables penetration, given their

intermittency. The transport sector is

also expected to decarbonise – 19%

of UK emissions come from road

vehicles - with more electric vehicles

and hybrids, plus shipping covered for

the first time in the 5th budget. Greater

efficiency in buildings is expected to

bring overall emissions down by a further

3% over 2020-2030, notwithstanding

a projected 15% growth in the number

of households, while efficiency

improvements and fuel switching are

also needed in manufacturing industry1.

With a new Prime Minister in place, there

is uncertainty over priorities in energy

and climate policy2. However, investor

confidence is buffeted by the mandatory

12-year lead time for legislating carbon

budgets, a key advantage of the

Climate Change Act. Although there is

a chance that a new administration can

challenge the UK Climate Change Act,

we do not think this will be a priority in

the near term and expect sector level

policies to emerge to support longer

term carbon budgeting targets.

1UK : DECC Disbanded https://www.research.hsbc.com/R/29/DfnlfRwKI8wg2UK adopts carbon budget https://www.research.hsbc.com/R/29/fSDpdLkKI8wg g

9

Does Brexit affect climate change goals?Zoe Knight, Managing Director, Head of the Climate Change Centre of Excellence

When the UK voted to leave the EU on 23rd June 2016 it

threw out uncertainty on a number of key climate and energy

policies on both sides of the Channel. What happens to the

UK climate change Act? Will the UK stay part of the European

trading scheme? What will the UK do to renewable energy

goals that were part of the European framework? These

are just some of the questions that investors are asking.

The UK adopted a climate change act in 2008. It is unlikely

that this will be repealed, because the emission reduction

2017 targets are already achieved and the UK is on track

to beat the 2022 goal. New ministers are going to want

to bed down in new roles. Energy is now part of the new

‘Business, Energy and Industrial Strategy’ Department and

climate adaptation issues are likely to be taken up by the

Department for environment, farming and rural affairs.

Mitigating climate change is ultimately about reducing

emissions. Once the UK leaves the EU it will be free

from obligations under the EU’s 2030 Energy and Climate

framework, including a contribution towards the EU-wide

renewables target of a 27% share of energy consumption.

This brings uncertainty on how emission reductions

will be achieved over the medium to long term.

From the perspective of the EU, Brexit would make its

2030 emissions reduction target of a 40% cut vs 1990

levels harder to achieve. The UK has made a greater

contribution than some member states to overall targets

and has legislated for a 57% emissions reduction over 2028-

2032. We calculate that the emissions reductions of the

remaining EU-27 states will have to be 7.6% deeper if the

40% target is maintained than otherwise, in aggregate.

Using less energy is also an effective way of reducing

emissions. The EU’s headline energy efficiency

target, a 27% improvement in 2030 vs 1990, will also

become more challenging. The UK increased its GDP

per unit of energy consumed by 46% over 1990-2014,

whereas the EU-27 only achieved a 33% improvement.

Removing the UK contribution again makes overall

targets more challenging for remaining states.

Another means of driving emissions down is to implement

a carbon price. One way to do this is via cap-and-trade

schemes, which drive sectors to achieve cuts where it is

cheapest to do so. The EU-Emissions Trading Scheme (ETS),

the largest carbon pricing scheme in the world, has already

faced problems in supporting a price as high as it needs to

change industrial practices. We expect the UK’s regulatory

trading status to determine its participation status in the ETS.

If the UK remains inside the European Economic Area, it is

likely to remain in the scheme, since Norway, Iceland and

Liechtenstein operate on this basis and are required to join EU

member states as ETS members. However, if the UK left the

EU but was in the European Free Trade Association (as per

Switzerland), we think the picture is less clear, as the Swiss

operate their own carbon cap-and-trade scheme. A UK exit

from the ETS could be negative for its efficacy - without the

allowances given to UK firms (11% of the total), there would

be less liquidity in the ETS, which could further affect pricing.

No-one likes uncertainty, least of all investors, but bringing

emissions down requires investment. Put broadly, economic

and policy uncertainty from Brexit is likely to sap investor

confidence, while lower-than-expected GDP will in turn impact

energy demand, meaning total capital allocation to low-

carbon transition of the energy system faces new headwinds.

Nevertheless, we believe commitment to addressing climate

change has been developed in many areas of EU-wide and UK

policy frameworks and so expect it to remain strong at both

levels, regardless of the final degree of political integration.

10

The Quarter in ReviewReview of the quarter/ Preview next quarter

Investment disclosure developments were further bolstered in Q2 2016, and continue to look like a key second half of the year focus.

At the ICMA Annual General Meeting in June, the Green Bond Principles (GBP) Executive Committee released the

updated version of the GBP. These focused on enhancing disclosure transparency with the biggest updates made to the

eligible green sector example list and ongoing reporting requirements. See below for a summary of the update:

1. Use of Proceeds categories updated

– Renewable energy – Energy efficiency – Pollution prevention and control Sustainable management of living natural resources

– Terrestrial and aquatic biodiversity conservation – Clean transportation – Sustainable water management – Climate change – Eco-efficient products, production technologies and processes

2. Project evaluation and selection

– The GBP …recommend that an issuer’s process for project evaluation and selection be supplemented by an external review

– Green Bond investors ‘may also take into consideration the quality of the issuer’s overall profile and performance regarding environmental sustainability’

3. Strategy for management of proceeds

– Largely remain unchanged – Focus on Temporary investment structures and the ‘adjusted’ balance, rather than the ‘unallocated’ balance as it is understood that some projects repay early, or get sold and so unallocated balances can go up as well as down

4. Develop reporting strategy and commitments

– Issuers should make, and keep, readily available up to date information on the use of proceeds to be renewed annually until full allocation, and as necessary thereafter in the event of new developments

– Include a list of the projects to which proceeds have been allocated, as well as a brief description of the projects and the amounts allocated, and their expected impact

– The Social Bond Guidance was also released at the GBP AGM. The guidance has been developed to confirm the relevance of the GBP in the Social and Sustainability bond market, and also to add clarification around the type of eligible projects.

– It states: ‘In line with the GBP, the approval of Social Projects should be subject to transparent, issuer-defined eligibility criteria and an associated process for project evaluation. Social Projects should provide clear benefits that can be described and, where feasible, quantified and/or assessed.’

Social Project categories include, but are not

limited to, providing and/or promoting:

• Affordable basic infrastructure (e.g. clean drinking water,

sewers, sanitation, transport)

• Access to essential services (e.g. health, education and

vocational training, healthcare, financing and financial services)

• Affordable housing

• Employment generation including through the potential effect

of SME financing and microfinance

• Food security

• Socioeconomic advancement and empowerment

Examples of target populations include, but are not

limited to, those that are:

• Living below the poverty line

• Excluded and/or marginalised populations and /or communities

• Vulnerable groups including as a result of natural disasters

• People with disabilities

• Migrants and /or displaced persons

• Undereducated

• Underserved

• Unemployed

11

For more information see the ICMA webpages

at www.icmagroup.org/socialbonds.

• Q2 also saw the release of the CBI / HSBC State of the

Market report. (Source - http://www.climatebonds.net/

resources/publications/bonds-climate-change-2016)

This is the fifth edition of the report which focuses on sizing the

climate investment opportunity, distinguishing between labelled

Green Bonds and the Climate Aligned Bond universe.

• Current issuance: Total labelled green bonds outstanding

were USD118bn at June 2016 (vs. USD65.9bn at June 2015

and USD36.6bn by end of 2014)

• Future issuance: Issuance is expected to ramp up in the

second half of 2016. The Climate Bonds Initiative estimates

total 2016 issuance could reach $100bn

• Issuers: 43% of the bonds outstanding fall into the AAA

credit ratings band, although Corporate bond and commercial

bank bond issuance continues to grow

• Maturity focus: The average tenor of labelled green bonds

is between 5-10 years

• A broad range of use of proceeds: Energy (29%) and

Buildings & Industry (15%) are the largest themes with many

issuers opting for multi-sector, which makes up 49% of the

market and comprises bonds with a mixed use of proceeds

for a variety of projects

• Many currencies but volume remains in USD and EUR:

25 different currencies represented, with the bulk remaining

in US dollars and Euros (80%)

• Pricing: View is that pricing will (and should) remain tight,

but within limits acceptable to the majority of investors.

Beyond this, green investments should and will be

preference using government policy tools.

• Standards can help to boost the market: Bonds that have

received an external review make up approximately 60% of

the labelled green bond market - this has remained relatively

constant year on year

• Key takeaways: – COP21 commitments mean that vast green infrastructure investments are needed.

– The capital needed is available and it needs infrastructure style yield.

– Institutional investors say they want green; the green bond market is evidence of that demand.

– Governments now need to act to bring green infrastructure projects to market.

• Potential future developments: – Develop local green bond markets – Ambition adequate to the challenge ... Governments at national and sub-national levels need to turn their now ubiquitous climate change plans into green investment plans that can be used to drive financing strategies.

– An opportunity for governments to act ... Action to bring green infrastructure projects to market will deliver deal flow for pension and insurance funds, and deliver it with

the risk/yield profiles investors need.

Also this quarter we have seen plenty of action on the

investor side, a few examples are shown below:

AXA Investment Managers (AXA IM) has launched a

‘smart beta’ fund that incorporates both positive and

negative screening of companies on environmental,

social and governance (ESG) criteria.

The AXA World Funds Global SmartBeta Equity ESG fund

aims to outperform the MSCI World Index by between

1% and 2% annually, with 80% of the volatility, and better

ESG performance, including a lower carbon footprint.

The screening process removes companies with low

ESG scores and increases exposure to firms with high

ESG scores, using a ‘best-in-class’ approach.

It is currently being offered to institutional investors

in Europe, with a retail share class being planned

for later this year. AXA has offered a similar ‘smart

beta’ equity fund in Australia since August 2014.

Source: https://www.environmental-finance.com/

content/news/axa-im-launches-smart-beta-esg-fund-

for-european-investors.html?utm_source=713na&utm_

medium=email&utm_campaign=alert

• IFC plans $2bn emerging market green bond fund

The $2bn Green Bond Cornerstone Fund will provide anchor

investments for green bonds issued by financial institutions

in emerging markets.

IFC will also offer issuers advice on how to structure the

bonds in line with the Green Bond Principles

Source: https://www.environmental-finance.com/content/

news/ifc-plans-2bn-emerging-market-green-bond-fund.html

• Blackrock launches two new ESG ETFs for retail investors,

now offers seven ESG ETFs representing $1.2bn in assets – The new ETFs will optimize traditional indices to overweight companies with strong ESG ratings (based on MSCI ratings):

– I. iShares MSCI EAFE ESG Select ETF (ESGD): companies in Europe, Asia and Australia

– II iShares MSCI EM ESG Select ETF (ESGE): emerging markets companies Source: Bloomberg

12

• Ircantec, the €9.2bn French public sector, are reported

to be setting up a dedicated green bond fund at the

end of this year. The pay-as-you-go pension fund has

already invested over €300m in green bonds since 2013,

representing 7% of its overall bond holdings held previously

within its general bond fund. The new dedicated green bond

fund will be mandated to invest in green bonds from issuers

in OECD countries and structured as a fonds commun de

placement (FCP) open-ended fund. A tender for the manager

to run the fund will be put into the market shortly.

Source: https://www.responsible-investor.com/home/

article/responsible_funds_july_8/

• Analysis: Australia’s asset managers double ESG uptake

in two years as Nordics continue to lead. Another new

study – the annual benchmark report by the Responsible

Investment Association Australasia (RIAA) – suggests that

SRI uptake may be faster and keener in the antipodes.

It reports that just shy of half (47%) of all professionally

managed assets in Australia were invested responsibly

in 2015, accounting for around A$633bn (€435bn) of

investments. Money held in “core responsible investments”,

which RIAA defines as sustainability-themed investments,

ESG screened products and impact or community finance

vehicles, contributes $51.5bn to this figure, double the

figure two years ago and representing a significant rise as a

proportion of Australia’s total assets under management: up

to 3.8% in 2015 from 2.5% in 2014.

Source: https://www.responsible-investor.com/home/

article/analysis_australias_asset_managers_double_esg/

Key facts & figures – including deals and state of

the market

USD40.5bn equivalent over 44 green bond transactions has

been issued 2016 YTD, (as at July 26th July, per Dealogic

database), up 50% in value terms from 1H 2015.

HSBC DCM database records USD40.373bn equivalent

over 44 green bond transactions including those of above

USD300m size, or USD44.872bn equivalent over 111

green bonds, with no filter (as at July 28th July).

The notable Chinese transactions of Q1 are followed

up with a new issue from Bank of China, (executed 5th

July), USD3.03bn equivalent over 4 tranches (USD,

USD, EUR, CNY), bringing to market the largest green

bond ever issued (more details below). Also late July,

we saw Industrial Bank return to the Green Bond market

with its second transaction USD 3bn equivalent.

Q2 alone saw approximately USD14.2bn equivalent over

22 transactions, vs approximately USD10.6bn equivalent

over 21 transactions Q2 2015. Average deal size 2016

Q2 was USD646m equivalent, compared to USD508m

comparable PY quarter. The Q2 2016 size increase can

to some extent be explained by large deals from EIB

(EUR1.5bn 10yr), Iberdrola (EUR 1bn, 1.13%, 10yr) Toyota

(USD1.6bn 0.5% split tranche maturities 1yr-6yr).

Corporate issuance has dominated the quarter with

USD7.3bn over 12 transactions (over 11 issuers) due in part

to big deals from Iberdrola (EUR1bn, 10y, XS1398476793)

and TenneT (EUR1bn 10y and 20y, XS1432384409 &

XS1432384664) and Starbucks (US855244AK58 )and

Fonciere Des Regions (FR0013170834) mentioned below.

SSA follows with USD4.5bn over 5 transactions from 5

issuers, as we see the second ICO Social Bond (timed

very nicely for the release of the Social Bond Guidance,

mentioned above) and their second Annual Sustainable Bond

Forum (held in Madrid 29th June). EIB broke the USD1bn

equivalents, issuing USD1.5bn 10yr (US298785HD17)

as did KfW issuing EUR1bn 8yr (XS1414146669).

FIG lagged behind in Q2 bringing to market only 2.5bn

over 5 transactions that all hovered around the USD 500m

mark. ABN Amro and DKB issuing EUR500m (USD559m

equivalent XS1422841202 & DE000GRN0008 respectively)

being the largest (we have excluded the Bank of China

Green Bond here, noting that it was early July trade).

Notable firsts include:

• Bank of China (Green Bond) EY assurance: 4 tranches

(USD750m 1.67% Dec2019, USD1bn 2.25% Dec2021,

EUR500m 0.75% Dec2021, CNY1.5bn 3.40% Dec2018

(USD3.03bn equ.) (issued 05/07/16)

• Axis Bank (Green Bond) CBI certification: USD500m 2.88%

Jun2021 bond (issued 23/05/16) - the first G3 Green bond from

India to be independently certified by a second party reviewer

• Fonciere Des Regions (Green Bond) Vigeo Second Opinion:

EUR500m 1.88% Jun2026 bond (issued 20/05/16)

• Turkiye Sinai Kalkinma Bankasi -TSKB Bank (Sustainability

Bond) Sustainalytics Second Opinion: USD300m 4.88%

May2021 bond (issued 18/05/16)

• Starbucks (Sustainability Bond) Sustainalytics Second

Opinion: USD500m 2.45% Jun2026 bond (issued 16/05/16)

*Source: HSBC DCM database. Filtered for deals over

USD300m equivalent. Please note: Adjustments on last

quarter figures have been made following a review of the

database which has refined those deals classified as eligible

13

Looking through to the second half of 2016 we believe that the FIG Green Bond volume will continue to be bolstered by the

Chinese banks, but we also encourage the European and American institutions to embrace new and follow up transactions. We see

more pressure on banks to increase Green Bond issuance as the COP21 Nationally Determined Contributions are becoming ratified

it is evident the private sector needs to finance the bulk of the investment needed. This is a view shared by various market

participants, see recent article in Environmental Finance by Lauren Compere, managing director at Boston Common Asset

Management: ‘After Paris, ‘banks’ need to up their game on climate change.’

Source : https://www.environmental-finance.com/content/analysis/after-paris-banks-need-to-up-their-game-on-climate-change.html

Published: September 2016

For Professional clients and Eligible Counterparties only.

All information is subject to local regulations.

Issued by HSBC Bank plc.

Authorised by the Prudential Regulation Authority and regulated by the

Financial Conduct Authority and the Prudential Regulation Authority.

Registered in England No 14259

Registered Office : 8 Canada Square London E14 5HQ United Kingdom

Member HSBC Group

Deal Pricing Date

by Quarter

Deal Value $

(Proceeds) (m)

Number of deals % rise (value

of deals)

% rise (volume

of deals)

2016 1H 33,622 37 62% -3%

2015 1H 20,737 38 91% 124%

2014 1H 10,830 17 _ _

2016 Q2 14231 22 33% 5%

2015 Q2 10684 21 132% _

2014 Q2 4613 5 _ -12%

2016 Q1 19,391 15 93% 42%

2015 Q1 10,053 17 62% _

2014 Q1 6,217 12 _

HSBC’s Sustainability Leadership Programme – ‘A Movement for Change’As part of HSBC’s broader commitment to sustainability,

we are focused on embedding this ethos into the

fabric of our corporate culture, through a senior

management engagement framework called the

Sustainability Leadership Programme (SLP).

With the main goal of helping HSBC meet its long-term

sustainability strategies, the SLP is a professional development

experience for select senior executives (and key partners

including clients), designed to support understanding of the

impact of climate change around the world, how it affects

businesses and empowering the programme alumni to make

sustainable changes throughout their business units.

The Programme

• The 4-day experiential learning journey, including the field

programme working with NGO Earthwatch, aims to deeply

engage senior business leaders in sustainability and climate

change issues by working with scientists in the field and

through facilitated and peer led learning sessions

• The programme curriculum supports the delivery of the

Banks strategy, specifically in terms of reducing the banks

environmental footprint, cost base and growing revenues

through Sustainable Financing opportunities

• The cross-business nature of the participants develops and

mobilises a global strategic network of leaders who have the

ability to create meaningful commercial change

• The field work undertaken enables participants to contribute

as a citizen scientist to an important climate change research

project – to date HSBC has contributed over 19,000 hours to

this research globally.

Looking to the future

Since 2010, 1050 Senior Managers have attended the

programme, on 91 programmes, from over 50 countries

globally. The programme is designed to be cross-border,

cross-functional and cross business. Decisions and actions

taken by Sustainability Leaders have delivered significant

efficiencies across the bank and are now developing new

ideas and solutions throughout our global businesses to help

support HSBC’s clients to transition to a low carbon economy.

If you are interested in learning more about the HSBC

Sustainability Leadership Programme, please contact Matthew

Robinson, Sustainability Engagement Head, HSBC.

Carina Wu, Global Alliances Manager, ARUP

“ It has been a fascinating and enjoyable experience to explore the issue of sustainability and climate change with HSBC leaders who are passionate about the cause. Climate change is a critical global issue which is too often dismissed as “too complex to solve”, or “not my problem”, but in fact, we all have a role of play. This programme has given me a good understanding of the scientific, business and socio-economic issues around sustainability and why it is important for individuals and businesses to make substantial behavioural change. As a client and corporate partner of HSBC, we look forward to working even closer with you to shape a better, more sustainable world. ”

15

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