This structure is generally associated with project

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many assets. This structure is generally associated with project bonds, asset-backed securities (ABS) and municipal debt issuance. Within the unlabelled market, there is a small but growing pocket of bonds whose cash flows depend on the underlying projects, unlike corporate and SSA bonds where cash flows depend on the issuer and may not necessarily be linked to projects. These With the exception of the ring-fencing or ear-marking of proceeds required by the green label, green bonds have financial characteristics that are identical to conventional bonds from the same issuer, including the credit quality, yield and price at which they are issued. The concept of “flat-pricing” has been central to the rapid expansion of the market driven by investor demand. Prices are said to be flat at issuance because the credit profile of a green bond is the same as any other   of the most regular, simple and standardised (“plain vanilla”) bonds from the same issuer, so no difference in pricing is warranted. 16 This means that issuers have not been able or willing to realise pricing advantages (and a correspondingly lower cost of capital for green projects) through green labelling as investors are unwilling to take lower than expected returns at the primary issuance stage simply for the ability to “go green” (BNEF, 2014). At the same time, investors have not been able to realise demand for higher yields to justify supposed additional risk-taking to finance green activities as in general (with exception for project, covered and ABS bonds) they are financing the balance sheet of the issuing entity itself (so the credit risk is the same to any other regular bond from the same entity). Yet, one report has indicated that green bonds trade on the secondary market at a slight premium during certain periods studied (Barclays, 2015). Barclays partly attributes this phenomenon to “opportunistic pricing based on strong demand from environmentally focused funds faced with comparatively limited green bond supply” along with other factors that are difficult to substantiate empirically at present (Barclays, 2015). A mix of views exist on the likely development in the market pricing for green bonds. Debate is ongoing, characterised by a tension between issuers who see strong demand to the point of oversubscription and argue for a pricing advantage to compensate for issuance costs, and investors, who are unwilling to take a pricing “haircut” (i.e. a lower price) that cannot be sufficiently justified on a risk-adjusted return basis. The green bond market is evolving under pressure from issuers looking to drive the costs of issuance down and investors calling for more supply to meet their demand. BOX 7: GREEN BONDS CURRENTLY HAVE FINANCIAL FEATURES THAT ARE IDENTICAL TO CONVENTIONAL BONDS POLICY PERSPECTIVES
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unlabelled green project bonds and ABS totalled about USD 15 billion in 2014 according to CBI/HSBC (2015).
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