Box 1 what is a green bond 5 10 15 20 25 30 35 40

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BOX 1: WHAT IS A GREEN BOND? 0 5 10 15 20 25 30 35 40 2007 2008 2009 2010 2011 2012 2013 2014 2015 (YTD) USD equivalent (billions) Energy / utility sector (3) Financial sector and other corporates (2) Government / agency / local (1) KfW Other MDB EIB WBG (inc. IFC) SSA Corporate, project, covered, ABS
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attempts to establish stringent requirements and standards for bonds to qualify as “green” could slow, inhibit or de-rail the growth of a potentially critical source of capital for LCR infrastructure at an early stage of development (Deutsche Bank, 2015; Global Capital, 2015; Institutional Investor, 2015). In response to these tensions, a significant amount of market-led effort has gone into shaping and cultivating a better-defined market with assurances for the environmental integrity and impact of green bonds while keeping “green transaction costs” low or seeking to drive them lower. Much of this initial work has involved determining what investments count as “green”; enhancing the transparency of the process by which a green bond is issued and how the proceeds are used and managed; and also on improving data and impact reporting. Market and government-led efforts at standardisation and definition in the green bond market have borne fruit, with the emergence of The Green Bond Principles (GBP - a self-regulatory initiative designed to promote transparency and disclosure in the market), the Climate Bond Standards; and other principles and guidelines recognised and backed by the official sector including public financial institutions and development banks. As the green bond market has expanded and investor appetite increased, so too has the need for comparable performance data and the need to create benchmarks or reference points for performance. Market indices are broadly defined as metrics, often statistical, that track the performance of a specific group of securities or investment vehicles. In 2014 a range of banks, ratings agencies and service providers launched green bonds indices. These indices are aimed at lowering information barriers facing investors by providing clear risk-return data. Many institutional investors are required to invest exclusively in “benchmark-eligible” securities, so having a green bond included in a benchmark index can be an important attribute for attracting these mainstream investors. As of November 2015, four “families” of green bond indices were available to investors, each with different methodologies for calculation and with eligibility thresholds for green bonds (including currency, size, rating, and extra-financial characteristics like second-party opinions). The four indices are: – Bank of America Merrill Lynch Green Bond Index – Barclays MSCI Green Bond Index – S&P Green Bond Index and Green Project Bond Index – Solactive Green Bond Index Indices also take a view on what projects and activities are eligible. For instance, to qualify for the Barclays MSCI Index, at least 90% of proceeds must be used for either new or existing environmental projects in five
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