ANDRA AP-FONDEN GREEN BONDS

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ANDRA AP-FONDEN AND GREEN BONDS

ANDRA AP-FONDEN GREEN BONDS

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Climate change is one of the greatest chal-lenge of our time. Extensive investments are required for a transition to a more sustainable global economy. When the opportunity to invest in a green bond was introduced back in 2008, we recognized this as an unique opportunity to combine global fixed income management with our commitment to cli-mate change. AP2 is an active global fixed income investor and our conviction is that cli-mate change offers opportunities for invest-ment as well as impacting risks assessments.

The World Bank is active issuer and finance a range of projects in a global con-text. Green bonds introduced a methology for disclosure of proceeds and pooling pro-ject investments with clear environmental benefit in a bond. As an investor this was a way directing investments into green finance, investing in climate related projects and at the same time receiving a good return.

Green bonds have been an effective way to implement and develop sustainability in our fixed income. Since the initial invest-ment, the proportion has gradually increased over the years and since 2016, green bonds have been a strategic asset class for AP2.

What is a green bond?The difference between a green bond and other bonds is that the proceeds is ear-marked for projects supporting the environ-ment. The projects include renewable energy such as solar, wind or hydro power, energy

Energy efficiencyProjects and measures aimed at improved and more efficient energy use in energy systems such as heating, cooling, smart grid, energy recovery and energy storage.

A decade of green bonds Andra AP-fonden (AP2) celebrates ten years as an active green bond investor. In November 2008, the Fund invested in the World Bank’s first ever green bond, becoming one of the pioneers in the green bond market.

efficiency, properties built to, or being con-verted to, a high environmental standard, water or anti-pollution. The market lacks a clear defined standard for what is considered ’green’. In the end, it is up to each individual investor to decide how green a bond is and to follow up the reporting. There are guideli-nes for standards and also third party organi-sations that verify, and in some cases grade,

the green process, for instance the process of project selection. By issuing a green bond, the issuer commit to provide annual reports on use of proceeds, this is a good develop-ment for us as an investor as we get a better understanding of the issuer. It also gives a clearer overview and understanding of investments at project level, as well as the environmental impact.

Future developmentGreen bonds are an excellent instrument for mobilizing awareness of climate issues and for increasing climate-related investments. The market for green bonds has been suc-cessful in recent years in terms of the increa-sing number of bond issues, as well as the interest in investing in these bonds. There is still a scarcity of green bonds and AP2 believe

”Green bonds are an excellent instrument for increasing awareness of climate issues and for increasing climate-related investments.”

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Green bonds are an important source of financing to manage the transition to a more sustainable economy. Green bonds proceeds are earmarked for environmental projects. The projects primarily focus on mitigating climate change by investing in cleaner and more efficient technology aimed at reducing emissions and energy consumption. The type of project depends on the bond issuer and where the funds are to be invested. Projects can be divided into the following main categories:

Renewable energyProduction and distribution of renewable energy, wind, solar or hydro power. This also includes projects for deve-lopment of bioenergy, geothermal energy, biogas and/or transition from fossil energy to renewable energy.

Real estateNew construction of energy efficient buildings or building refurbishment that leads to a reduction in energy consump-tion and meets the requirements of regionally, nationally or internationally recognised standards or certifications.

TransportRailways, underground, trams, buses and infrastructure that supports public transport. And also other sustainable forms of transport, such as electric vehicles and logistics solutions invol-ving reduced environmental impact for transportation of people and goods.

WaterProjects focusing on water infrastructure, access to clean water, water treatment plant, waste water treatment, and various forms of flood prevention measures.

EnvironmentEnvironmental measures include prevention and limitation of pollu-tion, nature conservation, sustainable farming and forestry, promo-tion of biological diversity and protection of coastal and marine environments and flood plains. Research projects referring andintroduction of more environmentally friendly products with envi-ronmental labelling and/or environmental certification.

10 years

of green bonds

its important to support and contribute to market development and growth. We do this by being active in the market and supporting market development by sharing our experience and knowledge. There are several initiatives on EU and global level. AP2 support and engage in development of stan-dards and research initiatives in order to increase awareness of green finance. For instance, AP2 acted as an expert for the Swe-dish Government’s inquiry to promote the market for green bonds and also serve as an advisor for the independent research institute Cicero’s initiative on climate action.

Supranational issuers have been the backbone of green bonds development, both in terms of issued volume and by dri-ving development of reporting standards. Looking ahead we expect the portfolio becoming more diversified with more issu-ance from corporates and municipality. Sovereign green bonds is also a sector where we expect more issuance going forward. Growth is important but not at the expense of watered down environmental require-ments. Confidence is key and we expect increased diversity as more issuer see the benefit of issue green bond and beeing transparent with the sustainability strategy and green investments. AP2’s green bond portfolio corresponds to a market value of SEK 5.7 billion and it is expected to conti-nue to grow in line with the market on commercial terms.

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Global climate investmentsThe transition to more sustainable development, which conforms to the Paris agreement, requires extensive investments. The climate challenge requires a global approach and green bonds are an effi cient way of channelling capital towards environmental projects and increasing the focus on sustainability issues in the fi nancial sector. AP2’s global green bond portfolio holds bonds issued by 52 diff erent issuers and involving more than 1,300 diff erent projects in 96 countries. Below we show a few examples of these climate change mitigation projects, as well as the fund’s green bond investments by project category and continent.

India, Jaipur Metro Rail Line. Expansion of public transport capacity. The project will add a 2.3 kilometre underground railway from Chandpole to Badi Chopar, as well as two stations, providing access to the central business districts. The aim is to improve public transport in Jaipur and reverse the rise in the use of private cars for commuting.

Sweden, Knivsta. Högåsskolan is the fi rst school in Sweden to be built as a passive house. Passive house buildings are well-insulated and is heated by the energy produced in the building. Knivsta municipality built the school according to this model in order to minimise energy consumption and life cycle costs. The heating requirement has been measured at 8 kWh per m2 and year, well below the Passive house threshold of 15 kWh per m2. The school can accomodate 540 students.

Mozambique, Mocuba Solar. The coun-try is deemed to have great potential for solar energy. It is estimated that the expansion of the Mocuba Solar project will, on completion, produce 77 GWh of elec-tricity per year and supply 65,000 custo-mers in Mozambique, while also cutting annual CO₂ emissions by 14,800 tonnes.

Indonesia Development programme for protecting and creating the conditions needed for a more sustainable coral eco-system. It involves reducing harmful fi shing in specifi c areas and supporting surroun-ding fi shing communities. 1.4 million hec-tares have been declared a protected area, an important element in the conser-vation of rich biological diversity.

Marocco National savings programme for more effi cient water consumption. The aim of the pro-ject is to support the adjustment to more effi cient use of water in farming in particular, and involves expansion of irrigation systems to help farming become established, thus alleviating the eff ects of climate change. The project covers an area of a total of 26,000 hectares, comprising 10,250 farms divided between two water basins, Oum Rbia and Loukko.

Green bond port folio with projects in96 countries

North America

South America

Europe

Africa

Asia

Oceania

Renewable energy

WaterTransportEnvironmentReal estateEnergy effi ciency

Project categories

Mexico Efficiency programme for hous-ehold appliances and lighting. The aim is to reduce energy consumption through increased use of energy efficient techno-logy. Emissions will be cut by around 3.3 million tonnes of CO2 equivalents. Electri-city consumption in residential buildings will be reduced by 50-60 per cent.

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Reporting add valueGreen bonds have opened the doors forincreased transparency and informationabout issuers. As investors, we receive more in-depth information about the business activities of issuers and in particular about their investment plans for climate change. One of the core components of the guiding principle for green bonds is reporting. The issuers are to produce an annual report on use of proceeds.

As a global investor we recognize great diversity in reporting, both in content and layout. The lack of standards is clearly notice-able and what is reported depends on the type of business and to which extent it is possible to share information at project level.

AP2 has been active in the green bond market for ten years and our bond portfolio has continued to grow in terms of volume and has become more diversified as the

Green bonds an instrument for a transparent sustainability strategyAP2 is committed to climate issues and have for the last ten years been successful implementing sustainability aspect within fixed income. Today sustainability must be considered for all kind of organizations. Climate change poses risks as well as opportunities; from more frequent occurrences of extreme weather to new regulations and changing consumer preferences. Traditional bond market will change as investors will demand transparency regarding the issuers sustainabi-lity strategy and the green bond market will lead the way.

number of issuers has grown. Reporting is a very important tool for visualising and high-lighting sustainability efforts in the business. This report is part of AP2’s ambition to aggregate information on green bond reporting and to provide a overview of the geographical distribution of the bond port-folio and the investments made in environ-mental initiatives. This year it comprises reports from 52 different organisations representing governments, supranationals, municipalities, financial institutions and cor-porates. More diversification to comeEurope leads the way in the green bond market. Following the Paris climate agree-ment, the number of issues has risen. France set a strong example in 2017, when the French government launched a green bond. The compiled report suggests that invest-

ments in climate change mitigation projects primarily focus on three of the main groups: renewable energy, transport and real estate. Renewable energy primarily comprises investments in transition to fossil-free energy alternatives such as solar, wind and water.

The transportation sector is investment intensive and forms an important part of the transition. This sector comprises several pro-jects relating to trains, high-speed trains and other public transport solutions. Properties with good environmental performance or investments in conversions to more energy efficient properties is also an area that has been growing in recent years.

Asia is showing growing interest in issuing green bonds. Many of the developments banks that AP2 is investing in are also active in this region.

Expectation for the next ten yearsThe transition to meet climate targets requires large investments. Municipalities and government related institutions have an important role to play in this transition. Large investments are required in public transport solutions. We therefore believe a rise in the number of bond issues by municipalities is the natu-ral development.

Governments have an important role to play and we have seen a number of sovereign bond issued in recent years. We expect this development to conti-nue. AP2 served as an expert in the government inquiry ‘Promoting green bonds’, where one of the proposals was that the Swedish government could boost the green bond market by issue a sovereign green bond. AP2 supports this proposal as we believe the government has a key role in investment role the necessary transition and as a precursor in further developing of reporting standards.

Corporates are becoming a more important sector for the market as several companies have issued green bonds during the last couple of years. Parti-cularly companies in sectors such as energy produc-tion, real estate, and transport. These are sectors which can be expected to show strong growth in the future. Financial institutions have also become a more frequent issuer of green bonds. Theses institu-tions are able to efficiently pool green assets and finance through larger green bond issuances. We also expect to see an increase in green bond issues in emerging markets going forward. These markets have significant need for investment and offer opp-ortunities for leaps in technology that support more sustainable growth and development. AP2’s portfo-lio can be expected to continue to grow in line with increasing volumes and increasing opportunities for diversification through more issuers and industries.

Large growth potentialGreen bonds continue to account for a small proportion, less than one per cent, of the global bond market. However, interest in sustainability issues in general is growing in the financial sector, and in green bonds more specific. There is a scarcity of green bonds and AP2 considers it important to be actively involved in the market and, participating and supporting various initiatives and research projects, to support standard development and further growth.

Supranationals have been the backbone for growth of the green bond market, both in terms of volume and the develop-ment of reporting standards, etc. Through project-level reporting on investments in climate change mitigation projects around the world, they have paved the way for a market that in 2017 issued bonds worth the equivalent of 155.5 billion USD and which offers plenty of room for growth.

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AP2’s total portfolio of green bonds reported by category of investment

AP2’s total portfolio of green bonds reported by geographical distribution of projects

Renewable energy, 21%

Water, 11%

Transport, 22%

Environment, 9%

Real estate, 26%

Energy efficiency, 11%Africa, 3%

South America, 4%

North America, 4%

Europe, 75%

Asia, 13%

Oceania, 1%

AP2’s portfolio of green bonds since inception, SEK m

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Andra AP-fondenP.O. Box 11155SE-404 24 Göteborg, SwedenVisitors: Östra Hamngatan 26Phone +46 31 704 29 00www.ap2.se