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Why green bonds?Green bond

frameworks and

Sustainability

Grading

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ada 02. Mai,2014

Katharina Serafimova, Head of Finance Sector Engagement WWF Switzerland

Some observations

• Enthusiasm and optimism from the part of issuers on one side: EIB, World Bank, Rabobank, Merrill Lynch

• Welcome and some caution from buy side investors and NGOs: “Many shades of green”

• Jim Kim, President World Bank: above $50 billion 2015.

Why do we need green bonds?

October 23rd 2012 3

“Companies with strong environmental records consistently pay lower costs for debt, while firms with weaker records face higher costs of financing and lower credit ratings.”“Corporate Environmental Management and Credit Risk,” by Rob Bauer and Daniel Hann 2010.

We do need green bonds…

October 23rd 2012 4

Materiality of ESG-issues

Fixed income

Impact on ratings - interim changes to rating might not change pricing of existing business but does impact the capital requirements & pricing in new transactions

Timing

• Profitability, liquidity and solvency determine a company’s capacity to meet its debt obligations.

• ESG issues are hard to quantify over short time periods

• Difficult to link them to common financial ratios (like debt to equity or asset turnover).

Why do we need green bonds?

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To trigger a change towards sustainable economy : There is a demand of 700 billion USD / a to finance decarbonization

1. Ideal for high capex, long payback infrastructure projects

2. Largest single pool of capital: $80trn vs $53trn in equities

3. Mobilisation of bond market is key to meeting 2-degrees-

targets.

Green bonds as chance to increase green capital allocation, if we get it right• Many shades of green: There is a need for standards

and third party verification

• Relatively new concept: There is a need to develop investment track record

• Scalability beyond the niche: There is a need to improve the attractiveness. (Do we need carrots?)

The market is on a knife edge

October 23rd 2012 7

• Greenwash, intransparency and hiding risks

• Good standards leading to high-impact investments

Regulatory events can have an impact over night: Adaptive capacity to event risk outcomes is very limited

11.03.2011: Fukushima , earthquake and nuclear catastrophe

Source chart: Performance RWE Stämme, 16.02.2012, http://www.rwe.com/web/cms/de/109536/rwe/investor-relations/aktie/aktienkurse/

14.03.2011: Merkel announces „Atom-Moratorium“

„Ethikkommission“ presents final report

06.06.2011: Federal Government enacts „Energiewende“

09.08.2011: RWE presents business development first half of fiscal 2011

10.11.2011: RWE publishes report on the first three quarters fiscal 2011

Source chart: Performance RWE Stämme, 16.02.2012, http://www.rwe.com/web/cms/de/109536/rwe/investor-relations/aktie/aktienkurse/

FOR ILLUSTRATION OF ARGUMENT!

Are fixed income instruments impacted?RWE – constant decline, lack of CO2 strategy

Moody's:

„The negative outlook therefore continues to reflect the execution risk around the disposal programme and other remedial measures, as well as the challenges the company faces in managing the implications of the nuclear phase-out, renegotiation of its long-term gas contracts and looming CO2 burden which in Moody’s view imply uncertainty around recovery in RWE’s financial strength in 2012 to a level consistent with its A3 rating“

S&P (Global Credit Portal, 30/6/2011, page 10 & 2)Corporate Credit Ratings History RWE:

08-Jun-2011 A-/Negative/A-208-Apr-2011 A/Watch Neg/A-113-Jan-2009 A/Negative/A-103-Jun-2008 A/Stable/A-125-Feb-2008 A+/Watch Neg/A-1

Weaknesses:

• High carbon intensiveness of electricity generation operations.

• Challenging market outlook characterized by falling generation spreads and rising carbon dioxide costs.

• Structurally impaired gas operations and unfavorable cost structure of imported gas.