Green Bonds for Cities: Nudging EU-China Cooperation on Sustainable Urbanisation into the Right Direction 15 March 2017 Nadia Kahkonen Sid Sala

Agenda Urbanisation Finance Green Bonds Addressing Challenges 03 Finance 06 Green Bonds 21 Addressing Challenges 31 Conclusion 39

Urbanisation

Urbanisation Our future is set to be urban In the next three years, 60 percent of China’s population will be urban Our future is set to be urban In the next three years, 60 percent of China’s population will be urban

The future is urban

Urbanisation A priority for EU and China European cities accounting for more than 70 percent of EU energy consumption “EU smart cities” “Low-carbon economy 2050” China depends on its cities for economic growth 13th five-year plan We want cities that are economically, socially and environmentally sustainable

Urbanisation Huge demands on climate, environment and infrastructure “polluted, pricy and congested cities” greater repercussions for citizen’s wellbeing Urbanisation rate and speed… Greater infrastructure needs… globally = double at $6 trillion; China = 50% gdp to offset env cost; EU = EUR 100m investment gap/year to deliver energy union 2030

Finance

Finance Financing sustainable urbanisation will be expensive Investments into infrastructure will need to double globally Low-carbon solutions require higher upfront capital expenditure Public finance alone can no longer meet overall infrastructure needs China: investment by government and commercial banks not enough to meet capital requirements EU finance gap China: public finance can only meet 15% of the capital required for environmental solution required by infrastructure EU: to deliver an Energy Union by 2030, EIB sees a gap of EUR 100 billion/ year from 2016 onwards in order to deliver its 2030 climate and energy targets Financing sustainable urbanisation will be expensive Investments into infrastructure will need to double globally Low-carbon solutions require higher upfront capital expenditure Public financing alone can no longer meet overall infrastructure needs

Green Bonds

Green Bonds “Green bonds are like regular bonds with one distinguishing feature: proceeds are earmarked for projects with environmental benefits, primarily in climate change adaptation and mitigation.” [Climate Bonds Initiative] To refresh, Green bonds are essentially regular bonds / debt instruments with the distinguishing feature of proceeds going towards projects with climate and environmental benefits. The green label here also acts as a discovery mechanism for investors, allowing them to identify climate-aligned investments

Green Bonds Within finance, green bonds are the most promising platform for cooperation Bonds are familiar instruments for investors Green bond market is growing very quickly There is increasing private sector appetite for climate-aligned investments / impact investing So why do green bonds deserve to be highlighted in the context of cooperating to scale private finance? 1) firstly, bonds are familiar instruments for investors, and green bonds are simply bonds with proceeds that are earmarked for projects with climate or other environmental benefits. This familiarity creates great potential to rapidly scale up finance for green investments through green bond markets. 2) secondly, speaking of markets, the green bond market is also growing very quickly: only last month, France issued a record EUR7 billion in green bond; and China is, at present, the largest country of issuance with USD 246 billion outstanding) and its potential to bridge the finance gap for sustainable urbanisation merits further exploration. 3) There is also a growing trend and investor appetite towards investments with clear climate, social and/or environmental impacts. Many institutional investors have dedicated green funds, including the likes of Credit Agricole, Barclays and Blackrock

Addressing Challenges

Addressing Challenges “EU-China: Focus on political alliances before anything else” Critics: “form stronger political alliance on sustainable development and climate change to fill the gap left by the U.S.”

Addressing Challenges “Green bonds just one of many instruments to support investment in sustainable infrastructure.” Universe of climate-aligned bonds not enough to bridge the investment gap for sustainable urbanization

Addressing Challenges Investors are not yet ready to ‘pay for green’ Lack of standardization in the market

Addressing Challenges Response: Building long-term commitment offers ground for common understanding Response: Green bond market currently concentrated on project categories linked to urbanisation. Green bond based capital to fund infrastructure projects already an established model. Response: Green investors are not born but made. Finally, green investors are not born - they are made - and both EU and China have, through their respective actions, been working on developing policy that will push green finance even further. [China = Green Finance Task Force; EU = EC’s High Level Expert Group on sustainable finance.]

Addressing Challenges “To investors, green bonds offer a stable, rated and liquid investment with long duration. To issuers, they could tap the USD 100 trillion global institutional fixed income investor base.” - Mark Carney, Governor of the Bank of England

Conclusions 15 March 2017 Nadia Kahkonen Sid Sala

Conclusion Sustainabile Urbanisation is a pressing/priority policy area for EU and China Strong trends and politically non-contentious An important ground for common understanding and cooperation Greater infrastructure needs that public finance alone cannot address Infrastructure needs vs. finance gap Within finance, green bonds are the most promising platform for cooperation Growing market and investor appetite for green investment From SCS to AIIB, but the pressing of them all…