Global Capital, IMF editions, October 2015
There is vulnerability to climate change, and then there’s the Netherlands. Two thirds of the country is vulnerable to flooding; about 26% of it is actually below sea level; it is densely populated, and its biggest city, Amsterdam, is right in the firing line; and it is traversed by two of Europe’s great rivers, the Rhine and Meuse, which have been bursting their banks since before there were humans to notice. Short of the Maldives or a handful of Pacific Islands, it’s hard to think of a nation that has more reason to worry about rising sea levels.
Naturally, the Dutch lead the world in flood prevention; generations of experience mean that they are the first port of call when someone else suffers flooding, be it Bangladesh or the Mississippi. Along the way, they have learned a great deal about which environmental battles to fight and how to fight them. “The water authorities are very much focused on the environment as well as flood prevention,” says Tom Meuwissen, General Manager, Treasury at NWB Bank in The Hague, which is 81% owned by the 26 Dutch water authorities themselves. “It’s not about building dykes as high as possible, but letting water have its natural flow and adapting the countryside to that.” And it’s not about stop-gap measures, and hasn’t been for a long time. “All the things they do, they focus on the next 50 to 100 years.”
Meuwissen is clearly a little in awe of the engineers and water authority specialists who keep his country above water; he takes them on roadshows when he issues bonds to fund their work. “We are not the experts,” he says. “We just finance them.”
Earlier this decade, it became apparent to NWB that the water authorities’ work would be a perfect fit for a green bond. Clearly, preventing flooding is environmentally significant; doing so in a way that seeks harmony with existing watercourses is better still. There’s a matter of classification, but that turned out to be easily resolved. “They have a governing body, a union of the water authorities, who have all sorts of statistics,” says Meuwissen. “90 to 95% of their expenses are environmentally friendly, and the rest is overheads.” The water authorities are significant enough to levy their own taxes – people don’t tend to complain about taxes if they stop them from being flooded in their own homes – and they are not part of the government budget. The taxes account for two thirds of income, and the remainder is borrowed from NWB. Consequently, if the accounts are structured in such a way that the overheads are covered from the taxes, then it’s easy to ensure that all the bond proceeds are going to the green bit of the business. “Everything we borrow for them is according to the Green Bond Principles,” he says.
There have been two green bonds so far: Eu500 million of five-year funding in 2014, and then a 10-year Eu1 billion capital raising in August. Those funds then go into a separate internal account at NWB dedicated for lending to the Dutch water authorities. The loans are balance sheet financing, and go mainly to projects that either mitigate climate change (waterway management), adapt to climate change (flood protection, defences and pumps) or water-related biodiversity projects (such as sanitation and dredging of waterbeds, or disposal of sewage sludge).
Projects like this are always something of an education, even to the bankers who run them. “I was surprised to learn that the North Sea is not the problem,” says Christopher Flensborg at SEB, which led both deals. “We have the pumps for that. The pressure instead is water pushing from the inside. It’s rainfall.” That takes a number of forms: the inability of city stone and pavements to absorb water as soil once did; or changes to rain patterns creating dry spells in a country where so much of the economy needs irrigation, from tulips to tomatoes.
In any event, both bonds were a significant success. The first of them was so swiftly oversubscribed the books were closed in two hours; by then there were Eu1.8 billion of orders for a Eu500 million deal, from 83 investors. Around 75% of them had a specific green interest; they varied from dedicated green investors like Mirova to mainstream names like Aegon and Robeco. “It really was a blow out, beyond our expectations,” says Meuwissen. “We had to limit it to Eu500 million because we only had that amount of lending to the water authorities.”
While most repeat issuers report a learning curve and an evolution, whether in disclosure or documentation, Meuwissen reckons they got it right the first time. “We ticked all the boxes already.” The second deal went around 45% to green investors – its long tenor may have put some off – and attracted a majority of mainstream names, from instos to central banks. “A green bond is like a normal bond: the same documentation and pricing, with a euro benchmark,” he says. Despite having issued in August, he says NWB might raise another Eu500 million later this year, possibly in US dollars.
This sense of investor familiarity is vital if big institutional names are to be attracted. The first bond “fits within our existing mandate guidelines and our impact investing approach in which we select investments that meet our existing risk and return requirements, but also have the intent to create a measurable social or environmental impact,” said Hendrik Jan Tuch, senior portfolio manager at Aegon Asset Management, of the first bond. And that’s a fairly typical view.
Indeed, such is the similarity to a conventional bond, one could reasonably say that the NWB could be financed without the existence of a green bond market. “Yes, but that is true of all green bonds,” says Meuwissen. “I see this market as being at the awareness stage. It definitely helps. It is not that projects are being done that would otherwise not be done; it’s about awareness.” Meuwissen imagines a time when the bank as a whole could qualify for green bonds – it has some interesting work in social housing, for example.
Awareness is certainly worthwhile. An OECD study of Dutch water governance notes the ‘awareness gap’ as a significant challenge. “Dutch citizens take current levels of water security for granted,” it says. “As a consequence, they tend to be less involved in water policy debates, to ignore water risks and functions when they develop property, and to be little concerned with water pollution. Their willingness to pay for a service they take for ranted may erode in the future.”
Water is a growing theme for green bonds. “The trend in the US of labelling municipal water bonds as green has dramatically increased the size of the water theme,” says the Climate Bonds Initiative. It highlights the success of the municipal water utility DC Water, which raised $400 million in a green bond last year and has been followed by other municipalities. “Proceeds from these bonds have been used for climate change adaptation purposes such as widening storm water tunnels, as well as efficiency in wastewater treatment.”