2018 - 2019 Edition of Citi Perspectives for the Public Sector

8 Recently, during a green bond underwriting for a sovereign, Citi’s syndicate team solicited order interest from large investors for a bond offered either green or vanilla. This process was critical, because in order to truly estimate the incremental demand, the question has to be asked at the same time of the same issuer in the same market. While large investors philosophically prefer not to differentiate what they will pay in NIC for green bonds relative to vanilla paper, in this particular case, the potential order size from the same large investors nearly doubled when asked, “What if this were green?” Should this be broadly representative of the trend moving forward, the idea of sustainability bonds only being “a few bps” cheaper or of pricing differences getting “lost in the wash” could change. Though perhaps even more important than debating whether an issuer’s green bond curve might trade at lower yields than its non- green curve is whether, when issuing a green bond, issuers are entering into a dialogue with various stakeholders, demonstrating the issuer’s sustainability strategy. In the case of sovereigns, green bonds demonstrate to citizens and others that the government is serious about implementing not only its Paris Commitments but also its SDG targets. In the medium term, given the growing significance of sustainability within credit evaluations, we believe that issuers with a credible sustainability strategy will trade better than those without one. In addition to the pricing debate, there continue to be discussions about disclosure and the ability of investors to influence the behavior of issuers. While the impact of the Climate Bond Initiative on green bond market data has blazed the trail for disclosure and transparency, there is still much more to be done. Disclosure standards will continue to develop on the back of rating agency efforts. For example, Green Bond Assessments by Moody’s and S&P’s Green Evaluations push sustainability considerations into core credit strategies. Also, a myriad of other initiatives, like the UN Global Compact and the Task Force on Climate-related Financial Disclosures, are promoting metrics and disclosure standards that go far beyond sustainability bond requirements and reinforce the overall move toward transparent and broad- based benchmarking. On the Future of Sustainability Bonds