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SUSTAINABLE AND RESPONSIBLE CAPITAL MARKETSSeptember 2014

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CONTENTS

2 | September 2014 | Sustainable and Responsible Capital Markets

FOREWORD 4 Have we reached the tipping point?

THE STATE OF PLAY ON CLIMATE CHANGE 6 The last chance saloon

CLASSIFICATION AND STANDARDS 10 What is a green bond? And who should decide?

SRI INVESTMENT IN THE BOND MARKET 14 Bond investors get serious on ESG — and issuers respond

GREEN BONDS18 Green bonds hit the big time

PUBLIC SECTOR BORROWERS 20 SSAs take pioneering spirit to new frontiers

EUROPEAN PUBLIC SECTOR SRI BOND ROUNDTABLE 23 Public sector borrowers define the environment — and beyond

MUNICIPALITIES36 Bold munis make long green strides, but most are far behind

AMERICAS SRI BOND ROUNDTABLE38 SRI bonds — forerunners of the new green generation

BANKS49 Economic powerhouse could one day lead in ethical issuance

ASIA SRI BOND ROUNDTABLE51 Projects and pricing: issuers and investors debate the future of Asian SRI

CORPORATES60 Corporates take up the green bond baton

EUROPEAN CORPORATE AND FINANCIAL INSTITUTION SRI BOND ROUNDTABLE62 Companies, banks highlight hidden value, prepare green bonds for climate mission

CAPITAL MARKETS TIMELINE72 The Green Bond Timeline — 2006-2014

Managing director, GlobalCapital group: John Orchard • [email protected] editor: Toby Fildes • [email protected]: Ralph Sinclair • [email protected]

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002 Contents SRI 2014.indd 2 23/09/2014 17:48

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African Development Bank

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Asian Development BankClean Energy Bond

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Asian Development BankWater Bond

BRL208.0m / TRY59.0m

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International Bank for Reconstruction and DevelopmentWorld Bank Green Bond

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International Bank for Reconstruction and DevelopmentSustainable Development

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Bringing together investors and issuers for sustainable growth

Contacts

Americas: Jim Merli [email protected] (excluding Japan): Clayton Carol [email protected]: Nick Dent [email protected]: Shohei Takahashi [email protected]

www.nomuraholdings.com/csr

© Nomura Holdings Inc. 2014. Nomura is the global marketing name of Nomura Holdings, Inc. (Tokyo) and its direct and indirect subsidiaries worldwide including Nomura International (Hong Kong) Limited (Hong Kong), licensed and regulated by the Hong Kong Securities and Futures Commission, Nomura Securities International, Inc (New York), a member of FINRA, NYSE and SIPC and Nomura International plc (London), authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and a member of the London Stock Exchange. This communication is not intended to form the basis of a decision to purchase or sell securities or enter into an investment banking transaction, and does not constitute (i) an offer, invitation or recommendation to purchase or sell securities or to dispose or acquire assets, (ii) an opinion as to the potential market price of any security, (iii) an opinion, invitation or recommendation to enter into a financial or capital markets transaction, including, without limitation, any public or private offering of securities, bank financing, interest rate, currency or foreign exchange, derivative or hedging arrangements or treasury products services, or any form of business combination, merger or acquisition or disposition of assets or securities or (iv) any form of legal or tax advice, opinion or recommendation. Clients should only contact Nomura market professionals and execute transactions through a Nomura subsidiary or affiliate in their home jurisdiction unless applicable governing law permits otherwise.

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FOREWORD


This question is asked a lot in connection with the green bond market: Have we reached the tipping point?

Last year, at one of GlobalCapital’s first roundtables on sustainable finance, I said I thought we had. The green

bond market had taken off — from the early days, starting in 2007, when pioneers like the European Investment Bank and the World Bank created bonds for investors looking to support climate invest-ments, to 2013, when new issuance of labelled green or climate-focused bonds reached more than $10bn, including the first $1bn bonds by International Finance Corporation.

By mid-2014, so many new green bond issues had come to mar-ket that in the first six months more green bonds were issued than cumulatively in the seven previous years; the green bond market had diversified so much that non-multilateral development bank (MDB) issuers made up more than 50% of the total market; and more than 20 banks had signed the Green Bond Principles.

So maybe mid-2014 was the tipping point?A banker said recently: “We know we’ve reached a tipping point

when everyone claims credit for having started the market,” add-ing that by that measure we certainly had reached it!

But we will only know for sure if we’ve reached a tipping point (or whether what we are seeing now is just the tip of the iceberg) when we look back in a decade or so to see how green bonds changed the bond market.

A catalyst for changeThe purpose of the green bond market is to mobilise private sector financing for climate and environmentally friendly investments. The beauty of the product lies in its simplicity (and KEEP IT SIM-PLE is also what works in capital markets!)

The first green bonds issued by the World Bank in collaboration with SEB were for Scandinavian pension funds looking for a liquid, plain vanilla product of the highest credit quality that supported climate-friendly projects selected based on rigorous standards for project selection, due diligence and monitoring. Since then, green bonds have become popular with other mainstream inves-tors interested in the use of proceeds for their investments and those who are incorporating environmental, social and governance (ESG) criteria in their investment strategies as part of their overall analysis, as well as with traditional ethical or sustainable impact investors.

Green bonds not only direct capital toward climate and environ-mentally friendly activities, but also act as a catalyst for another change that started much earlier and is much broader and deeper than the green bond market.

Sustainable and responsible investingThe surge in green bonds and emergence of other issuance using the same model for other purposes reflects growing investor inter-est in opportunities to address the problems facing our planet. For the world as a whole, environmental degradation, poverty and social exclusion threaten well-being and stability. Investors rec-ognise that environmental and social imbalances threaten long term financial value and have been reflecting this in their choice

of investments as they incorporate ESG factors. Bond investors are also asking what their funds are being used for and what social or environmental impact they will have — positive and negative — in a trend that is referred to as results-based or positive impact invest-ing, or more generally, sustainable and responsible investing.

Projects financed by MDBs support members’ development goals in sectors such as education, health and infrastructure. At the World Bank, we work with countries to address extreme poverty and income inequality using sustainability as the underlying prin-ciple. This is done by applying environmental, social and fiscal sus-tainability analysis during every project’s due diligence and moni-toring process. Projects are designed to achieve specific social and environmental development outcomes, taking actions that mini-mise harm to the environment and potentially affected groups. Measuring a project’s impact to report back to stakeholders is part of the process. All bonds issued by MDBs like the World Bank are aimed at supporting sustainable activities — green bonds are thus a subset of multi-purpose sustainable MDB bond offerings.

Impact reporting — what gets measured gets doneThe dialogue among and between issuers, investors and bankers is increasing the ‘climate literacy’ and understanding of the social implications of investments among the entire financial communi-ty. Different types of issuers are increasingly measuring and report-ing on the environmental and social performance and impact of their projects. If investors continue to ask for details about the investments they are supporting and encourage issuers to harmo-nise the reporting, they will have other performance measures to help guide their investment decisions. The green bond market will have acted as a catalyst not only for climate finance, but for more transparency around what money is used for.

The next generationI believe that for the next generation of portfolio managers, ask-ing about all issuers’ ESG credentials and the long term positive and negative social and environmental impact of all their invest-ments will become standard. They will wonder how in the past, short term financial results took such prominence, without more focus on the use of proceeds and their impact. Sustainable invest-ing will be the standard way of managing a fixed income portfo-lio. This will transform how companies and the projects they sup-port with bond proceeds are managed.

Then we will know that we have reached and surpassed the tipping point.

For now, each of us needs to continue to play our distinct roles in financing a more sustainable planet through the capital markets. GlobalCapital’s reporting on sustainable and responsi-ble investing, supported by the sponsoring banks and all those of us who are participating in this market and in the dialogue around it — including in GlobalCapital’s SRI special report — are getting us one step closer. s

The opinions expressed here are the author’s and do not necessarily reflect those of the World Bank or its stakeholders.

Have we reached the tipping point?by Heike Reichelt, head of investor relations and new products, The World Bank

004 Foreword SRi.indd 4 23/09/2014 18:07

TWO LEADING IDEAS FROM GERMANY: ENERGY TRANSITION & COOPERATIVE BANKING

Sustainability, solidarity and responsibility are nothing new for us – they have been, and still are, the founding principles of co-operative banking. DZ BANK is a leading German commercial bank and your partner for sustain-able and responsible capital markets business. » www.dzbank.com

For further information, please contact Arnold Fohler, +49 (0) 69 7447 4997 or Ralph Ockert, +49 (0) 69 7447 7051.

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DZB_140911_Windraeder_CapitalMarketNews_210x297.indd 1 16.09.14 12:52

THE STATE OF PLAY ON CLIMATE CHANGE THE STATE OF PLAY ON CLIMATE CHANGE


AS THIS REPORT goes to press, heads of state and prime ministers from virtually every country are en route to New York, for a summit con-vened by the UN Secretary-General, Ban Ki-moon.

As at the Rio Earth Summit in 1992, the reason for all the world’s most powerful politicians to come together is the climate.

It is an issue that affects every human being — and we are in danger.

“Climate change is undoubtedly being driven primarily by human activities,” says Bob Ward, policy and communications director at the Grantham Research Institute on Climate Change and the Environ-ment at the London School of Eco-nomics. “Levels of carbon dioxide in the atmosphere are now 40% above pre-industrial levels, and these lev-els haven’t been seen on earth for at least 800,000 years, if not millions of years. Given that modern humans have only been around for about 250,000 years, the atmosphere has a composition we have never seen, and temperatures are rising as a result.”

The world’s average temperature has risen by 0.8C to 0.9C since 1900. “If we carry on at current rates of warming, we could be talking about four or five degrees above pre-indus-trial levels,” says Ward. “We haven’t seen anything that hot for tens of millions of years.”

In 2010, governments agreed in Cancún that emissions should be cut to give the world a reasonable chance of avoiding more than 2C of man-made warming. Beyond that point, the risk of very large and irreversible impacts increases a lot.

If the Greenland ice sheet melts, that could raise the sea level by 6m or 7m, inundating hundreds of millions of homes. The effects on food pro-duction are likely to be severe.

“We would start getting widespread

melting or thawing of permafrost, which holds methane, a powerful greenhouse gas,” adds Ward. “Tem-peratures would then start to climb, regardless of what we did about CO2.”

In his view, to secure even a 50-50 chance of avoiding warming beyond 2C, global annual greenhouse gas emissions would have to be cut from about 50bn tonnes of CO2 equiva-lent to under 20bn by 2050 — a cut of more than 60%.

Plainly, switching to low energy lightbulbs, recycling tin cans and driving a hybrid car are not going to be enough.

“Simply put, the 2C target would imply emissions peaking around 2020,” says Daniel Klingenfeld, head of the director’s office at the Pots-dam Institute for Climate Impact Research. In fact, emissions are still going up very steeply.

Talks to prepare for tough talksThe point of the New York summit is to get world leaders to start focusing in earnest on what they can bring to the table for negotiations on a glob-al climate agreement, scheduled to be clinched at a summit in Paris in December 2015.

The last attempt, in Copenhagen in 2009, was a washout amid the finan-cial crisis. The only real climate deal was struck in Kyoto in 1997. The US never rati-fied it, Canada withdrew and it expired in 2012.

Whether a deal worth having can be reached in Paris depends above all on the US and China, which have lagged far behind Europe in tackling cli-

mate change. If they can agree, other countries are expected to fall into line.

Environmental specialists are try-ing to be optimistic. “There are very positive signals that both the US and China are taking it very seriously and preparing their offers of how much they are going to cut emissions in the future,” says Jennifer Morgan, cli-mate director at the World Resources Institute in Washington.

However, things have got much harder since Kyoto because China’s per capita emissions have caught up with those in the EU — meaning China will have to start making abso-lute, per capita cuts quite soon if real progress is to be made.

“If we don’t get an agreement in Paris, it’s hard to see us cutting emis-sions in time to avoid more than 2C of warming,” says Ward. “That would be a historic mistake of potentially catastrophic impact.”

It is concerning that although Pres-ident Obama will be in New York, China is only expected to send its vice-premier and India its environ-ment minister.

Nevertheless, “One of the things that is going to make a difference,” says Ward, “is that this time Paris will be only one year before the begin-

Paris, December 2015. That is widely seen as the world’s last chance to save itself from devastating climate change. People all over the world can already feel its effects, and the prognosis is terrible. But as Jon Hay reports, the energy and creativity being deployed to fight climate change are immense, and encouraging. Nations must reach a deal — but there is plenty for everyone to be doing in the mean time.

The last chance saloon

cement

gas

oil

coal

5

10

0

1750 1800 1850 1900 1950 2000

Fossil fuel and cement CO2 emissions (PgCyr-1)

Source: IPCC

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THE STATE OF PLAY ON CLIMATE CHANGE THE STATE OF PLAY ON CLIMATE CHANGE

Sustainable and Responsible Capital Markets | September 2014 | 7

ning of the next Chinese five year plan, when China is likely to include a commitment to put a cap on emis-sions and peak its consumption of coal.”

Get buildingIf a deal can be reached, an enormous amount of infrastructure will have to be built and modified, to fit the econ-omy for a low carbon future.

Much of this will have to happen in the field of energy, which accounts for about 70% of greenhouse gas releases.

“There is definitely room for pro-gress, both with and without a global agreement,” says David Elzinga, sen-ior energy analyst at the Internation-al Energy Agency in Paris. “It’s going to cost about $44tr of additional investment in the energy system by 2050, on top of $120tr under current policies. But that should result in about $115tr of savings.”

The IEA has modelled a scenario in which all technological avenues are used to try and achieve the 2C tar-get. “Renewable energies are the only technologies that are so far making enough progress towards the target for the midpoint of 2025 on the way to 2050,” says Elzinga. “All the others — gas, coal with carbon capture and storage, nuclear, energy efficiency in buildings, industry, transport, biofu-els, smart grids — are either in red or yellow mode.”

Policy support is needed. Ener-gy efficiency measures, for exam-ple in homes, save people money. But we still don’t invest in them, partly because houses sell on their looks and price, not something dull like lower energy bills over 20 years.

“It’s a market problem. So buildings standards can play a real role,” says Elzinga.

Carbon capture and storage, by contrast, costs the installer money, with no payback. “So this technol-ogy needs some sort of climate deal or incentive to make it happen, but it also needs near term support on R&D,” Elzinga says.

Other challenges concern regula-tion and financial risks. Wind farms, for example, are more expensive to build than gas power stations, per megawatt, but have no fuel costs. However, electricity regulatory regimes are set up to allow fossil fuel plants to pass on any rise in their fuel costs to power customers. Wind gen-erators do not benefit from that, so are disadvantaged.

Managing and regulating electric-ity markets astutely, which costs very little, can enable countries to cope with the variability in supply of wind and solar power.

“I’m a firm believer in human innovation and capacity but you need the right incentives, either regulatory or economic,” says Laura Tlaiye, sustainability advisor at the World Bank treasury in Washing-ton. “Years ago I worked on chloro-fluorocarbons [which were creating a hole in the ozone layer]. DuPont, which invented these chemicals, said we could never replace them — they were non-toxic, the best solution. But they were forced to face this situ-ation, and they came up with new solutions. They just needed to face reality.”

The scale of the task is daunting. The IEA’s estimate of $1tr of invest-ment a year, above business-as-usu-

al, is widely mentioned and has been dubbed the Clean Trillion.

But it is less scary when you reflect that, in dollars alone, $3.3tr of bonds are due to mature in 2015 according to Dealogic — and will therefore need refinancing anyway. The increase is not so huge in comparison.

The balance of power in fixed income remains hugely in issuers’ favour — there is enormous excess demand for bonds. If low-carbon infrastructure investment does really get going, the bond market will be eager to participate — a hope that animates participants in the fast-growing green bond market.

Get your heads togetherIt is clear that in wind and solar power, and other emerging technolo-gies, humanity knows how to gener-ate clean energy. The kit just needs to be installed on a massive scale.

And that is not a technical problem or even a financial one — it is a politi-cal one.

“In the end it boils down to a will-ingness of the world to accept that we need to absorb a cost early,” says Tlai-ye. “It pays to invest today to avoid damage, but politically no one wants to absorb these costs today.”

That humanity, staring at catas-trophe, has still not managed to bury its petty rivalries and resolve to work together for the common good can be depressing.

But some see cause for hope. “It’s never happened that you have this many leaders coming together to talk about climate change,” says Mor-gan. “It is significant in its own right. When world leaders come and give speeches, they have to have some

Citizens held 2,000 demonstrations in 150 countries in September to press world leaders to act on climate change


THE STATE OF PLAY ON CLIMATE CHANGE


substance. My hope is that the cli-mate change issue is re-established on the top table of world leaders and that it is the beginning of that con-versation all the way to Paris.”

Top of the political problems lead-ers have to face are short-termism and justice.

Democratic leaders facing re-elec-tion find it very difficult to tell voters they must use less power or petrol, or pay more for it.

And how do you share out the costs of mitigating climate change among people of vastly different means, facing different threats, with different degrees of responsibility for emissions?

What may help with these issues is the growing popular and media consciousness that climate change has already begun. “I would expect most people are aware of the extreme weather patterns all over the world,” says Tlaiye. “Sea level rise for coast-al communities has begun already. Rain patterns are shifting — when you put your seeds in the ground, and expected to have rain, it doesn’t show. Then when you’re not expect-ing it, it floods your crops.”

Business raring to get on with itAnother source of comfort is that the private sector is becoming so engaged in the search for sustain-ability — even though government has rather held it back than pushed it forward in the past 20 years, certain-ly in North America.

“There is such an integration of the climate into real economy con-versations,” says Morgan at the WRI. “So many companies and investor groups are rolling up their sleeves and seeing what they can do. It’s a myth that we can’t do it — you can see that flying out the window as var-ious stakeholders join in, and those that aren’t in that space are clearly seen as the losers.”

Financial innovation could have a role to play. “One idea is something like a world central bank for man-aging carbon,” says Klingenfeld at Potsdam. “We have national central banks and the ECB, which have some degree of political independence. They are set up with certain statutes, then left free to manage according to their targets.”

Even just at a European level, a central bank for carbon could help

to revitalise the European Emis-sions Trading Scheme — a well designed carbon cap-and-trade pol-icy that was neu-tered because the caps were set too generously.

“There are ways to re-estab-lish the ETS’s market signals — even indus-try is calling for it,” says Klingen-feld. “One would be to include the transport sector and heating fuels. You would have to adjust the cap and take into account the current over-supply.”

A European car-bon central bank “could set out minimum and max-imum prices for carbon, and man-age the price within that corridor by adjusting the volumes of certificates auctioned” says Klingenfeld.

This would ensure the price did not fall too low, but also protect industry against price shocks, for example if there was an economic boom.

“We should be looking to business to innovate and create the solutions and get them out to people that can use them,” says Morgan, “whether it’s smart grids so you can save elec-tricity or really efficient transport in megacities, or what Tesla are doing with solar-powered factories.

“But the other piece of it is that businesses have to begin participat-ing in the policy process in a way that builds politics for change. They are not all there yet.”

In a survey of the UN Global Com-pact’s corporate members, only 30% had aligned their lobbying activities with their professed social respon-sibility commitments, including on climate change.

Many companies talk the talk on sustainability, but still belong to trade associations that are dragging their feet on climate change.

In August, Unilever quit Busi-

nessEurope, after the trade body had lobbied against tightening up Europe’s carbon trading scheme. Unilever’s CEO Paul Polman has called for a binding climate treaty and the company has cut CO2 emis-sions from energy in its operations by 32%.

“We need business to be a proac-tive public partner,” says Morgan. “Right now the high carbon lobby is a lot better at that than the low car-bon lobby.”

Number one needBut the real solution will have to come from governments acting together, in international forums, and preferably in unison.

Much of the debate in this report about green bonds and ESG invest-ing would be unnecessary if there was a proper global, or even regional, cap on carbon emissions, diminish-ing year by year until we reach a safe level.

That would instantly set a price on CO2 emissions, converting them into a financial cost. The world is already set up to do everything it can to max-imise profit. Saving the planet would no longer be a moral imperative that could be ignored. It would become an immediate financial imperative. s

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012Year

GlaciersGreenlandAntarctica

-2

0

2

4

6

8

10

12

14

16

SLE (mm

)

0

1000

2000

3000

4000

5000C

um

ula

tive

ice

mas

s lo

ss (G

t)

Antarctica Greenland

Distribution of ice loss determined from Gravity Recovery and Climate Experiment (GRACE)

Source: IPCC


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CLASSIFICATION AND STANDARDS CLASSIFICATION AND STANDARDS


AS SOON as the green bond market started to develop, bankers wanted to set standards for it. They felt an urge to protect their baby — afraid someone would spoil the market by bringing a deal with poor green credentials and discrediting the product.

But unlike other financial prod-ucts, green bonds are not defined by any inherent financial or legal char-acteristics. They are just like other bonds, with a promise — though not a legal contract — to invest the money in a certain way. And green itself is the vaguest of slang terms, without any hard and fast meaning.

Hence, a few investment banks, with issuers’ and investors’ input, col-laborated on drafting the Green Bond Principles. Formally published in Jan-uary 2014, they now have 55 signato-ries — issuers, investors and banks.

A governance framework for the Principles was settled in April and an executive committee formed. The International Capital Market Asso-ciation has begun administering its work.

The earliest work on the Principles envisaged including a definition of what was green. But the banks soon dropped this, in favour of merely list-ing multiple “taxonomies” that inves-tors and issuers might like to consider.

The Principles therefore concen-trated on the form of a green bond, rather than its content.

“There is a standard process, which is good, with five steps,” says Heike Reichelt, head of investor relations and new products at the World Bank in Washington. “Define your eligi-ble green project criteria and obtain a second opinion to strengthen your green project categories, determine the project selection process, ring-fence the proceeds through a sepa-rate account or other way of tracking of funds, provide impact reporting and assurance of compliance in a

transparent manner.”No one in the market has a bad

word to say about the Green Bond Principles. They define, in general terms, the standards of clarity and transparency that investors like to see, in a way that helps issuers.

Grappling with greennessBut the problem remains of wheth-er the “green” in green bond — or the terms “sustainable” or “socially responsible” — need defining.

Such categories exist in the finan-cial world. Equity indices such as the FTSE4Good and Dow Jones Sustain-ability have for years analysed com-panies to sort the good citizens from the rogues.

Barclays and MSCI have a suite of bond indices incorporating environ-mental, social and governance analy-sis. They draw on MSCI’s 10 year old ESG rating system, which grades over 5,000 companies and governments from AAA to CCC.

Many green bond issuers have emphasised such ethical ratings in their marketing. Münchener Hypothekenbank, which issued a €300m bond in September dubbed the first ESG Pfandbrief, has a Prime C rating for corporate responsibility from Oekom Research — the equal highest of any bank.

But the purpose of the labelled green or SRI bond market is to allow institutions that are only partly green

— or only a pale shade of green — to issue bonds tied to their darker green, or especially socially progressive, activities.

This requires project-specific analy-sis, which FTSE4Good and MSCI have not done.

Seals of approvalSo far, many issuers have paid a con-sultancy or research organisation to write an opinion of the green or social merits of their bond.

“I think it’s important for investors that they know what they are buying and can justify their investments,” says Ralph Ockert, head of syndicate at DZ Bank in Frankfurt. “If one of the sustainability rating agencies puts its stamp on something and says it’s OK, people are more willing to buy it and it’s more transparent.”

The Centre for International Cli-mate and Environmental Research Oslo (Cicero) was brought in by SEB to give an opinion on the first World Bank green bond in 2008. Since then it has worked on all SEB’s deals.

Other providers of similar services include Vigeo, a French ESG research and ratings company, Oekom in Ger-many and Sustainalytics in the UK.

Other issuers have used DNV GL, a Norwegian-German shipping and oil industry consultancy.

However, some investors are disap-pointed with the quality of the second opinion reports.

“They say they lack substance, are formatted in ways that are difficult to understand and that the science behind them is sometimes a bit lack-ing,” says Stephanie Sfakianos, head of sustainable capital markets at BNP Paribas in London. “Yet the investors are still accepting them and buying deals on the basis of them. Second opinions remain very important for the market. The opinions are useful because they enable investors who don’t have huge teams of people to

Green bond is a label that issuers attach to their deals. No one says who may use it, or on what kind of bond. But participants in the market have already evolved a set of conventions to guide its use. Exactly what counts as green, however, remains undefined. As Jon Hay reports, this is a hot topic of debate that will shape how the market evolves.

What is a green bond? And who should decide?

“Second opinions remain very

important — they enable investors

who don’t have huge teams of people to

have an opinion they can feel confident in”

Stephanie Sfakianos,

BNP Paribas

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CLASSIFICATION AND STANDARDS CLASSIFICATION AND STANDARDS


have an opinion they can feel confi-dent in.”

Many of the investors’ demands are contradictory.

“There are investors who say ‘we want to make a quick decision in a fast-moving market, is it a yes or a no?’,” says Lindsay Smart, head of UK and US markets at Vigeo in London. “That structure doesn’t exist yet — what we provide is transparency, to enable them to decide.

“On the other hand, we also hear ‘we want more information and more detail — this information first and that second’. And another investor will say they want it the other way round.”

Longings for formal standardsThe green bond market is developing fast under current market practic-es. But some participants feel things would be easier if everyone could agree on what green meant — or at least, if it was easier to get answers to this question, even if there were mul-tiple answers.

“I would not be surprised if bigger parties came in to provide the service [of certifying bonds] — maybe the rat-ing agencies or big accounting firms,” says Manuel Adamini, head of ESG research at asset manager Actiam in Utrecht. “There is still diversity, which fits a younger market, but at some point there will be bigger players and it will solidify.”

The environmental field concerns theoretically measurable effects in the physical world. And environmental consciousness today is dominated by one over-riding issue — the battle to save the world from climate change.

“You need to distinguish between climate-focused standards and ESG-focused ones,” says Sfakianos. “The ESG side is harder to quantify and standardise. But on the climate side there is a particular lack of quantifi-able measurements of carbon emis-sions.”

One kind of greenAt one end of the spectrum, some believe there should be one badge that qualifies an instrument as a green bond. That implies, probably, one body designing the badge.

“The market needs a very credible label,” says Adamini. “I think the mar-ket will develop official standards of what is a green bond. Such standards

should be set up and accredited by very specialised bodies, like Cicero or the Climate Bonds Initiative, hav-ing the technical knowhow to assess projects.”

The CBI, an NGO in London, was established independently of the green bond market, to pursue the goal of transition to a low carbon economy, in the belief that bonds are the way to get there.

The Initiative has defined a uni-verse of about $500bn of climate-related bonds, 71% of them issued by railway companies, especially China Railway Corp.

Sean Kidney, the Initiative’s CEO, welcomes the arrival of the compara-tively tiny labelled green bonds mar-ket ($36bn issued so far), even though their issuers would have carried out the same green projects anyway. What Kidney likes about the green bond market is the labelling itself.

“We’re happy with what’s hap-pening because it’s a way of making it very easy for investors,” he says. “We’re not at this stage really seeing much new investment flowing any-where. But that’s how bond markets start.”

He points to the history of the South Korean bond market, saying the government provided guaran-tees for corporate bonds to get issu-ance started, then withdrew after five years when investors were ready to take risk.

Kidney believes firmly that scien-tists can decide what is green. The CBI is building a “tick” certification scheme that will be a simple binary label identifying a climate bond. A very thorough process is being used to define the criteria, involving working groups of experts and public consulta-tions for each sector of the economy.

Some see creating a universal green bond standard like this as a key to unlocking official support for the mar-ket, whether through tax breaks or other aid such as credit enhancement.

For Adamini at Actiam, it would make the investment process more efficient — especially if the green label had two to four shades of green.

Without a label, “every investor who is serious like us has to do due dili-gence on every single deal — not just the credit call but also the environ-mental call,” Adamini says. “But if we could do due diligence just once, on the labelling process or provider, and

reassess it, for example once a year, then we could outsource a large part of the assessment of individual deals to such a label.”

Another group who need to define green bonds are index providers. The first green bond index was created by Solactive in March. It was done remarkably quickly, using the CBI’s list of green bonds, which includes labelled corporate and public sector deals and smaller project bonds.

Standard & Poor’s launched its green bond index in July, again fol-lowing the CBI’s taxonomy.

Cicero and friendsSome bankers have hoped Cicero’s criteria could become the market standard.

Partly to protect itself from being swamped by banks wanting green bond opinions, Cicero worked exclu-sively with SEB until this summer — an arrangement that also suited SEB.

Both parties are working to broaden their partnership. HSBC has joined, and in future other banks will be able to as well.

Meanwhile, Cicero has formed an alliance with four other research insti-tutes, in Sweden, Spain, Canada and China, called the Expert Network on Second Opinions.

“The idea is to build on the Cicero model of second opinions, scale up our capacity to produce those for the green bond market, and extend our regional and technical expertise,” says Christa Clapp, senior adviser at Cicero and leader of its climate finance work stream.

Yet Clapp does not claim Enso should be the only arbiter of what is green.

“That is not the role we want to play,” she says. “We want to provide greater access between the research and financial communities, and increase the flow of information.

“The market needs a very credible label.

I think the market will develop official

standards of what is a green bond”

Manuel Adamini, Actiam


CLASSIFICATION AND STANDARDS


There are probably going to be a vari-ety of approaches to environmental due diligence in the market for the foreseeable future.”

For one thing, Cicero looks only at climate issues, not broader ESG issues such as workers’ rights, like Vigeo.

Virtue in diversitySome in the market do not think seeking one definition of green is desirable.

“I think the banks active in green bonds will push for there to be one standard that defines a green bond, because then it’s easier for them,” says Ockert at DZ. “The Green Bond Princi-ples fulfil that role. But when it comes to what is green, we may need more than one standard.”

Nick Dent, head of EMEA syndicate at Nomura, argues: “You can’t have a singular body at the top saying wheth-er something is OK or not. In time, Cicero and all the other providers will develop their own reputations. It’s like the debate about ‘is Standard & Poor’s enough or should we get Moody’s too?’ It’s been going on for 20 years. We can have two or three providers — it’s fine, as long as they are all trad-ing off their own reputations. Inves-tors should have choice, and they can make up their own minds.”

There are pragmatic reasons for taking this view. “I can see the logic in a [single label],” says Vince Pur-ton, head of debt capital markets at Daiwa Capital Markets in London. “But the danger or impracticality is if you have only one agency provid-ing that. Whether it’s credit rating agencies, law firms, exchanges to list bonds on or even the Islamic scholars who approve sukuk, you need a vari-ety of options to have a correctly functioning market.

“Yes we need verifica-tion which is seen as rig-orous, but there is value in having several agen-cies providing opinions, from a flexibility and competition point of view, and also in terms of their capacity to cope with the dealflow.”

Rigid, single stand-ards carry risks — espe-cially if they were ever used to allocate subsi-dies.

One is of making standards too strict, discouraging both incremen-tal steps and innovation. “Obviously investors want the gold standard,” says Smart at Vigeo, “but if you say to companies right now, ‘this is the gold standard you have to achieve’, then probably no more green bonds would be issued. You can’t frighten companies with overly prescriptive expectations.”

Equally, if standards were too lax, even in isolated areas, technolo-gies such as biofuels that make little or no impact on carbon emissions could be wastefully promoted.

No one right answerBut there are also more fundamental reasons to question whether green-ness can be unified.

To the French, who get 75% of their electricity from nuclear sta-tions, nuclear power is green — because of low carbon emissions. In Germany, it is seen as the opposite of green — and after the Fukushi-ma disaster, the country decided to wind down its nuclear power sta-tions.

Which view is right? Some believe you just need to get the scientists in a room and thrash out an answer. But as the World Bank’s Reichelt says: “To quote my colleague, if you put a group of environmental and climate experts into a room, you will come up with just as many different views of what is green.”

Nuclear power is low carbon, but carries the risk of catastrophic acci-dents and side effects, thousands of years into the future. Is that a risk worth taking? It is impossible to know for sure. This question is

always going to come down to a mat-ter of judgment, in which individual values will play a part.

In less apocalyptic ways, every environmental intervention has multiple effects, some of which may be good and some bad.

Judgments about what to do are always going to have to take into account specific questions of geogra-phy, law, culture, economics, politics and business dynamics — as well as pure climate science.

Many heads better than oneAt the other end of the spectrum from those who want one green bond label is the view that investors should decide for themselves.

“The problem with too rigid a defi-nition is that it’s not that something is green or not. There are many dif-ferent gradations, and how do you compare them?” says Purton at Daiwa. “Markets generally thrive on the flexibility to look at trades indi-vidually. Investors can look at the specific green nature of each trans-action and make their own choices about what is green.”

In this, investors can use expert opinions — but those opinions themselves are necessarily going to be diverse.

The urge to wrap the market in cotton wool is also weakening. “A bad deal will happen sooner or later,” says Dent at Nomura. “There are always going to be setbacks. But in Europe, one deal might knock that issuer out, but it’s not going to knock the market out. It’s strong enough to cope with a failure — I think the market would react quite positively to the lessons learned.”

If investors have to decide for themselves — as they are doing at the moment — it could also stop them from switching off mentally and saying “I’ll leave that to the experts”.

It would ensure that investors’ intellectu-al resources remain engaged in the process of working out which technologies and prac-tices are the most effi-cient for accomplish-ing the shift away from carbon. s

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Atmospheric concentrations of carbon dioxide

Source: Summary for Policymakers

Atmospheric concentrations of carbon dioxide

Source: IPCC


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SRI INVESTMENT IN THE BOND MARKET SRI INVESTMENT IN THE BOND MARKET


THE DAYS WHEN a mention of ethi-cal investing provoked a stifled smirk in financial circles are long gone.

The UN Principles for Responsible Investment, launched by Kofi Annan in 2006, now have 1,260 signatories all over the world, including pension funds, investment managers and ser-vice providers.

In September, as world leaders pre-pared to fly to New York for UN sec-retary-general Ban Ki-Moon’s climate summit, 340 institutions with a com-bined $24tr of assets urged them to take strong action.

The drive for institutions to act responsibly when managing money is producing a huge variety of effects. While some investors begin by screen-

ing out undesirable sectors such as arms or tobacco, repressive regimes or companies embroiled in scandals, others go much further — seeking out investments that they believe will positively help the environment, or some other aspect of society. And this is happening as much in the world of fixed income now as in equities.

Some bond managers are even con-sidering asset types that they would not normally have in their portfolios.

Stuart McMaster, investment man-ager at Alliance Trust Investments in Edinburgh, co-manages a £320m Sus-tainable Future Corporate Bond Fund and has looked at private placements, for example.

“The trouble is that they’re very

small usually, and a lot of work,” he says. “But they can unearth some gems. We looked at one last year that was for a vehicle to boost investment in solar panels on local authority rent-ed accommodation. There was a kick-back as the renters got cheaper elec-tricity by having solar panels. There was a chance of buying an index-linked transaction where the revenues would grow in line with or outstrip inflation.

“It was a little bit quirky, something that wouldn’t normally fit into a con-ventional bond fund. We didn’t par-ticipate because one large pension fund took the entire transaction, but we met with the company. The portfo-lio’s never going to be filled with small

private placement transactions but there’s scope for a number of small deals to find their way in.”

Other kinds of non-standard bonds can whet investors’ appetites if they have an ethical or environ-mental attraction.

“We have some exposure to hous-ing associations’ bonds and Greater Gabbard, an offshore wind farm,” says McMaster. “They are invest-ments that wouldn’t necessarily be attractive to our other fixed income portfolios, because they are longer

dated and don’t offer the prospect of significant return. We’re always look-ing to find assets that are fairly valued that support the ethos of the product.”

Don’t forget the basicsEven though SRI investors are inter-ested in bonds that might fail to attract a wider audience, they still have the same fundamental needs as conventional investors.

“Liquidity matters,” says Frank Wiederhold, senior portfolio manag-er at Union Investment in Frankfurt. “As a mutual fund manager, we want liquidity and benchmark size so we can manage our portfolios. We man-age our SRI portfolios in a very similar way to our conventional portfolios, so

we participate in new issues, we trade in the secondary market and we take steps to manage our credit and dura-tion approach. The difference is our SRI rating system and scoring for issu-ers.”

Union’s system of internally rating issuers for their SRI credentials is typi-cal of the approach taken across the industry.

Alliance Trust, too, has its own SRI team that screens industries to see if their sustainability credentials are up to standard — and also evaluates the quality of management at companies.

With most of the large investment managers now signed up to the UN PRI, and what is required of signato-ries getting tougher all the time, issu-ers should prepare for such scrutiny.

Alliance has a management quality review process that rates companies on corporate responsibility and ESG aspects, covering the detail of policies, effectiveness of implementation and reporting standards.

“In essence, how effective they’ve been, how supportive of suitable prin-ciples, what regulatory challenges they have had and other areas,” says McMaster. “That gives us a manage-ment rating for their company. It’s not just about the industry, it’s about whether specific companies are up to scratch.”

The banking sector is a good exam-ple, he says: “As an industry it ticks the sustainability box, but there are a number of banks that have fallen foul of regulations and that precludes them from investment by us. Indeed, as we are a signatory to UN PRI, environmental, social and govern-ance analysis forms part of the credit research process for all our credit port-folios, not just our sustainable range of funds.”

Cherry-picking assetsBut despite the now well established and fast-developing practice of inves-tors applying ESG criteria to whole

Five years ago, if you asked a bond fund manager about ethical investing, the answer might have been ‘oh, that’s for the equity people’. You would not hear that today. Market forums on integrating environmental, social and governance analysis into bond investing are proliferating. As Craig McGlashan reports, it is leading to a much richer dialogue between investors and issuers — and to the growth of a whole new bond market.

Bond investors get serious on ESG — and issuers respond

“It was a little bit quirky, something

that wouldn’t normally fit into a

conventional bond fund”

Stuart McMaster,Alliance Trust

Investments

014-16 Investors SRI.indd 14 23/09/2014 18:13

SRI INVESTMENT IN THE BOND MARKET SRI INVESTMENT IN THE BOND MARKET


portfolios, there was room for some-thing more — and this drive has been led by the issuers.

Themed green or SRI bonds have mushroomed in the past seven years as a way for mainstream issuers to increase their appeal to ethical fund managers.

The logic of the market is that inves-tors with the strictest ESG criteria might not buy even bonds issued by development banks like the World Bank, classing some of their activi-ties as undesirable. But if the bond proceeds are specially targeted, even these investors will buy.

“Nuclear energy does not make the cut for how we think about sus-tainability,” says McMaster at Alli-ance Trust. “But Electricité de France issued a green bond last year, where the proceeds were for renewable ener-gy projects. We felt that was a good thing and it allowed us to rate the issu-er sufficiently highly to include it in our portfolio, whereas EDF as a stan-dalone entity would have been pre-cluded.

“It’s a grey area because other sus-tainable funds might believe nuclear industries to be investible,” McMaster adds. “Meanwhile, some end investors might take a very hard line and say that even as a green bond they don’t think it’s appropriate, because there’s still linkage with the parent company because the green bond debt is pari passu with the other bonds.”

Supercharging ESG appealEarmarking funds for specific pur-poses does not just unlock pools of money that might have screened out a particular issuer for negative reasons. Much more importantly, it acts as a positive marketing flag, saying “Hey, look at me, I’m a green bond.”

It is not often retail investors show global institutions with billions to invest the way forward in capital mar-

kets. But that is what has happened with themed socially responsible bonds.

The Japanese retail-targeted Uri-dashi market has for years been buy-ing a variety of bonds with an ethical tint, and the global benchmark bond market is starting to follow suit.

“The Uridashi SRI market is already extremely varied in terms of the themes on deals and the use of proceeds,” says Vince Purton, head of debt capital markets at Daiwa Capital Markets in London. “Themes

connected with water purification, education, microfinance and so on have been enthusiastically received. Japanese investors are always very open to new themes along those lines. I believe that we will see that diversity of SRI theme transferred to the larger international market.”

Norbert Schäfer, head of institu-tional sales at DZ Bank in Frankfurt, agrees that investors are interested in every area of SRI.

“In my eyes the environmental aspect is only one part of the story,” he says. “It’s essential for all investors to focus on other aspects like corporate governance and social impacts in the SRI bond space too.”

The Inter-American Development Bank pushed forward the growth of social bonds with a $500m four year issue in mid-September. Proceeds will be ringfenced to back IADB projects that provide funding for education, youth and employment.

In the same month, Münchener Hypothekenbank issued the first cov-ered bond backed by environmen-tally and socially conscious mortgage loans.

Similar deals could follow. “Pre-viously if an investor wanted to get involved in this sort of market they’d have to take a bit more risk, going into the project financing almost directly,” says Nick Dent, head of EMEA syn-dicate at Nomura in London. “The easiest place to start is environmen-tal, given it’s very transparent. In education and social there are places you can start like social and efficient housing.”

But issuers should remember that many investors will not be satisfied just with a bond invested in virtuous projects. They want to know that the issuer as a whole is acceptable, too.

“We see green bonds as a new, grow-ing asset class and as an additional

pillar in our SRI process for our fixed income portfolios,” says Wiederhold at Union Investment.

“We use our own SRI rating system, where we decide on a company level if an issuer is allowed in our portfolio. The SRI rating system gives every issu-er a specific SRI score. Our approach is that we only buy bonds from issuers that meet our SRI standard.”

Setting some ground rulesThe green bond market’s rapid growth has prompted market participants to try to standardise it. In January, a group of banks — with heavy involve-ment from investors and issuers — published the Green Bond Principles, which aim to boost growth and intro-duce standards to the market. The International Capital Market Associa-tion serves as secretariat for the initia-tive.

But the subjective nature of sustain-ability still poses problems, according to Marcus Pratsch, head of sustain-able investment research at DZ Bank in Frankfurt, who encountered similar difficulties in a previous job covering equities.

“The Green Bond Principles are a good way to start, but in the SRI uni-verse you have so many different defi-nitions of sustainability and some-times it just depends on individual investors,” he says. “For instance, when churches are investing they have much stronger criteria than most others and a different under-standing of sustainability. Standardi-sation is important because it helps make things comparable, but on the other hand I also see in fixed income that there will be the same difficulties we had on the equity side for 10 or 15 years.”

Investors also welcome the effort to bring harmony to the market, particu-larly for less sophisticated buyers.

“Green bond principles make it eas-ier, increase transparency and allow the market to grow,” says Aitken Ross, fixed income analyst at Alliance in Edinburgh. “We always look through at the individual projects and run our internal sustainability screen. But I can see for some investors that princi-ples would be key.”

Full disclosureIf standardisation is something inves-tors would like, stringent reporting is something they demand.

“From an analyst’s perspective, KfW’s

model is very good. Transparency is very important. But using this model depends

on how large and frequent the issuer is”

Marcus Pratsch, DZ Bank


SRI INVESTMENT IN THE BOND MARKET


“Key to the development of the green bond market is the reporting standards,” says Ross, “especially with companies like, say, EDF, which you wouldn’t regard as normal green issu-ers. Making sure the ring-fenced pro-ceeds are going towards the designat-ed projects is crucial.”

The focus on reporting standards is becoming increasingly sharp, espe-cially as the themed bond market has evolved from SSA issuers — which typically have sustainable and social credentials hardwired into their very reason for existence — to corporations and banks.

“As we grow the diversity by issuer type, investors are going to be focus-ing more and more on exactly what is behind the title,” says Purton at Daiwa. “Is it green? How is it green? How do we verify it’s green and who monitors it? Not all issuers will be able to pro-vide the same degree of information as KfW, but there are minimal amounts that are required.”

KfW, the German development bank which issued its first green bond in July, offered some of the most state-of-the-art reporting yet seen in the market, with investors given an esti-mate of how much CO2 reduction their money would cause.

But even such specific detail can still, like much in the SRI world, be subjective.

“Any kind of reporting from green bond issuers is a good thing,” says Ross. “But at what point does it become good or bad? As an example, would KfW’s recent green bond still be seen as good and a success if the projects delivered lower carbon reduc-tions than expected?”

KfW is likely to keep on its path of detailed impact reporting and oth-ers will follow, but the lack of such stringent reporting from other green bond issuers will not be a deal breaker — although certain standards will be required.

“From an analyst’s perspective, KfW’s model is very good,” says Pratsch at DZ Bank. “Transparency is very important.

“But using this model depends on how large and frequent the issu-er is. It is the same in the equities universe with company disclosure — some do it in a lot of detail, but other smaller companies don’t have the capacity to do it, so it’s more our job to do the analysing.”

Green books or muddy results?Differences of opinion, down to the individual investor level, of what counts as SRI also raise questions about the usefulness of the SRI bond product, at least for attracting new investors. When pricing SRI bonds, issuers often ensure that SRI investors get bigger allocations but when distri-bution statistics are released, things are not always clear cut.

“You have investors that get special mandates from, say, church banks,” says Kai Poerschke, head of origina-tion at DZ Bank in Frankfurt. “They sit with companies like our Union Invest-ment and define criteria for their port-folios. Those investors can be dark green, then at the same time Union has all these very normal, standard portfolios that are much less green, while generally speaking Union has signed the UN PRI and supports the European SRI Transparency Code.

“On a new issue you see Union wanting €23.8m, but it was collect-ed from different portfolio man-agers. Is that dark green or light green? There is different treatment of these orders, where some issuers will accept any order and others try to pinpoint ‘pure’ SRI investors. The market is only finding its way at the moment.”

One boon of the maturing green bond market is that ethical inves-tors are expected to hold bonds until maturity. “We also face a grow-ing number of buy-and-hold inves-tors that are interested in buying green bonds,” says Schäfer at DZ Bank.

But issuers can never be certain investors will not sell their bonds — especially if the borrower does not keep up its side of the SRI covenant.

“Sustainability is a long term idea,” says Pratsch at DZ Bank. “In research we have flexibility to look at controver-sies or exclusion criteria surrounding companies and then recommend that managers reshuffle their portfolios.”

As long as issuers keep their report-ing up to scratch and adhere to the standards expected, they can expect to enjoy an ever-growing pool of demand for their products — including from the larger peers of the original retail buyers in the Uridashi market.

“Japan has been slightly slow on the institutional investor side, but that is now changing,” says Purton at Daiwa. “We are working on a trade right now and there is a high degree of Japanese

interest. Japan institutionally is com-ing on stream and while lagging the US and Europe, it’s ahead of the rest of Asia. Over the next 12 months this will be a crucial area of growth. Japa-nese institutional investors will have a much larger take-up on SRI deals.”

Looking for a step change in growthInvestors are impatient for more issu-ers to join in. “There’s been roughly $40bn of green bond issuance in total since the first deal in 2007,” says Alli-ance’s Ross. “In the first quarter of 2014 issuance was $9bn, nearly out-stripping issuance for 2013, so it is obvious that the market is growing. Verizon did a bond last year that was $50bn. They managed to issue that in an afternoon. What’s stopping more green bond issuance? Capital may be available but are there the right pro-

jects out there to invest in?”The major group of capital markets

issuers yet to enter the SRI market could hold the keys for that growth, but not necessarily by printing bonds.

“Governments can turbo-charge this sector by bringing projects to market faster and offering credit enhance-ment to make sure that projects’ rat-ings profiles match investor demand,” says Sean Kidney, CEO of the Climate Bonds Initiative, an NGO in London.

“There’s a big lump going into the triple-B category, which is the wrong category. They’ve got to be shoved up into single-A. The EIB already has a small facility called the Project Bond Initiative which is an example of what can be done. The underlying thing that governments need to do is sort out climate and energy policy.

“The growth of the green bond mar-ket shows that there is investor appe-tite. Now is the time for regulatory and policy changes that will lead to deal-flow that investors will buy into.” s

“Any kind of reporting from

green bond issuers is a good thing, but at what point does it become good or

bad?”

Aitken Ross,Alliance Trust

Investments


We congratulateMünchener Hypothekenbank eG

on the debut ESG Pfandbrief

Thank you to Münchener Hypothekenbank eGfor a very successful collaboration.

The bookrunners

€300m 0.375% September 2019, mid swaps minus 10bp

ESG (Sustainable) Mortgage Pfandbrief

GC Munchener Deal.pdf 1 17/09/2014 13:28

GREEN BONDS GREEN BONDS


GREEN BOND ISSUANCE is expect-ed to hit $40bn this year and $100bn in 2015, according to the Climate Bonds Initiative. While still small compared to overall bond volumes, the growth is big. In 2013 the figure was just shy of $11bn — as of Sep-tember, issuance in 2014 was already $25.89bn.

Given its green bond industry association status, the CBI is pre-dictably bullish on its forecasts. But where does it expect growth to come from?

“In the green bond space there’s a lot of untapped demand,” says Sean Kidney, CEO and co-founder of CBI in London.

“At this stage, they are mostly a marketing differentiator for issuers and that’s quite valuable a story. The

corporate earmarked model, adapted from the development bank world, has only just started playing out. More than half of issuance this year has been from corporates, which means over $13bn from basical-ly zero before November 2013. The DCM teams in banks are only just getting their heads around this.”

But growing the green bond mar-ket is not only about getting issu-ers to market, according to Kidney. Investors also need education about what can constitute ‘green’.

“When people think green they generally think renewables,” he says, “but low carbon transport is a criti-

cal investment as well. Rail bonds are already a more than $50bn a year market. The bulk of that issuance should be relabelled as green with the proper reporting requirements.”

Green and proudMany issuers with obviously green credentials still baulk at the cost of labelling bonds green — and the reporting and ring-fencing require-ments that go with it. But borrow-ers that have entered the market say that having the label makes all the difference to green focused investors — and shows up in the new names that appear in order books.

“A lot of issuers would rather do the bonds without the ring-fencing,” says Nick Dent, head of EMEA syn-dicate at Nomura in London. “But

the demands are always going to be towards ring-fencing and clar-ity. Issuers are igniting this mar-ket more than any other base. It’s driven partly by the high stand-ards they’re putting on them-selves, but also swallowing the costs implied. They’ve gone from trying to issue in an arbitrage style to flattening the pricing differen-tial.”

Pricing has been another point of contention on green bonds, but there are signs that is changing.

Previously, investors wanted extra return for the lack of liquidity in the green bond market, while issuers wanted cheaper funding costs to off-set the extra reporting requirements. That tends to mean that, as a com-promise, deals are priced in line with conventional curves.

But as volumes are expected to more than double again next year, the Climate Bond Initiative’s Kid-ney believes “that would remove any arguments about the need for illi-quidity premiums and stop it being treated as a risky niche sector”. Once that happens, investors that have yet to participate would pile in, he says.

The debate on pricing versus con-ventional bonds already appears to be shifting. KfW brought its first green bond in July and, after pricing in line with its conventional curve, it traded around 3bp tighter in sec-ondaries. It eventually had an effect on KfW’s curve — but not in the way that many issuers worry about.

“One of those questions that arises all the time is, ‘if I do a green bond, does that make the rest of my curve different?’” says Nomura’s Dent. “That opinion is eroding as issuers such as KfW and the supranational community continue to access this market with no detriment to their outstanding curve. KfW’s deal man-aged to tighten its conventional curve.”

Market participants believe that could become the norm.

“Green bonds offer additional value to investors,” says Kai Poersch-ke, head of origination at DZ Bank in Frankfurt. “There’s less liquidity, but also less volatility. These issues are rarer than conventional bonds, so are more difficult to replace if sold. So investors will probably hold on to them, reducing liquidity but show-ing an additional value for it. That should create a better performance in the secondary market and it should distinguish these issues from conventional bonds.”

The growth of the market could eventually mean green bonds price through curves at re-offer.

“Ideally we’d like to see green bonds price through the convention-al curve,” says Kidney at the Climate Bonds Initiative. “But how quickly that happens is another matter. The market has to be big enough.”

A full green menuOf course, the conventional bond market is not just about the price of benchmarks and for the green bond market to be fully mature, it needs to be the same.

If 2013 was the breakthrough year for green bonds, then 2014 is very much when they are becoming part of the mainstream. Volume is already more than double 2013’s figure, while new borrowers are joining the market and ever more sophisticated approaches are being taken to issuance. Craig McGlashan reports.

Green bonds hit the big time

“Ideally we’d like to see green bonds

price through the conventional curve.

But how quickly that happens is

another matter. The market has to be big

enough”

Sean KidneyCBI

018-19 Green Bonds SRI.indd 18 23/09/2014 18:15

GREEN BONDS GREEN BONDS


“We’ll see private placements, structured deals and reverse enquiry-driven trades,” says Vince Purton, head of DCM at Daiwa Capi-tal Markets in London. “Once you have all the range of funding struc-tures you’ll find the pricing will vary according to which is chosen, just as issuers have a conventional bench-mark and private placement price.”

Part of that market development has been the extension of tenors.

In early September, green market pioneer the European Investment Bank sold its longest dated Climate Awareness Bond ever — a €500m 12 year — and almost doubled the length of its euro CAB curve in the process. A week later, debut green issuer Agence Française de Dével-oppement sold a 10 year green bond that was the first from an SSA issuer to hit €1bn.

The length of the tenors is signifi-cant, given that before the deals the weighted average maturity at issu-ance of syndicated euro and dol-lar deals of green benchmark size (at least €500m or $500m) was just 6.3 years across all asset classes, according to Dealogic.

“A core group of issuers will increase their annual volumes in green or SRI and that leads to the creation of yield curves,” says Dai-wa’s Purton.

SSA issuers might be leading the way on curve extension — although GDF Suez represented the corporate sector by selling a €1.3bn 12 year as part of its dual tranche green debut in May — but more are likely to fol-low, says the Climate Bond Initia-tive’s Kidney.

“SSAs will start that and then issuers will say, ‘Ooh, now I have a really solid treasury reason to pur-sue this’,” he says.

New frontiersThe green bond market has room for innovation, too.

KfW’s debut green bond in July offered investors a state of the art feature. Proceeds from the bond were used to fund the agency’s Renewable Energies — Standard loan programme. Analysis by the Centre for Solar Energy and Hydro-gen Research Baden-Württemberg (ZSW) shows that for every £1m invested in the programme, about 800 tonnes of CO2 equivalent is

saved a year — meaning investors in the bond get a real sense of the impact from their money.

“KfW’s impact assessment is great to have and leads the way in self-regulation,” says Nomura’s Dent. “As the market matures, we will move along from simple ring-fenc-ing and we will see more formats like KfW’s. Is there any difference between that and a covered bond with constant monitoring of the cover pool?”

Speaking of covered bonds, Münchener Hypothekenbank added another first to the 2014 list by printing the first covered bond backed by environmental and social governance mortgage loans in September. The Climate Bond Initiative’s Kidney believes there is more potential in that format, as well as others.

“We expect to see growth in pro-ject bonds and green asset backed securities,” he says. “There’s an argu-ment that regulators, the ECB and Bank of England, should preference green ABS as part of their commit-ment to grow securitization. This is an argument that will grow in cur-rency. It has to be done because bank recapitalisation pressures have reduced lending allocations to renewable energy.”

Emerging markets and Asia are another field for green bankers to furrow.

“I expect to see a lot of issuance out of Brazil and China,” says Kid-ney. “In fact, we might see a first labelled green bond within a month from China. It will be one of the big-ger green bonds so far. Although Japan will take couple of years to

warm to the market there are already rumours of a supranational issuing an inaugural institutional investor green bond in the Japanese market. But in every bond market I can think of around the world there are discus-sions about issuance.”

Last piece?This year just about every type of issuer has been in the green bond market, from supranationals and agencies, to banks and corporations. But one large no-show so far is sov-ereigns — and opinion is mixed on whether those issuers will print in the market.

More generally, there are still obstacles to issuance.

“We’ve had meetings with issuers that haven’t come to the market yet but it takes time because you need to prepare with certification [and] sec-ond opinion agencies and you need to be clear what projects you can set apart and prepare internally,” says DZ Bank’s Poerschke. “So there’s a lot of work to be done before you can do the first issue. Once you’re set up it’s easier but the first takes some time.

“There’s lots of different parties involved. It’s not just the usual case of a treasurer in charge of fund-ing. Investor rela-tions are involved and on a strate-gic level manage-ment and board level people are involved. There are lots of stake-holders looking at the final decision to go with an issue like this.” s

0

5

10

15

20

25

30

2010 2011 2012 2013 2014

Agencies Corporates FIG Sub-sovereigns Supranational

$bn

Green bond market diversifies as it grows

Source: Dealogic

“Green bonds offer additional value to

investors. There’s less liquidity, but also

less volatility”

Kai PoerschkeDZ Bank

018-19 Green Bonds SRI.indd 19 23/09/2014 18:15

PUBLIC SECTOR BORROWERS PUBLIC SECTOR BORROWERS


The International Finance Corp has played a big part in growing the green bond market — bringing the first benchmark-sized deal last year and printing $3.6bn of paper since 2010. But it has been very much focused of late on issuing bonds linked to social projects.

The supranational is set to unveil its next socially responsible invest-ment opportunity — dubbed an “inclusive business bond” — in November.

“The inclusive business bond is looking to help the very poor, to extend the last mile of any supply chain,” says Evelyn Hartwick, IFC’s head of socially responsible bond programmes in Washington DC.

“For example, in Pakistan, we provided a loan to Engro Foods Ltd, a manufacturer that produces and sells dairy products, such as ice cream. Their business model has to include farmers in the informal sector as well as help the smallest farmers overcome challenges by providing training programmes.”

But it is not just pioneers like the IFC that are opening up to oppor-tunities beyond the environmental sector. Even issuers that were reluc-tant to print green bonds — typi-cally because they felt that all their operations, and therefore bonds, should qualify as green — are look-ing at other themes after enjoy-ing strong responses to their green debuts.

KfW sold its debut green bond in July, a €1.5bn five year note that drew a book of €2.65bn and 90 investors. Its focus this year will stay environmental, with a dollar green bond in the works — but it is already exploring other opportuni-ties.

“We believe just to focus on green bonds can only be a first step,” says Horst Seissinger, head of capital markets at KfW in Frankfurt. “We

will look into other areas of SRI bonds.”

Nederlandse Waterschapsbank had also been reluctant to print green bonds but is now embracing SRI more broadly. In June it printed its first green deal, a €500m no-grow five year whose proceeds were earmarked for lending to water authorities in the Netherlands.

After the success of that deal — orders reached €1.8bn — NWB is keen to branch out into other areas of the SRI market, although it still wants those bonds to have a green element.

“Two thirds of our lending goes to social housing each year,” says Tom Meuwissen, general manager of NWB’s treasury in the Hague. “So we are open to the idea of printing a social housing bond in the future.

“We decided to go with a water bond first because it seemed a bit more obvious — everything [the water authorities] do is green. With our social housing lending we would have to pick certain piec-es because not all their activities would qualify as green.”

New avenuesDespite recent efforts by suprana-tional agencies to develop the social bond sector — and hints from agen-cies like NWB and KfW that they could also enter the market — envi-ronmental bonds are very much the first choice for many investors. Market participants are keen for that focus to broaden.

“People are talking narrow-ly about green bonds, but are we going to move to a wider definition including not only environmental but also other wider issues?” says Vince Purton, head of debt capital markets at Daiwa Capital Markets in London.

Issuers such as the World Bank

— another pioneer of the SRI sec-tor — agree that green is the fla-vour investors prefer, at least for the moment.

“I’ve seen a lot of people asking about different things that we need to raise awareness for, but so far the scale of demand hasn’t been com-ing from investors as it did for green

bonds,” says Heike Reichelt, head of investor relations and new products at the World Bank in Washington.

“That may be because the specific topics aren’t seen as huge in terms of risk or impact, as climate change is the challenge for our generation. However, I do expect we will see more bonds with a specific sector focus — like education or gender.”

Another potential avenue for SRI bonds is corporate governance. The World Bank has already brought innovations to that market, selling an ethical equity index-linked green bond in August — the first of its kind. The bond is tied to the Euro-pean Ethical Equity Index, which selects eligible companies for inclu-sion based on their corporate social responsibility.

BNP Paribas sold the €50m August 2024 index-linker. Inves-tors liked what they saw and want more, according to Jamie Stirling, co-head of supranational, sovereign and agency DCM at BNP Paribas in London.

Supranational and agency borrowers have been the most important drivers of the green bond movement. Fostering that market until it reaches maturity is still a big part of their plans, but as Jonathan Breen reports, many issuers are also making big efforts to bring bonds focused on social and educational issues to the mainstream.

SSAs take pioneering spirit to new frontiers

“Part of our issuance strategy is to issue

green and social bonds in a variety

of emerging market currencies, in order

to continuously grow the SRI base”

Evelyn Hartwick, IFC

020-22 SSA Focus SRI.indd 20 23/09/2014 18:12

PUBLIC SECTOR BORROWERS PUBLIC SECTOR BORROWERS


“We have had a lot of discus-sions with investors interested in the same structure,” says Stirling. “As a market initially develops, it typically focuses upon plain vanilla structures. Then, as confidence and knowledge of the core underlying product increase, the market inno-vates more structured solutions.

“Last year discussions with issu-ers and investors revolved around the benefits of the product as a whole — now those discussions are focused on what more is possible.”

Green floweringWhile developing social, educa-tion and corporate governance-linked bonds is part of suprana-tionals’ plans, helping the green bond market mature is still a cen-tral focus.

“We have somewhat changed our approach to green bonds compared to our earlier efforts, because we have responded to a change in market needs — specifi-cally, a call from the market for more benchmark-type products,” says Aldo Romani, deputy head of funding, euro, at the European Investment Bank in Luxembourg.

“Instead of issuing mainly small, ad hoc transactions, we are now trying to develop a benchmarking approach.”

The EIB took a big step in that direction in September, printing a €500m 12 year Climate Awareness Bond. Its longest previous CAB was a six year.

And before the EIB’s deal, the weighted average maturity at issu-ance of syndicated green bench-mark euro and dollar bonds (at least €500m or $500m) was just 6.3

years, according to Dealogic data.Big, liquid issuers like the EIB

building green curves offer new

opportunities in the market. “If we are able to construct a

curve that is comparable with a mainstream curve then there would be scope for using it as a pricing ref-erence on its own merit,” says Rom-ani. “What this will lead to is the development of a new asset class. An asset class is not made up of one single issuer and one single type of product, but of different issuers that offer comparable products and have different characteristics in, for example, credit and yield.”

Ralph Ockert, head of syndicate at DZ Bank in Frankfurt, says: “The EIB has two curves now. They have their EARN curve of the really liq-uid, €4bn-€5bn issues which they do four or five times a year in euros. Then their Ecoop curve, where they continually tap deals, trades about 5bp or 6bp tighter. The Climate Awareness Bonds are a third pillar, and trade at the same level as the Ecoops.”

Crunching the carbon numbersBut bringing the green bond market to maturity is not just about build-ing a curve. Quantitative impact reporting is becoming important for

investors, says the EIB’s head of investor relations Peter Munro in Luxembourg.

“Investors would, for exam-ple, like to see how many tonnes of CO2 are saved by the projects to which green bond funds are allocated,” he says. “Over the last few weeks we have been collating that information.

“Earlier this year, EIB made a pioneering step by launching the systematic calculation and publi-cation of CO2 data for all projects

with a material footprint directly financed by EIB, and we have start-ed to present these kinds of statis-

tics in a more digestible form.”Standardised reporting of such

information is lacking in the green bond market, says Romani. “There are discussions going on, which are happening because people realise there is a large potential amount of green bond issuance on the hori-zon.”

“The very existence of this debate provides the comfort that there will be more transparency going for-ward.”

The World Bank has convened an informal working group with other development banks including the EIB, IFC and African Development Bank to develop a framework for impact reporting. The goal is a har-monised set of metrics on expected outcomes of green projects.

“We’re focusing on renewable energy and energy efficiency,” says Reichelt. “The problem is many projects have other benefits, not just tonnes of CO2 emissions saved.

“We need to be careful with impact reporting that we don’t nar-row things down just to environ-mental or climate metrics. We are focusing on these because they are relatively simple, but there are other areas too, which are impor-tant to report on to investors.”

KfW has already brought such incisive reporting with its green debut this year, where investors could get a real sense of the differ-ence their money made. According to KfW’s estimates, €1m of invest-ment in the bond will avoid roughly 800 tonnes of CO2 emissions. Inves-tors snapped it up — and KfW has plans for more.

“The next step will be to issue a dollar bond, which is something we have started to prepare,” says Seiss-inger. “Liquidity in this market is always an issue so I would expect a minimum size of $500m. Depend-ing on the demand, we could also consider a larger volume.”

Small and beautifulWhile many SSAs’ focus has been on bringing liquid, benchmark SRI bonds to the market, others want to keep issues small — and only in the hands of SRI investors.

“We intend to issue SRI bonds exclusively for SRI investors,” says Leopold Olma, head of funding at Rentenbank in Frankfurt. “SRI

“Instead of issuing mainly small, ad

hoc transactions, we are now trying

to develop a benchmarking

approach”

Aldo Romani, EIB

“People are talking narrowly about

green bonds, but are we going to move

to a wider definition including not only environmental but

also other wider issues?”

Vince Purton, Daiwa


PUBLIC SECTOR BORROWERS


benchmark transactions of €1bn or more are not on our agenda for the foreseeable future, since our annual funding volume of €10bn will not allow that kind of approach. Additionally, the participation of SRI investors in large public green bonds is limited anyway.

“For the moment we are happy to provide small to medium sized SRI bonds between €50m and €200m, tailored for one specific SRI inves-tor or for a limited number of SRI investors only. We are fully aware that the SRI market is constantly creating new ideas and we’re follow-ing these developments closely.”

Emerging investor baseBut SSAs’ job in growing the SRI market is not only about the struc-ture or tenor of the bonds on offer — it is also about educating and growing the investor base. The IFC has a specific goal to do that in emerging market countries.

“Part of our issuance strategy is to issue green and social bonds in a variety of emerging market curren-cies, in order to continuously grow the socially responsible investor base,” says Hartwick.

“This approach will allow us to grow the SRI market in multiple directions; in the US and Europe with public syndicated deals, and in emerging markets with targeted issues for investors who are transi-tioning into the SRI space.

“By bringing SRI bonds to emerg-ing markets in local currencies, we are trying to spread awareness of the need to finance the environ-mental and social investment gaps.”

The issuer is scouting for its next opportunity, says Hartwick, after issuing the first green bond in Peru from an international borrower in August.

Peruvian insurance compa-

ny Rimac Seguros bought the NS42m ($15m) 20 year zero cou-pon note.

But the IFC’s investor educa-tion work goes even further than bringing bonds to new markets. It is holding a series of SRI-themed events in emerging markets to try to enlighten market players. The first event will be in Mexico on October 27.

“We want to attract poten-tial investors and issuers to the events and have the banking

community as well as market regu-lators on board,” says Hartwick. “The main focus of these events will be to share what we have learned from our green bond issuance pro-gramme — we hope to share an overview of the green bond mar-ket, where we have been and want to go.”

In the first round of events, the IFC will visit Mexico, Brazil, China and India.

Other work by supranationals includes evolving the Green Bond Principles, which aim to provide a framework that issuers, banks and investors can use to identify what makes a bond green. Market par-ticipants published the Principles earlier in January, but they are very much a work in progress.

“We are one of the issuers work-ing with other market participants on the Green Bond Principles and we are part of several working groups where investors are devel-oping common statements of what they expect from green bond issuers,” says Reichelt.

Cultivating retailWhile the IFC is putting a big effort into emerging markets, it is also working to grow a larger investor base in perhaps the most developed market of all — the US. The IFC started offering green bonds in Sep-tember through its US retail plat-form — dubbed the Impact Notes programme — which the issuer had launched in March.

After a promising start to the green bond issuance, the suprana-tional is hoping demand will snow-ball, says Hartwick.

“We see the demand for green bonds from US retail investors growing rapidly,” said Hartwick. “Our programme is relatively new

in the US — maintaining a constant issuance pattern will help us grow this market.

“The majority of retail investors participate through small broker-dealers, which have to go through an approval process to buy IFC paper. Due to our bi-weekly issu-ance approach, more of these broker-dealers are going through their internal processes required to approve IFC’s credit as investment-worthy. So gradually we are seeing more and more investors involved.

“We have sold over $60m on the programme so far but we see issu-ance picking up over time as IFC becomes a household name in the US retail market.”

IFC’s US retail channel is a new development, but SRI bonds have long been a regular feature for Japa-nese retail investors. The Uridashi market, through which internation-al issuers can sell to Japanese retail investors, hosts bonds with a varie-ty of socially responsible themes.

And with issuers discussing new areas of sustainable investing to move into beyond the environment, Daiwa’s Purton suggests the market could learn from Japan.

“The Japanese retail investor is to some extent showing the global markets how to move forward,” says Purton.

“In Uridashi you have green, edu-cation, water, microfinance, and agribusiness bonds etc, all of which are covered by the SRI nomencla-ture. So as the market develops in Europe I’m wondering if in parallel with green we can have other issues with a social context, or perhaps we put them all together in one SRI grouping. Ethical doesn’t just have to be green. Green will always be the main focus but it doesn’t need to be the only focus.” s

“We believe just to focus on green

bonds can only be a first step. We will

look into other areas of SRI bonds”

Horst Seissinger, KfW

“Two thirds of our lending goes to

social housing each year, so we are

open to the idea of printing a social

housing bond in the future”

Tom Meuwissen, NWB


Sustainable and Responsible Capital Markets 23

European Public Sector SRI Bond Roundtable

Participants in the roundtable were:

Nick Dent, head of EMEA syndicate, Nomura

Christopher Egerton-Warburton, board director, International Finance Facility for Immunisation (IFFIm)

Gefion Harig, director, investor relations, ratings and sustainability NRW.Bank

Jens Hellerup, head of funding and investor relations, Nordic Investment Bank

Doris Herrera-Pol, global head of capital markets, World Bank

Eila Kreivi, head of capital markets, European Investment Bank

Isabelle Laurent, deputy treasurer and head of funding, European Bank for Reconstruction & Development

Tom Meuwissen, general manager, treasury, NWB Bank

Carlos Perezgrovas, executive director, DCM, Daiwa Capital Markets Europe

Pierre Van Peteghem, director, treasury department, African Development Bank

Kai Poerschke, head of origination, DZ Bank

Huib-Jan de Ruijter, director, financial markets, Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden (FMO)

Jamie Stirling, global co-head of SSA DCM, BNP Paribas

Otto Weyhausen-Brinkmann, senior funding manager, KfW

Chris Wigley, senior bond portfolio manager, Mirova

Tessa Wilkie, moderator, GlobalCapital

Public sector borrowers define the environment — and beyond

Supranational borrowers gave birth to the sustainable bond market, but as it reaches adolescence supras risk being overshadowed by corporate borrowers printing big deals and stealing all the glory.

But public sector issuers are kicking down doors for capital to flow to a broader range of socially responsible investment (SRI) uses than just green, and are disciplining this evolving asset class to ensure that it grows in a healthy manner.

Development in this market has to be handled with care. The decisions these issuers make on standards will define SRI capital markets for decades. Set standards too lax, and they leave the market open to accusations of greenwash and pointlessness. Be overly tough, and the market could suffocate as new borrowers baulk at onerous entry standards.

GlobalCapital gathered leading public sector borrowers — including the pioneers of sustainable bond markets — together with the buyside and investment bankers in London on September 10 to discuss how the public sector should lead the way for SRI markets.

023-35 SRI SSA RT.indd 23 23/09/2014 18:11

24 Sustainable and Responsible Capital Markets


: One of the most interesting develop-ments in what has been a busy year for SRI capital markets was EIB’s 12 year Climate Awareness Bond in September, which is one of the longest euro benchmark green bonds out there. Eila: how did that bond come about and does it mark a growing matu-rity in the investor base?

Eila Kreivi, European Investment Bank: We have been thinking about starting to create some kind of curve in our euro green bonds for a while. Our last new issue green benchmark was issued in July 2013 with a slightly long six year bond. That’s already pretty long for a green bond but we wanted to go longer in response to investor feedback.

We’ve been thinking about printing for about six months but we wanted to increase the previous deal first to a good size.

Once we had done that we worked on the maturity extending trade over the summer. Of course, the situa-tion with very low yields and spreads did not make the plan easy. The yield on the 12 year was around 1.3% and the spread was 1bp over swaps, but even so we had a very good reception for the bond.

Investors bought it because it was green. Although the scale is, of course, small, we are really starting to see some advantage in the green label because, for example, this was priced around 22bp through OATs, but we still sold a few tickets in France. I have a bit of a tough time believing that we would sell a normal bond without a green label in France at 22bp through OATs.

We also had a very high level of placement to Ben-elux and the Netherlands, two thirds, where you have a high concentration of green investors. That’s higher than we would normally have for this kind of bond. So the investor distribution shows that the green label does bring added value. We want to bring our Novem-ber 2026 to a larger size over time and then maybe at some stage we’d like to add another point on the curve.

We want to have a green curve, not just one bond out-standing. We also wanted to do something a bit longer because it reflects the maturity profile of the typical loans that back the bonds.

: Bankers: do you see signs of the tra-ditional green investor base pushing out along the curve and being willing to buy longer dated assets than they used to, or whether it is the investors that typically buy at the long end of the curve becoming more interested in green or SRI?

Jamie Stirling, BNP Paribas: This is a timely question from our side at BNP Paribas, as this morning [Septem-ber 10] we have announced a new 10 year green bond benchmark for Agence Française de Développement. So that’s definitive proof of how the investor base is matur-ing and extending out the curve. There is a very broad order book with all European regions well represent-ed and it is more a case of the typical green investors extending rather than the usual longer end buyers sim-ply buying the green. We had initially been looking at a shorter trade but with strong feedback from the road-show with feedback exactly as Eila mentioned — green investors wanted longer dated assets — the issuer chose to extend to the 10 year sector.

Nick Dent, Nomura: Certainly from Nomura’s side the market is maturing very quickly. We started with retail format which was largely in the form of short dated products with accounts taking both the SRI product and perhaps some currency exposure. We’ve moved into a two tier system where we have benchmarks coming out alongside the retail product.

We’re in a very strong environment both for duration and for the SRI product. And as these long-dated bench-marks have begun to appear we’re in another zone. These bring in a whole different client base, not just the traditional green investors.

Kai Poerschke, DZ Bank: We were a bookrunner on EIB’s November 2026 deal and a lot of feedback we got was that this maturity extension was a great fit for the issuer and for investors at the same time. It reflects, on the one hand, the long term viability of the pool of assets that’s put against it, and on the other hand, it very much fits investors’ interest and long term view.

Chris Wigley, Mirova: From an investor’s point of view, we’re finding a lot of choice in the zero to five year part of the euro curve, but we have less choice further out the curve. So we welcomed a 2026 issuance. And if there is further issuance further out the curve, ideally maybe 15 years or more, that would be welcome as well.

: Is anybody here looking to do a 15 year plus bond?

Otto Weyhausen-Brinkmann, KfW: We have to keep one restriction in mind when discussing the matu-rity, and this is the assets we are ring-fencing. At KfW the average duration of our assets from the renewable energy programme is slightly below nine years. For a bond which has a longer maturity than the ring-fenced assets, the assets which are redeemed during the life of the bond must be replaced with new ones at some point in the future. That doesn’t give investors the kind of cer-tainty around the asset pool that they like. So under the renewable energy programme it is unlikely that we will issue a green bond with a very long maturity.

Gefion Harig, NRW.Bank: For NRW.Bank it is the same. Therefore we decided that the shortest loan maturi-ty defines the longest maturity of the bond. So NRW.Bank’s next green bond will have a maturity of three to four years depending on the shortest loan. That means

Chris Wigley,MIROVA

023-35 SRI SSA RT.indd 24 23/09/2014 18:11



we don’t have to look for new projects fitting on to that same bond.

Doris Herrera-Pol, World Bank: We don’t have dura-tion targets for any of our funding, although we do have a preference for intermediate or more than five year maturities for our green bonds to make them bet-ter aligned with the implementation time for the green projects.

We started our green bonds issuance catering to pen-sion funds. By definition, pension funds typically look for longer assets, but ours was a short maturity bond.

The expansion of the long duration preference among investors is a reflection of the market coming of age. Investors have moved from proof of concept deals five or six years ago to investors considering them as a seri-ous product, not anymore as a leap of faith or an experi-ment.

Wigley, Mirova: One of the noticeable trends over the last year is more corporate issuance — so we’ve had a broadening out by issuer type as well as maturity. The focus used to be on triple-A rated bonds. We’ve had issu-ance this year across the credit curve from triple-A to triple-B, we would welcome further extension along the credit curve from corporate issuers.

Pierre Van Peteghem, AFDB: The African Development Bank does not have a duration target because the pipe-line of projects that would be eligible for green bond funding is expanding day by day. The African Develop-ment Bank disburses loans at very long tenors of up to 25 years.

The green bond programme has allowed the African Development Bank to access new investors, for exam-ple in the Swedish market. We issued in Swedish kronor twice this year. We’d never have done this if we didn’t have the green bonds because we wouldn’t have had the traction with investors.

: I’d be interested to hear from IFFIm, which has been issuing since 2006. Has your investor base changed over that period of time?

Christopher Egerton-Warburton, International Finance Facility for Immunisation (IFFIm): When we started issuing the IFFIm bonds we did not really know we were issuing socially responsible bonds — we felt

good about it but I’m not sure we were aware that we were issuing a separate category of bonds. We were a little ahead of our time in that regard. It was really the Daiwa programme placing vaccine bonds in Japan that opened a door to investors really caring about the under-lying product that they’re buying.

That market exploded, and exploded not just for vac-cine bonds but for themed bonds from all the suprana-tionals. It was one of the forerunners for what we now think of as the green market.

What this has shown, and we’re seeing it in some of these comments here today, is that SRI or green bonds don’t defy the law of gravity or defy the law of markets.

From IFFIm’s perspective we will look for new mar-kets to tap. As we see the Uridashi market waning some-what we’ve seen a decline in demand. Fortunately other markets are expanding and so we are expanding into Europe.

I won’t say I hope we get a premium for being an SRI issuer — no one needs to buy an IFFIm bond. We’re the smallest issuer in the market. It makes no sense for anyone to spend time working out why they would put a tiny bit of money into IFFIm versus all of the fantastic benchmarks that the issuers around this table can issue. IFFIm bonds are a little signal that investors will go the extra mile if they value the cause.

That said, I was struck by a conversation we had with a pension fund manager about five years ago, who said: “We hope this market doesn’t develop but if it does we will all have to jump on board.”

The barriers to entry for asset managers — unless you’re fortunate enough to have a sovereign wealth fund — is that money can move very quickly between fund managers, and therefore they need to be at the cut-ting edge of explaining what it is that differentiates their product from another product.

Carlos Perezgrovas, Daiwa: We see growth in several directions. As well as longer tenors we expect to see dif-ferent currencies and different formats.

There are two areas in particular where we see growth. One is the social aspect. Much has been done and has been said about green bonds. Social bonds are clearly lagging behind.

Social bonds won’t catch up in terms of volumes but there will be a growing focus on the kind of deals that at the moment are mainly seen in the Uridashi market. These are the education bonds, the microfinance bonds, water bonds and so on. I expect more deals that target social outcomes to be sold to institutional investors.

Institutional investors have guidelines in place for investing in green bonds. They should be able to repli-cate those guidelines for social projects and the feedback we have from several investors is that they want a wider range of products to invest in, not just green bonds.

The other place we see growth is Asia. Asia has lagged Europe and the US, especially on the investor side, in terms of focus on the green and social aspects. That is changing.

The feedback we are getting out of Asia is that inves-tors are becoming more familiar with and more inter-ested in SRI guidelines. They’re not just asking questions about their investments but they are looking at potential issuance from Asia. With the EIB we ran the first green Samurai, which could be a market for issuers to explore. Borrowers from the region are also looking at deals

Pierre Van Peteghem,AFDB

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that are backed by green and social projects. On the social side I’d really like to see public sector

issuers tapping the market more regularly and bringing in the social projects. Governments and local authorities can do this too.

Herrera-Pol, World Bank: I agree with Carlos on the expansion of the investor base. Even in the traditional retail investor base we are seeing geographical expan-sion. US high net worth individuals are becoming more and more active in green bonds. We are seeing investors in non-Japan Asia become increasingly interested too.

Another investor base we see coming on board is emerging market pension funds. We already sell other products to those investors and as we do our investor work with them they are beginning to ask questions about our green bonds. Of course, given that the fund-ing we raise through green bonds goes to finance climate friendly projects in developing countries, it makes emi-nent sense for investors from those geographic regions to consider those investments.

Tom Meuwissen, NWB Bank: The investor base for this product is immense so I don’t think investor outreach is a problem. Social bonds are lagging behind green bonds because it is more difficult to tick the boxes for bringing a social bond.

With a green bond it can be quite easy because it can be a straightforward story to show the good things for the environment. We are looking at a social bond because everything we do is green or social and our social investments are much bigger than our green investments. However, it is more difficult to find a for-mat that everyone is happy with. But the size of the investor base doesn’t seem to be a problem at all.

: FMO did a sustainability bond which was backed by financial inclusion projects as well as climate friendly projects. Did you encounter any questions from investors about that, as Tom was say-ing, where they wanted more clarity on the social side?

Huib-Jan de Ruijter, FMO: We very deliberately made the choice to combine the green and social aspects with our bond because that really fits our strategy and iden-tity. We focus, on the one hand, on green development, and on the other hand, on inclusive development. We

felt a bond needed to reflect that. What struck us was that on the roadshow and during the investor meetings, investors were particularly interested in the social side of things.

We met with quite a few institutional investors some of whom said that they had been looking to invest in microfinance for some time, but that as an insurance company they weren’t keen to take equity exposure. They now have the opportunity to invest in a fixed income alternative. So there is definitely a lot of appetite for that as well in terms of impact measurement and pro-ject selection. There is a little less development than on the green side, but on the green side we’re making steps in the right direction and I’m sure on the social side we can also do that.

Isabelle Laurent, EBRD: We’ve kept the two things dis-tinct — we separate our green bonds from our microfi-nance bond issues. Our experience on the road is that investors aren’t exclusively interested in green bonds, but that the way most investors think is far more about exclusion. Investors want to exclude certain types of pro-jects from the things that their money goes towards, and therefore, if the general purpose is SRI and it excludes various things they’re not happy with, then they’re will-ing to buy. We’ve found this to be the case across inves-tor geographies, so it doesn’t surprise me to hear from FMO that when you try to combine green and social projects that it works well.

Kreivi, EIB: As Tom said green is very concrete. It is assets like windfarms where you can calculate perfor-mance measurements.

On the social side, things get a little bit more unclear so it needs a lot more work. Microfinance may be some-thing which is very clearly identifiable, but I’m less sure about social impact projects such as social housing, hos-pitals, schools. A very wide range of assets could come under the social label. There is firstly a problem of iden-tification and then when you get into the question of impact measurement that can become very difficult too.

Investors are perfectly happy to be on both products so it’s not a problem from the investor side but it’s more a matter of developing products so that it is something solid and transparent.

Herrera-Pol, World Bank: Among the investors that have bought our green bonds, 60% is investors that are new to the World Bank. Some of those investors that

Doris Herrera-Pol,WORLD BANK

Eila Kreivi,EUROPEAN INVESTMENT BANK

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first began buying World Bank green bond paper have taken the next step of buying our other products. With-out our green bonds we may not have achieved that first step so green bonds have opened doors for us.

Van Peteghem, AfDB: The supranationals around the table are working on harmonising the way that we report the impact of our green bonds. I’d like to ask a question to our investor: how do you prioritise trans-parency in the way issuers report use of proceeds? Not just in terms of the projects that we fund with the green bonds, but also the reduction in greenhouse gas emis-sions that those projects should produce.

This is the type of discussion that we have in our intra-supranational group — we want to make reporting as transparent as possible for our investor base.

Wigley, Mirova: Transparency is very important. I’ve been at Mirova for two months and I’ve spent most of those two months over the summer developing a green bond evaluation process. At the core of that process are the environmental projects and the impacts — one of the things I liked about the KfW deal that came earlier this year was the metrics that were included.

That evaluation process at Mirova will be transferred to our ESG [environmental, social and governance]

department, so it may well be in future that our analysts — we’ve got 11 analysts — will be asking more detailed questions about the projects and particularly the metrics as well. These metrics are going to become more impor-tant to us.

Stirling, BNP Paribas: BNP Paribas’ Investment Part-ners division has a large ESG group of around 10 ana-lysts. Their focus is on evaluating issuers. It’s not solely the actual bonds and the associated lending that is their focus, but also how the companies manage their busi-nesses as rated by ESG metrics. There is an increasing level of internal corporate governance at investors with the sustainability departments becoming more and more involved with the business.

Egerton-Warburton, IFFIm: I think transparency is the right way for the market to travel but issuers need to do this with their eyes wide open. If you give investors more transparency they’ll want even more. So the challenge is where do you draw the line.

The purpose of green investment is to help build a

green economy. If we want to build a green economy then we ought to be aware of how much CO2 is coming out of the atmosphere.

We can get to a point when we can measure how much impact, say, $1bn of capital has on carbon emis-sions. We can get there because of the work on met-rics with the Clean Development Market. It’s possible to know precisely on a day-to-day basis the impact of nearly every single one of the projects that you’re put-ting capital into.

But where is it that we’re trying to go? Are we trying to really change the capital markets and the allocation of capital into things which are having an environmen-tal impact or actually is knowing that the capital is doing good sufficient?

You have to adopt more metrics with your eyes open, knowing that it will lead to a waterfall where some proj-ects which today would be viewed as green might get less capital because although they are necessary for the green economy, for example a surveillance satellite, in themselves may not actually reduce much CO2.

There has been talk of carbon coupons which wouldn’t have any financial merit but would have a reporting use — so investors could just map the carbon performance alongside that of the financial performance. It’s all tech-nically very doable.

The challenge is, though, whether it actually helps the sector. Does it get more capital flowing to where we want it to go? Does it start making life impossible for social projects, like housing, where metrics are much harder to develop?

Jens Hellerup, NIB: Impact reporting is not that easy. Over the last couple of years we have talked a lot with the investor base about the selection criteria of projects and the separation of funds. But in the future we will talk a lot about reporting. Investors need to dig into how issuers do their accounting because opinions differ. While we may say there is a reduction in emissions of X thousand, another issuer may have another view, even though that within the international financial institu-tions [IFIs] there are some guidelines regarding common greenhouse gas accounting.

Kreivi, EIB: I would like the market to set some sort of a common standard, so that there is a common under-standing, before we get ahead of ourselves and start talk-ing about very advanced impact reporting.

Jamie Stirling,BNP PARIBAS

Christopher Egerton-Warburton,IFFIm

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We found a case where two institutions had financed the same project. It was a solar project and the two insti-tutions had totally different assumptions of the sunny days in that location, so the greenhouse gas emission reduction numbers were very different. We had no idea who was right or wrong about that, but that’s not the point. It’s a word of caution for the investors at this stage that you are not only trying to compare apples and oranges, you are comparing a whole host of other fruit, and probably a couple of vegetables too.

In this regard, the international financial institutions working group on reporting is very important — we want it to get to an advanced stage and make its findings public before even trying to set some sort of standard.

It’s one thing to be able to report numbers — we are all able to report numbers — but it’s not really possible for investors to extract the necessary information out of those numbers.

IFIs have been out there developing the market in terms of issuing and establishing the product. There are plenty of other issuers coming to the markets, so maybe our work — the next project — is establishing some sort of common framework of reporting standards.

Poerschke, DZ Bank: There are so many investors com-ing into the market. Couldn’t rating agencies or the certification agencies like Cicero, Oekom or Vigeo play a stronger role in the market? Some investors can really dig into the reporting and take on evaluating the rat-ing internally themselves. But there are lots of investors which just need something simpler. They are interested in the topic, but they don’t have the capacity to run the analysis.

Laurent, EBRD: Using rating agencies and potentially just using metrics like greenhouse gas emissions is very reductive. EBRD green bonds back projects like water management and waste management and these have dif-ferent metrics. Some will be about reducing phosphates and others about reducing nitrogen and others will be about something else. It shouldn’t invalidate a project because you can’t accumulate apples, oranges, pears and the vegetables that Eila’s talking about and evaluate them in the same way. We have good green projects that we find investors are absolutely happy with.

The trouble with delegating to rating agencies is that you’re looking at it through their perspective. Again it depends on what their definition of green is, which doesn’t necessarily seem to be the same as any inves-tor that I’ve encountered. Rating agencies cover things like governance which Pierre was talking about —where it’s very much what can be available on the website. It doesn’t mean that necessarily your governance is in any way lacking but if they cannot easily find a particular policy on the website, they might give you a lower score and it may be about something quite arcane and not cen-tral to what an institution is.

The rating agencies tend to focus on very specific green aspects, so they don’t look at the kinds of trade-offs that most of our institutions are required to make between how green a project is and its social impact. We may choose a project that substantially reduces green-house gases but which may not be a perfect solution. That project may in the view of one of these rating agen-cies delay the perfect solution by 30 years by prolonging the life of something that reduces greenhouse gases by

65% but doesn’t annul them. Those are the types of comments that I’ve seen and

they are not the types of things that the investors we’ve spoken to are that sensitive to and therefore if we start delegating things to rating agencies, this will be a con-cern.

Dent, Nomura: All markets that expand quickly go through growing pains such as this and the beauty of the public sector is that there is an element of trust.

Governance is clearly key and it is getting stronger, through the Green Bond Principles, the kind of impact reporting KfW did or external governance from rating agencies.

There’s not necessarily one particular area that should dominate but as with a mature normal bond market, we will take little bits from each. Investors in ordinary bonds look at rating agencies but they don’t look at rat-ing agencies as much as they used to. They do their own homework.

It’s definitely up to the agencies around this table today to set these standards of governance high because the issuer base is broadening fast and, for example, cor-porate issuers will be looking to the public sector for best practice.

Weyhausen-Brinkmann, KfW: With our first green bond issued in July, we are rather new in the green bond market. Before we came to the market we did a lot of research and analysed the market. We found a very broad range of reporting from the green bonds. Some were of high quality and on others we were missing information. However it is almost impossible to com-pare the impact of the different green bonds. One of the key aspects for us was that it is important to give impact measurements to investors which is, by the way, one of the recommendations of the Green Bond Principles. I would even advocate that in the Green Bond Principles this should be a requirement, not a recommendation, to give an impact measurement.

Under KfW’s loan programmes to support Germany’s energy turnaround plan there is one programme focus-sing in particular on renewable energies. This pro-gramme, which has already been running for a couple of years, fitted perfectly into the needs of a green bond. This programme also already had a very detailed impact measurement independently calculated from the Cen-tre for Solar Energy and Hydrogen Research, Baden-

Otto Weyhausen-Brinkmann,KFW

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Württemberg [ZSW]. The impacts per €1m invested are: greenhouse gas reduction of 800 tonnes per year, nine jobs created or secured for a year and €68,000 energy imports to Germany or fossil burning costs avoided. This gives an impact that is transparent and simple, and we believe this adds a new quality to the market. Investors were very positive on the impact measure-ment, but I’d like to stress that this is of course not the only way of reporting an impact measurement.

: Otto, as you were saying, you have the luxury of having this renewable energy programme and there aren’t that many issuers out there that have the scale of lending that KfW does. I wonder if for smaller issuers and corporate borrowers, wheth-er that kind of transparency and impact measure-ment would be possible.

Stirling, BNP Paribas: This issuer base is probably the most developed issuer base in the world and the cor-porates and financials look to many of the issuers here, the frequent borrowers, for guidance. The establishment of defined principles is very important. We’ve seen a lot of issuance from European corporates in the past 12 months but in the US it’s a different story — there hasn’t been anywhere near as much. The concern from the States has been that there isn’t an industry guideline and so what exactly are they agreeing to when they issue? It’s all very well for all of us here to talk about specific projects. Every issuer here implicitly has high ESG rat-ings due to their missions, but many issuers outside the public sector have very different underlying businesses and so green issuance becomes far more of a discussion point. It will be important to establish these guidelines to allow for a broadening of the issuer base to enable investors to evaluate the bonds on offer.

: One of the issues that comes up a lot is that of setting a standard but also not making it so difficult that new borrowers aren’t put off from issuing.

De Ruijter, FMO: Speaking from a smaller issuer’s per-spective, on the one hand impact measurement is com-plex and it’s not something you can do easily. But we get requests for transparency on the impact our investments have regardless of the green bond market. Hence we are further developing our impact measurement which we

can then also use in the green bond context. This will often not be the case for other smaller issuers though. So we shouldn’t overcomplicate it because ultimately all of this comes with a cost, and someone has to pay for it.

Hellerup, NIB: We are also a small issuer but we also do impact reporting. As the environment is part of our mandate, we have done impact reporting on every single project since 2007 to our owners. As a publicly owned bank our owners want to know we are doing the right things. We know exactly how much CO2 reduction is expected in each project.

We don’t report on individual projects publicly but we do report the impact of the green bond programme. Fur-thermore we report the bank’s total impact of the financ-ing every year.

Laurent, EBRD: I presume when everybody is talking about reporting they mean what is expected to happen with a project as opposed to what has happened with the project. The monitoring is about estimating what the effect is because projects are long-dated. The average maturity of our green bond portfolio is around 11 years. It’s longer than the average maturity of our normal proj-ects.

One of my concerns is always about what you include. So with energy efficiency, for instance, my concern is how you treat outcomes improving energy efficiency that may not cut greenhouse gas emissions.

For example CO2 emissions may go up because even though you’ve made something more energy efficient if, instead of heating one room, the people affected by a project start heating all the rooms in a house because it’s now affordable — or they take more bus rides because they are cheaper — that may mean that the project itself hasn’t had the net effect of reducing emissions.

That’s a difficulty because it’s always a concern to us. When we do work improving energy efficiency, we would like to see it included and it certainly has a value even if is more of a social value, rather than emissions.

Herrera-Pol, World Bank: In figuring out impact, we should avoid the tendency to focus on second order implications. For example, if people benefiting from a project to increase energy efficiency save money, what do they use the money for? But let’s keep in mind that we want to do something about climate change. The ultimate effect is that we want to help improve people’s

Huib-Jan de Ruijter,FMO

Isabelle Laurent,EBRD

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lives, and if the people that previously only had heat-ing for one room can now afford heating for all of them, while keeping the climate change impact as low as pos-sible, then that is a valuable goal. That is part of what we are all trying to do. We do not want to have people freezing in the winter because they need to reduce CO2.

Van Peteghem, AfDB: That question is so relevant in Africa. We don’t want people to be kept in the dark. Africa is in need of a vast amount of electricity genera-tion. And the big question is: what are you going to build? Are you going to build a windfarm? Are you going to build a solar plant? Or are you going to have a coal fired power plant? In any case, one of those three will be built and there we go back to: is the solar plant or the windfarm the best? That’s an economic decision, but if you don’t do those two you will have a coal fired power plant and you have many of those in Africa — they are the standard.

It’s not so difficult to measure how many tonnes of greenhouse gas emissions will be saved by building the windfarm instead of the coal-fired plant. That is why the group of IFIs are collaborating on producing impact standards.

Where it gets much more complicated, as Isabelle mentioned, is that green bonds are not only about renewable energy. For example, at the African Develop-ment Bank we also put climate change adaptation type projects in our green portfolio. What happens if you refurbish the sewage system of a city which is more and more exposed to floods because the rain cycle has changed somehow? How do you measure this, what is the impact measurement?

We do the same as NIB because we have stakeholders and we report on the impact of all our operations. There, of course, we work to a different standard. The com-mon standard we are talking here is only for renewable energy.

Meuwissen, NWB Bank: What always amazes me in this market is the big wish list from investors. We the issuer have to be transparent, we have to show the impact of our investments, we have to do everything. That costs us a lot and the investors don’t give up anything.

We want to make the world better one way or the other. But then you should make the financing cheaper for good activities but that is not happening yet.

Green bonds are all very nice but for all the issuers

here it’s quite a small part of the annual issuance. We can sell our bonds anyway. It’s nice to print a green bond, but they are the same price as our regular bonds. There’s no economic stimulus for us to do them but they involve a lot of work.

So we have to talk about how the market will develop. Either the green bonds will be sold at a concession for the issuer or I can imagine a market where issuers as a whole are either ESG eligible or not.

Stirling, BNP Paribas: But many would agree that if you’re buying exactly the same credit then buying a green bond obviously gives you extra benefits, and therefore in theory it should be a slightly more expen-sive instrument for an investor — and so cheaper fund-ing for an issuer.

Meuwissen, NWB Bank: But this is not happening.

Stirling, BNP Paribas: Well, the market is at a very early stage in its development so it will take time until we get increased liquidity and until the market matures.

Meuwissen, NWB Bank: Green bonds are hardly liquid, because there is no incentive for investors to sell a green bond. When you have done your research as an inves-tor and are happy with the green bond you have bought why should you sell it? Chris, are you willing to pay more for a green bond?

Wigley, Mirova: Fundamentally our clients want us to make a difference and this is why metrics are important. For example, if someone came to us and said, ‘we want to demolish a factory and re-build it, and it’s going to be more energy efficient’, would that be enough for us? We would perhaps say that with new standards it’s going to be energy efficient anyway and that’s not really making a real difference. So this is why impact measurements are important.

In terms of pricing we already have some green bond indices — and there will be more — and those indices consist of maybe more than a hundred issues. So inves-tors do have a choice. Earlier we were talking about evaluating the green profile of bonds, but there’s also the financial profile that we consider. We look at the credit rating, the spread, the maturity, and so on. So we look at a whole range of things, and if we find that we can find more value elsewhere, then that’s where we go.

Kreivi, EIB: Impact measurement is still based on assumptions. It doesn’t matter if you’re estimating before you start a project or at its end. We will know how much energy we have produced but we will never know for sure exactly how much fossil energy has been reduced. It is still going to be based on assumptions so I don’t feel those kind of impact measurements add value.

I spoke recently to a large SRI investor and asked them what they would like to see in ex-post reporting. They said they would prefer something like a normal project follow-up: first of all if the project happened, whether it performed and if it is doing more or less what it was expected to do.

That to me sounds more reasonable and adds more value. It’s also easy for an issuer like a multilateral devel-opment bank to do because we have that information anyway and we make it public — it’s on our website.

Tom Meuwissen,NWB BANK

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If that is a widely held view among investors then that seems a more reasonable kind of ex-post reporting to me than recalculating a lot of numbers that are based on assumptions held before or after that need fine-tuning.

When we discuss ex-post reporting with investors I try to ask them what exactly they mean by it — what exactly they want to see.

But they have to know that it will take time. You can’t do that reporting six months after you issue a bond.

Van Peteghem, AfDB: Some of our investors want to see the projects with their own eyes. We are taking a group of investors on a Weaver’s Workshop, where they go to see the projects that have been developed and built with their money. So that’s a qualitative assessment and a quantitative assessment. Would you be interested in that, Chris?

Wigley, Mirova: Just following on from what Christo-pher was saying at the beginning about the IFFIm deal — I bought the sterling deal when it came many years ago and really welcomed it.

I see responsible investment in terms of fixed income as two areas. There’s integrating ESG where we’re apply-ing ESG tools to deconstruct a corporate’s balance sheet, so that we can understand the risk better.

And the other side of it is also the green finance side of things and what we’ve found as investors is that our clients are very interested by these sorts of deals. When we reported that, for example, we were switching out of a 2015 Gilt to a 2020 Gilt, they were not very interested. If we said that we were using their money to finance programmes like IFFIm’s they became very animated and very interested. This is what they wanted their money to be used for.

It isn’t just a matter of negative screening and not assigning money towards defence or alcohol or gam-bling. They want us to assign funds towards positive investments such IFFIm’s bonds.

Stirling, BNP Paribas: Chris, just taking it to the next stage, do you think that some of your clients would have interest in gaining a return from the performance of these specific projects?

Wigley, Mirova: The whole green bond market has tremendous potential. It is dominated by use-of-pro-ceeds bonds and we haven’t seen very much in terms of secured deals yet. For example, there was the Toyo-ta green ABS earlier this year. But there is tremendous potential there.

Van Peteghem, AfDB: But how many projects bonds have been issued this year in Europe?

Kreivi, EIB: Not many. We did one.

Van Peteghem, AfDB: We’re talking about green project bonds when there are barely any normal project bonds around.

Laurent, EBRD: The size of the projects is an issue as well. When we’ve talked to investors about whether they’ve got an interest in going into our green projects directly, they generally don’t want to do it because of the size or because they want to do ready built and often

these projects can take three years to come to fruition. Plus the average rating of our green bond projects is around a double-B and investors want it with a wrapper to take it to at least investment grade. It’s very difficult for us to see project bonds taking off — we’ve done a couple, but it’s very difficult for us to attract investors to specific projects.

Kreivi, EIB: We have done a green project bond and it was very popular. The project bonds we have done have all been oversubscribed but there is a kind of partial wrapper or facility so they have a low investment grade rating. Getting to investment grade makes all the differ-ence.

Dent, Nomura: As this market moves into the main-stream there’s a very valid space for these sort of project bonds to exist. From the investor side you’ve got the dedicated SRI funds and then you’ve got the big broad-based funds coming in as well. You will end up with a two tier system with products to suit both types of inves-tor.

Stirling, BNP Paribas: We’ve seen demand for struc-tured green bonds — indeed structures that link the return of the bond to an index of ethically chosen stocks. The World Bank issued such a deal in July.

Dent, Nomura: The bulk of the market is use-of-pro-ceeds bonds with vanilla coupons and there has to be a catalyst: at the moment it’s price. Investors get a return and an additional benefit of investing in SRI. Times will change and it will shift from being a niche limited edi-tion market into the mainstream, where investors want to talk about the governance and social merits of each borrower rather than specific projects. We’ll get there but it’s just a question of how long that takes.

: With KfW’s bond it certainly seemed that the additional impact assessment helped to stimulate demand. Do you think you had investors in the book who wouldn’t have bought the bond with-out that impact assessment?

Weyhausen-Brinkmann, KfW: We issued the larg-est green bond in one shot so far and attracted a lot of investors. During the roadshow we had a lot of inten-sive discussions with green investors and then we saw a

Nick Dent,NOMURA

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lot of these investors coming into the order book, some with very large orders. We sold more to Scandinavia and the Benelux than to Germany because these are the regions with large SRI investors. Of course the transpar-ent impact measurements of our green bond was very welcomed from investors, but I do not think that the demand would have been significantly smaller with a different impact measurement.

Dent, Nomura: Otto, KfW has always marketed and branded itself a sustainable bank and I know that you took a long time to get to the stage where you decided to issue a ring-fencing bond. Do you think the process within KfW is to ring-fence first and then gradually bring that ring-fencing wider, or do you think you’ll always try to keep a portion fully ring-fenced and SRI?

Weyhausen-Brinkmann, KfW: Clearly, we have issued a green bond for the first time. But it’s not that we’ve changed our strategy. We focus a lot on ESG. We’re rated by the leading sustainable rating agencies and we take their feedback very seriously. We have a very good dialogue with them and they are challenging as well. This will remain and KfW as an institution will focus on sustainability across the bank. In 2013 our green assets were 38% of the total. So our traditional bonds remain also very suitable as a sustainable investment.

However, we have issued our first green bond because there is strong growth in this market where inves-tors came to us asking if we could issue a green bond, because they wanted to be able to present an impact to their shareholders. With our green bond we also want to help to establish green bonds in the capital markets and we want to add new standards due to our long track record in climate finance. Our goal is to add liquidity to this market segment. In the long run green bonds should provide an active contribution against climate change.

We will look at issuing in other currencies and at the end of the year we will define in more detail a green bond strategy for KfW. Green bonds will remain a part of KfW funding but not take over the rest.

Laurent, EBRD: There is always a danger if you seek to define green projects more loosely, and in such a way that they encompass the majority of your projects, then you end up having green bonds and non-green, whereas all supranationals are sustainable entities. We are focused on environmental and social concerns in everything that

we do. We’ve segregated some activities which are deep green for a particular investor base. But we don’t see our other activities as being non-green — they are green but just not deep green. That’s important and if you extend the ring-fencing too much you end up with something that’s then almost defined as non-green. That would be unfortunate.

Kreivi, EIB: It also depends very much on what your mission is in terms of what you fund. Not all of our proj-ects can be green: some of them have no colour, some are even brown. We cannot concentrate 100% on green projects because we have other tasks to do. That’s prob-ably the case for most other institutions which have a diverse job description.

Hellerup, NIB: It is something we have discussed a lot internally because we have two clear mandates: one is environment and the other one is competitiveness. Some 50% of our projects could come under environment. So could we do half of our funding programme in green bonds? It’s something we have discussed: what would our investors say if suddenly 50% of our funding is green bonds? So far it has been less. We have only cho-sen the best projects.

Herrera-Pol, World Bank: Like EBRD it’s fair to say that for most of us borrowers around this table even the tiniest project would have some positive environmen-tal impact, but we have chosen those that are distinctly, visibly green to be financed with the World Bank green bonds. We want to have high standards for investors.

Kreivi, EIB: For the last few years we have had a nega-tive relative greenhouse gas emission number for our total lending — including the brown projects — so that is a very good indicator to tell you that it’s not only the ring-fenced green projects which are done with these environmental standards, it’s actually all the other ones as well. In that sense, by green projects we usually mean projects which are very easily identifiable with renew-able energy or energy efficiency, where you don’t have to look too hard to know that it is green.

Perezgrovas, Daiwa: Is it fair that you should go the extra mile to report CO2 reductions on non-green bonds as well as green bonds? Kreivi, EIB: We do it already.

Gefion Harig,NRW.BANK

Carlos Perezgrovas,DAIWA

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Perezgrovas, Daiwa: If you could tell investors the actu-al number on a green bond and the actual number on a non-green bond that may trigger a difference in pricing.

Kreivi, EIB: But GHG numbers from one firm might be different to another firm’s GHG numbers — they may not have been calculated on the same basis.

Perezgrovas, Daiwa: I would say in general going the extra mile in giving as much transparency as possible is good. Obviously if you have the information available it is always good to make it available, but not all of the elements we have discussed will become standard. Some may go to the next stage and become standard, some may not.

Harig, NRW.Bank: NRW.Bank reports on all our bonds and we believe that everything we do is SRI. Not all is green, some is social, some is governance, because NRW.Bank is a sustainable institution.

We have backed green projects with regular bonds as well. But with a green bond we give investors more detail on the projects: pictures, names, the impact and progress updates from the beginning to the end of the projects.

With regular bonds we usually don’t do that to this detail. As an investor you can come and talk to us and of course we tell you as much as possible but you will not read about single projects unless you’re the investor on a green bond.

Van Peteghem, AfDB: You might be able to reach some kind of standardisation on greenhouse gas projects. But for all the other shades of green or SRI, no. We didn’t talk about job creation, for example. Isn’t creating jobs an SRI outcome?

Perezgrovas, Daiwa: I find ironic that we said ear-lier that it was easier to classify green bonds than social projects because now we realise that actually classifying green projects is not that easy. And for some employ-ment projects at least at the end of the project you can say you’ve created 2,000 jobs. Or if it’s an education project that you’ve educated X number of children. Isn’t that clearer? Isn’t that easier for investors to understand rather than X number of kilograms of C02 were reduced in emissions?

Van Peteghem, AfDB: You’re identifying that there are many, many types of different SRI projects.

Herrera-Pol, World Bank: But looking at the education example you used you would have somebody asking about the quality of the education that you have deliv-ered. They would want to see the true impact in terms of what these kids are able to do after they have graduated.

Meuwissen, NWB Bank: But does any issuer do any-thing differently because of green bonds? Have they changed their lending to specific projects?

Laurent, EBRD: But if one were to do that then the tail would wag the dog and that was never the intention. We have institutions that were set up to do something very specific that the shareholders have bought into

and therefore it’s very important that we continue to do those things in relation to those standards. We wouldn’t wish to be driven by what investors determine is green or otherwise at a given moment.

Meuwissen, NWB Bank: But then it would have an influence.

Kreivi, EIB: But it’s not by coincidence that the multilat-erals have led the way in this market. It may not have changed the way we do things very much — because we already have high standards and transparent systems — but it may change the way things are done in say the corporate sector or for financials. If those issuers want to come into this market then they have to think seriously about how they do things. There most likely will be an impact, but probably not a measurable one

Meuwissen, NWB Bank: But that impact would have been there anyway.

Herrera-Pol, World Bank: Yes in the case of the mul-tilateral development banks but not in the market as a whole. We are lifting the standards so that as long as we don’t make it excessively difficult for issuers to comply then we are helping to channel funding to things that benefit the world. Otherwise you would not have any issuers looking into ESG and investors would also find it very tricky to participate and expand their investments in this market.

Meuwissen, NWB Bank: The most transparent thing would be when the issuers of the green bonds or the social bonds are the companies that we on-lend to. We are just the banks in between.

Kreivi, EIB: Not all of them are of a size where they could do that.

Dent, Nomura: That’s where we will get to with the sec-ond phase of the market.We’ve got the big public institutions and then, as we were talking about earlier, you start to see covered bonds or potentially down the line securitizations.You will get that as investors trickle down the credit curve. A lot of these small projects can be packaged together and sold. There’s a lot of scope, particularly in the financial sector, for banks to get involved and bundle

Kai Poerschke,DZ BANK

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up these projects.

Poerschke, DZ Bank: Energy companies are looking at refinancing sustainable energy projects with specific bonds financing wind parks, for example. So that would be direct funding through that market.

Herrera-Pol, World Bank: That is a great preamble for a question to our investor here. You have energy compa-nies that have traditionally been oil companies and now they’re interested in improving their footprint. They are targeting the creation of a portfolio of energy-efficient projects. If this oil company issues a bond backed by green projects, would you be looking at the bad track record that this company has had in the past with fossil fuels or would you be looking at the future, supporting the fact that this company is doing something to change that? What carries more weight?

Wigley, Mirova: It’s a very interesting question. If we look at traditional engagement a responsible investor may well talk to such companies and welcome steps in the right direction. We were talking earlier about evalu-ation of the financial risks alongside evaluating environ-mental impact. This is something that we have to bear in mind as investors. If we look at some oil companies in the past, there may well have been a very large financial risk there. So while we might decide to invest in a green bond from such an issuer, we might insist on it being secured.

: One of the things that’s come out of today’s discussion is just how diverse the projects backing these bonds are. This is a market which started with small private placements and individual issuers talking to very small groups of investors. Is there still a place for MTNs and private placements with the issuers around the table? Perhaps for the socially themed bonds where impact is a little harder to quantify?

Herrera-Pol, World Bank: As with all our issuance we try to meet investor needs so to the extent that there is demand for private placements of green bonds we will issue them. We welcome the interest of more main-stream investors for the more liquid transactions and we have launched those as well. But we’re happy with both types of deal.

Stirling, BNP Paribas: One of the biggest problems that many of the issuers have is the allocations process in a benchmark-sized green bond. When they do transactions they want to ensure they allocate to investors who are truly buying for the green aspect and ideally diversify their investor base, which ultimately is one of the key drivers of the product. However, this can be a very deli-cate process given that they also do not want to upset their loyal buyers who will also have interest in green. MTNs gives issuers an opportunity to direct funding exactly where they want them to go. From a dealer’s per-spective I definitely see the advantages of an MTN.

Kreivi, EIB: We are all happy to do them but I just don’t see much demand. Liquidity is what everybody wants and the green investors have just started to see liquid or half liquid transactions coming regularly so I don’t see them going back any time soon to the illiquid ones.

Van Peteghem, AfDB: We’ve seen some demand for our green MTNs. I agree with Doris: all segments of the mar-ket can be accessed for green format bonds.

Hellerup, NIB: This month we did a regular Swedish krona deal but the dealer asked if we could do it green as that would have attracted further demand. We wanted to keep it as a normal bond but there would have been more demand for the themed bond.

Wigley, Mirova: Mirova’s green bond strategy, which we’re in the process of setting up, may be multicurrency but liquidity will be important as well.

Herrera-Pol, World Bank: We’ve done as small as $10m.

Kreivi, EIB: We have done green bonds in nine cur-rencies so far. Some of the deals were obviously small because the currencies are small — in markets like South African rand. But they have all been public bonds. Small, yes, but not private placements for one single investor.

Hellerup, NIB: We had one occasion last year where we had never seen the investor before and they wanted to buy a €40m green private placement.

: This market has grown a lot but there are still some issuers that question the value of going to all the work of setting up a green bond pro-gramme — particularly for the public sector issuer base because these are ESG friendly issuers anyway. What you would say to reluctant funding officials on what the advantages are?

Laurent, EBRD: I agree with what Doris said initially which was that in approaching the green bond mar-ket you get a more diverse investor base, but I would take it a step further. Quite a lot of the investors that wouldn’t have bought EBRD before being introduced to us through a green bond now buy our standard bonds as well, because as an ESG issuer we fit investors’ SRI port-folios with our standard bonds.

It diversifies the investor base and it allows one to get out an important story about the institution’s ESG cre-dentials that it would be harder to get across to investors without the green bonds.

Jens Hellerup,NORDIC INVESTMENT BANK

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Credit rating agencies these days take account of an issuer’s ability to reach a broader investor base when they look at the ability of an institution to finance itself. So there is an additional benefit, even for one’s normal bonds.

De Ruijter, FMO: I would echo that. As a fairly small issuer we sometimes had to convince investors to do the work and open up lines because we only come with one or maybe two benchmarks a year. So our sustainability bond has been very helpful in getting investors to look at FMO, to get familiar with the credit and to open up credit lines. We see spill-over into our non-green bonds. After the sustainability bond investors that previously said we were too small for them, but that bought the sustainability bond, started to buy our standard bonds too.

Van Peteghem, AfDB: Yes the investor diversification and the branding communication definitely helps the execution of your whole bond programme.

Kreivi, EIB: There is also an added benefit in getting closer to our engineers and understanding the projects and the criteria we apply in much more detail — it’s been very interesting. Meuwissen, NWB Bank: We had the same experience when we roadshowed with our shareholders the water authorities, they were very anxious to tell their story because everything they do is so green but not many people know about it. Then they had a good stage to tell people about what they do. We travelled around with them and a big benefit of the green bond for us was the increased contact with our main shareholders and to learn more about each other.

But also it’s good for investor diversification. We had never sold so many bonds in the Netherlands before the green bond and also the share of Scandinavian investors was bigger than usual. You can imagine that their inter-est in our non-green bonds might be bigger than before because of this experience.

Wigley, Mirova: Because of the transparency there’s a connection between issuer and investor with green bonds. And so the positives of issuing a green bond, in addition to diversifying your investor base for example, are also there in the sense of it being good for inves-

tor relations and certainly being good for your brand as well.

De Ruijter, FMO: One to add which positively sur-prised me in the process was the impact that it had on our staff. A lot of staff were focused on doing the right projects but when they saw our sustainability bond they became even more keen to do those projects that quali-fy for the sustainability bond. So that heightened aware-ness within FMO.

Poerschke, DZ Bank: In the end it should pay off, too. Economically all these factors such as enhancing the standing, improving the contact with existing investors, diversifying the investor base and so on, should then play out through an issuer being able to price an SRI bond at a different level to its standard bonds. We’re not at that stage yet but we have to start somewhere and we’re on the way.

Herrera-Pol, World Bank: It’s a matter of when, not if.

Weyhausen-Brinkmann, KfW: I’m convinced that we will see further growth in the investor base as well.

Laurent, EBRD: I wonder whether it’s not the corpo-rate issuers that are really going to see the differential pricing rather than us because so many green investors can buy our normal bonds. There’s the issue of fiduciary duty which applies to price, too.

But if it’s the difference between buying a corporate green bond and not buying that borrower at all then that may be where the pull in pricing really happens because a borrower will be able to reach investors that they can’t with their normal bonds. I suspect public sec-tor issuers won’t be the first to spot the differential in pricing.

: I wonder if that’s the case also for cities and municipalities which may be funding things like defence or nuclear power.

Dent, Nomura: Or getting duration that they can’t get in normal bonds — that’s a big thing for the cities and the municipalities.

Kreivi, EIB: For corporations in this market environ-ment doing a green bond probably doesn’t impact pric-ing much because it’s such a strong market — investors take everything off your hands anyway. But if in a few years from now we have a very bearish market where credit doesn’t sell as well then it will make a real dif-ference.

Herrera-Pol, World Bank: I’ve seen an increasing num-ber of job postings at asset managers for people with ESG experience and so there is a trend that more and more fiduciary investors are opening up to the idea of sustainability of their investments.

Wigley, Mirova: This is a good time for the market to grow. We have an almost perfect alignment of issuers, syndication banks, asset managers and clients — every-one’s on the same wavelength.

But I have to say a final word as an investor that when it comes to pricing: we do have a choice. s

Tessa Wilkie,GLOBALCAPITAL

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MUNICIPALITIES MUNICIPALITIES


THE POSSIBILITY that cities and municipalities will hit the capital markets en masse with bonds target-ed towards raising funds that back social or green projects has bank-ers hot with anticipation. But so far municipal issuance is tiny in com-parison with the explosion of deals in national and international public sector and corporate markets.

Those that have brought deals, such as City of Gothenburg, State of Massachusetts and Île-de-France, have demonstrated the benefits of issuing use of proceeds bonds. But unlike in the US, where even small towns issue bonds, for most smaller regions, cities or municipalities in Europe the bond markets are some-thing of a luxury. Bank funding may be costly, but so is the work involved in accessing bond markets. MTN

documentation, ratings — and then on top of that reporting on the use of proceeds — can all serve to put off any funding officials wanting to get into SRI.

For a wide-scale switch from regions, municipalities and cities to SRI funding, those costs need to be worthwhile — they have to answer to the taxpayer, after all. While investor diversification is one clear benefit of printing, often it is not enough of an incentive and issuers may wait until — or if — SRI capital markets reach a point of maturity where SRI themed bonds price inside issuers’ normal curves.

“Cities and regions as separate issuing entities don’t make up much of the conventional bond market,” says Vince Purton, head of DCM at Daiwa Capital Markets in London. “Economies of scale often see them issuing under an overarching con-solidated national umbrella. Per-haps the benefits that setting up an SRI programme can give, in terms of reaching new investors or per-haps eventually pricing, could be an added stimulus that some of the larger ones need to look at issuing bonds.”

There is another element of green bond capital markets that will feature in origination bank-ers’ bag of tricks to persuade reluc-tant funding officials to embrace SRI bonds: and that is of course the mar-keting effect. It’s hard not to imagine

one mayor in the UK with a knack for self-publicity being tempted at the prospect of selling a green bond — if only an SRI use of pro-ceeds could be devised beginning with a ‘B’.

However, for municipal issu-ers that want to get into the mar-ket the reporting requirements could be more onerous than for other borrowers. The long-dated nature of green projects means that the politicians that sign them off them will probably not be in

power by the time they are finished. And if there is one profession

regarded with more suspicion by the general public than investment bankers and journalists, it is politi-cians.

“It doesn’t take much for cynicism to emerge, so we have to ensure the highest standards,” says Nick Dent, head of EMEA syndicate at Nomu-ra in London. “That’s particularly the case with new sectors such as cities or financials — they are dif-ferent to the supranationals where almost everything they do is SRI. The municipal market is almost the toughest to ensure standards on

because of the longevity of projects and the fact that political will can change — bonds would have to be protected with the strongest of prin-ciples.”

Niche routeAnother problem with the scale of most municipalities, aside from the fact that few have funding pro-grammes large enough to justify capital markets issuance, is finding the projects to back an SRI bond that hits benchmark size — and justifies the extra work put into it.

“This will be a combined market of green projects and those that fit more into the sustainable category of ESG,” says Stephanie Sfakianos, head of sustainable capital markets at BNP Paribas in London. “A lot of cities and municipalities are heav-ily involved with environmental projects but struggle to find enough projects that tick the environmen-tal box to back a benchmark with. They want to sell bonds that meet very rigorous standards, so small-er entities may for practical reasons have a wider remit than just green for their bonds. For example, cities and regions back social housing pro-jects, projects to help marginalised communities and education — those could be included in a sustainabil-ity bond.”

For some issuers not looking to issue benchmark size SRI bonds, retail-targeted deals — such as in Japan’s Uridashi format — can make

Cities and municipalities should be one of the most exciting areas of sustainable and responsible capital markets, but origination bankers have their work cut out if they want any but the most obvious candidates to come forward. Tessa Wilkie reports.

Bold munis make long green strides, but most are far behind

“We don’t want to kill the market with

too much impact reporting in the

beginning. It has to increase with

the strength of the market”

Magnus BoreliusCity of Gothenburg

“Given the success of this issue, Region

Île-de-France will absolutely consider renewing this type

of operation in the future”

Jean-Paul HuchonRégion Île-de-

France.

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MUNICIPALITIES MUNICIPALITIES


a lot of sense. But for retail they need the name recognition factor.

“Retail bonds like Uridashi would be a great fit for some issuers,” says Purton. “They would have to be big enough to have the name recogni-tion in Japan for an Uridashi to work — a European capital city for exam-ple — but I would expect those to be really popular. But there is a major documentation issue for borrowers without a shelf programme in Japan — that will add considerable time and money to the preparation mix.”

Private placements are an option for the smaller borrower, but it may be harder for investor relations teams to persuade SRI investors to do the necessary credit work for the occasional $10m print.

Bringing regularitySweden’s City of Gothenburg hopes to issue a green bond annually, hav-ing first entered the market in Sep-tember 2013 when it became the first city in the world — and the first Nordic issuer — to sell a green bond.

It began tentatively with a Skr500m ($70m) deal, being unsure of the strength of demand it would encounter. As the deal was covered within 25 minutes it decided to be more ambitious with its next deal — a dual tranche June 2020 deal sold in May with a Skr310m fixed rate piece and a Skr1.5bn floater.

“We raised Skr1.8bn in spring and were really pleased with how many different and new investors came in,” says Magnus Borelius, head of treasury at the City of Gothenburg. “These were mainly in Sweden and in Norway, pension funds, insurance companies and some private equity firms.”

Gothenburg, which already had an established environmental policy, doesn’t find the reporting require-ments too onerous.

“We send out an annual report with statistics and figures based on the city’s environment programme,” says Borelius. “It’s important to remember that you’re doing it for the investors, so we spent a lot of time asking them what they wanted.

“We don’t want to kill the market with too much impact reporting in the beginning. It has to increase with the strength of the market. There’s a lot of information that we found

investors weren’t actually as interest-ed in hearing. In our annual reports we tell investors where the money went, give a brief impact report but we leave a lot of material out.”

Région Île-de-France was one of the first issuers to bring an SRI bond, back in March 2012, with a €350m 12 year. It returned this year and the SRI element of the transaction allowed it to sell the largest bond it had ever printed.

The deal, a €600m April 2026 green bond, attracted over €750m of orders, which allowed Île-de-France to increase the deal beyond its expectations. It had said at the time it was only expecting a €350m-€500m print.

“Given the success of this issue, Region Île-de-France will absolutely consider renewing this type of oper-ation in the future,” says Jean-Paul Huchon, president of Région Île-de-France.

While Île-de-France doesn’t obtain a cost saving on its green issues, it does broaden its investor base. SRI bonds also allow it to show inves-tors the kind of projects that it is already funding. It hasn’t changed the nature of the projects that it funds because of issuing SRI bonds, it tells GlobalCapital, but SRI allows it to highlight investment projects in housing, transport and town and country planning.

Starting a themeAnother way for regions to print would be through an agglomerat-ed issue. Those kinds of deals tend to be complex for investors to ana-lyse given the diversity of the credits behind them, but those that are well

established could find it easy to try their hands at themed bonds.

“You could combine the Laender bonds with an SRI use of pro-ceeds aspect,” says Dent at Nomu-ra. “You’ve got the advantage of a very mature Laender market and a mature curve. You’ve already got infrastructure there so it is an area ripe for issuance as the market matures. By pooling you get a lot of efficiency in the money used.”

Another way to agglomerate and ensure that regional issuers were able to get funding at attractive lev-els for their sustainable and respon-sible projects would be for a sover-eign to issue an SRI bond. But the route to the first government enter-taining a use of proceeds bond is fraught with obstacles.

“We’ve mentioned SRI bonds to a few sovereigns but we don’t expect the response to be fast,” says Pur-ton at Daiwa. “There are more dif-ficulties at a sovereign level — ring-fencing part of a national budget is not straightforward and might be impracticable. That said, a social bond as opposed to a green bond might fit better, for example housing bonds to finance part of the housing budget and health bonds the health budget.”

The most obvious areas for growth are where the SRI investor base is strongest.

“Scandinavian cities and munic-ipalities are prime candidates for issuance because the investor base is so well developed,” says Sfakianos at BNP Paribas. “We’re having discus-sions with public sector names in the Netherlands, France and Germa-ny, as well as Scandinavia.” s

Gothenburg: the first city in the world to sell a green bond

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Americas SRI Bond Roundtable

: Let’s start with an issue that everyone has an opinion on. Should issuers be able to price more tightly if they issue a green bond than they would otherwise?

Heike Reichelt, World Bank: Issuers are rewarded for issuing green bonds in different ways than pricing. It’s very hard for us as issuers to expect investors to accept a different price. And part of the growth of the market is because the larger transactions have been pricing flat. But there are rewards in other ways.

: Mahesh, would you consider buying a deal that was priced more tightly, because of its green credentials?

Mahesh Jayakumar, SSGA: It depends. The market’s still growing. Look at it from both sides. From the sup-

ply side, I agree with Heike. Issuers have been rewarded. They’ve been rewarded mainly not in financial means, but in other intangible means in terms of demand in attracting new investors that they never have had before.

I was sitting across from an issuer yesterday that said: “US investors never talked to us. All of a sudden they’re willing to talk to us because we are bringing green bonds to the market.” This is a wonderful devel-opment; there are issuers that I wouldn’t have spoken to, if they had not issued green bonds.

That is a very big reward in itself to issuers, even if the pricing is flat. The reason I’m not buying these bonds at a premium is because I have a fiduciary duty to my end investors in our funds. As we expand the market and the ability of our company to provide expo-sure to green, one selling point that we have is that you are able to get into green at the same price as you would in a non-green bond.


Suzanne Bishopric, director, investment management division, United Nations Joint Staff Pension Fund

Mahesh Jayakumar, portfolio manager in global fixed income, currency and cash, State Street Global Advisors

Mark Kim, chief financial officer, DC Water

Nancy Kyte, senior portfolio manager, Export Development Canada

Manuel Lewin, head of responsible investment, Zurich Insurance Company

Jim Merli, head of debt origination and debt syndicate for the Americas, Nomura

Jose Padilla, head of debt capital markets, Daiwa Capital Markets, Americas

Heike Reichelt, head of investor relations and new products, World Bank

Stephanie Sfakianos, head of sustainable capital markets (fixed income), BNP Paribas

Toby Fildes, moderator, GlobalCapital

SRI bonds — forerunners of the new green generation

Green bond issuance is accelerating and many market participants believe that 2014 is the year that the asset class will reach maturity. Not if maturity means it has all become plain sailing and uncontroversial. Market participants still have plenty of issues to debate. How much standardisation does the market need? Should the rating agencies move in? How should deals be priced? What is the value of third party analysis? And are issuers really gaining new investors?

Meanwhile, some of the first movers in the green debt market are also shifting part of their attention to other socially responsible investment themes, such as social, education and gender financing. GlobalCapital brought together some of the early adopters of green and other SRI bond issuance to discuss the heftiest debates in the market, together with SRI investors and bankers.

038-48 Americas RT.indd 38 23/09/2014 18:07



Suzanne Bishopric, UN: I have to second the point about fiduciary duty. When we started investing in green bonds, we were looking for an investment where we could support the green principles and perform our fiduciary duty. We were able to find green bonds at an attractive price, so that when we swapped out of the plain vanilla brand, we got a pickup in yield.

Careful attention to pricing allowed us to prove that we made a good investment for our pensioners, because the money we manage is theirs, not ours. It’s a key point for our fund. We’re always trying to buy more green bonds when properly priced because we want to support the principles and the climate change efforts that they make.

I love the fact that it contains a broad spectrum of projects; it’s not just about reducing carbon or air pol-lution, there are other environmental projects that are equally important, if not more so. But proving that we’ve executed our fiduciary duty is really difficult and these bonds often trade at a premium. It makes it dif-ficult for us to build our portfolio to the size we would like.

Manuel Lewin, Zurich: Prices are determined by sup-ply and demand. But if it’s going in a direction where there is a clear premium on green, it will very heavily constrain the size of the market. There will be investors that are happy to pay a premium, but that’s a very small universe. Considering the sums of money that need to flow into green, it would be a shame if the market was stopped in its infancy because fiduciary investors were priced out.

Jim Merli, Nomura: You could see — as in other prod-ucts — a scenario where there are dedicated monies going to funds that are specifically targeted to buy the green or socially responsible bonds, whether it’s ETFs or mutual funds or something else. That could help address the supply and demand issue.

Reichelt, World Bank: Suzanne mentioned fiduciary responsibility. Portfolio managers have a benchmark they are measured against. If you have ESG as part of your performance measurement and a longer-term hori-zon, it might make it more visible that there’s a price differential. As long as the performance benchmark is broad and the only purpose is short-term financial out-performance, it’s going to be hard.

Lewin, Zurich: These are fair points, but in the end we’re only going to solve the big issue, whether it’s cli-mate change or other environmental or social issues, if

there’s large sums of money addressing the problem. You can only achieve that if you get mainstream money. Financial sustainability is also part of sustainability. The universe of investors that are willing to say: “I’m choos-ing a different benchmark, a thematic benchmark, with something trading off return for positive outcome,” is always going to be very small.

Reichelt, World Bank: But as the market grows and green bonds catalyse sustainable and responsible invest-ing in fixed income markets, the benchmarks will have more of those types of things in them, and it will move in the right direction. I’m not supportive of many little niche things. There will always be pockets of interest for certain favourite things people want to support, but for there to be scale, it must all move in one direction.

Nancy Kyte, EDC: We’re seeing more of those types of assets on our books. The market will decide. We talk to investors, they tell us what they think their pricing requirements are, because they in turn are accountable to their constituents. But we want to see this market grow and we have a responsibility as a public sector institution to play our role to allow that to happen.

Jayakumar, SSGA: This issue is at the forefront because of a low rate environment. This conversation would be very different if interest rates and yields were higher, because it’s easier to address the pricing question in a much higher rate environment.

Merli, Nomura: I don’t agree. It’s all relative. If World Bank issues green bonds in a 4% interest rate environ-ment it’s relative to their standard benchmark issues. It’s all the same underlying Treasury yield curve.

Discussions around what people are investing in and their asset allocations differ in different yield curve environments. But looking purely at bonds relative to other bonds is a function of relative value. It won’t be different.

Social responsibility has become a major topic of dis-cussion. Every day you read in the paper what compa-nies are doing to address recycling, renewable energies — it’s here to stay. It’s at the forefront whether we’re in a 0% or a 4% interest rate environment.

: Have you been surprised by how quickly people have become interested in this?

Merli, Nomura: No, because it’s a very topical discus-sion away from just the financial markets. Every build-ing in the city that’s going up, including our new build-ing in midtown, is Leed certified green. My daughter has just graduated from Milano School of Environmental Policy and Sustainability.

Reichelt, World Bank: The financial crisis helped it get picked up so much in the financial sector.

: Because the financial sector is so keen for good news?

Reichelt, World Bank: Yes. About themselves and their role in making the world a better place.

Lewin, Zurich: Before we move from pricing, there are two questions. With an issuer hat on, if I’m not getting paid a premium then why should I issue a green bond? And if it’s not cheaper, how does it attract more capital to the sector?

Suzanne Bishopric UN

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Investor diversification is the argument that you hear most often. But from my experience as an investor, a very powerful effect of green bonds has been to raise awareness.

On the issuer side, particularly corporates, CFOs are for the very first time having conversations with their environmental experts, and starting to think more stra-tegically about what environmental risk really means for a company and for a business model.

That is extremely powerful. We’re seeing the same on the investor side. I’m having conversations with plenty of colleagues who have never thought about environmental issues before. The traction this generates in the media can’t be underestimated. For the green cause, this is of huge value.

Stephanie Sfakianos, BNP Paribas: I completely agree. I talk to corporates all the time, and it’s very clear that if the bonds were cheaper to issue, you’d have a flood of deals. There’s enough out there that get the message, that you were referring to Heike, for there to be a steady deal flow in the pipeline.

Issuers that are most active in sustainability are really keen to have platforms to talk about what they’re doing. At the other end of the spectrum, there are plenty of companies that feel slightly misunderstood, perhaps in sectors which are slightly less obvious for investors but are moving in a positive direction and those companies are very keen to talk about those things.

The supply will continue. The danger, if you were to make everything cheaper and have that deluge of issu-ance, is that you wouldn’t build up the investor base in parallel. The point you make about diversification is very important. They do want that. For the multina-tional development banks it’s slightly different because it’s clearly going to be an investor base leaning towards institutions, asset managers and pension funds.

For the corporates, whose natural investor base is that investor base anyway, it’s perhaps a little bit less obvious. The two need to be built up in parallel. They can’t run on either side.

Reichelt, World Bank: We saw investor diversification — 60% of investors that have bought our green bonds had not bought our bonds before 2008.

: Wasn’t that because they were all wiped out by the crisis?

Reichelt, World Bank: No. And the percentage was not in volume terms. A lot of these are small investors, but still, what Mahesh said is true, it’s the engagement with investors. And all the things that Manuel was mentioning about the rewards. It’s not just for MDBs where it’s part of our DNA and we’re supposed to do it anyway. We’re talking much more to our environment colleagues who are responsible for metrics, because we’re doing impact reporting. These colleagues know that people are really asking for it, which gives it more urgency and purpose. That’s a reward for organisations and it’s happening for us. For corporates that want to go down this route, it must be happening on a much bigger scale with even bigger potential.

Mark Kim, DC Water: When we went before our board to authorise the issuance of our green bond, the board asked me what a green bond was and what we were going to get out of it.

I told them before we issued that I couldn’t guaran-

tee that we’ll have X basis points savings from issuing a green bond, but I’m very confident we won’t be penalised. Investor diversification was an important element of that from an economic perspective. But there were significant non-economic reasons for us to issue.

We’re the DC Water and Sewer Authority. Our indus-try was considered polluters and we’ve completely changed that; we’re now the environmental stewards. We’re protecting the environment by what we do. At DC Water we run the world’s largest advanced waste water treatment facility.

The green bond financed our activities so it’s part and parcel of our mission to be environmental stew-ards. It allowed us to signal to the market our commit-ment to that, as well as to brand ourselves as part of this environmental movement. It was very important strategically for our board to position our organisation, as well as economically.

I was very happy to report the post mortem to the board after the deal. Of the slightly over $1bn of orders that we received for the $300m that we had initially offered, over $600m came from non-traditional munici-pal buyers. We had five self-declared SRI or green bond funds that had never bought a DC Water bond before, putting in about $90m of orders, almost 10% of the book.

I can’t translate that into a basis point savings, but it certainly didn’t penalise us, and there were a lot of other benefits.

: Heike mentioned that green bonds have introduced more investors to her conventional bonds. So if your next deal’s a conventional trade, would you be confident that you will get some crossover?

Kim, DC Water: We are very hopeful. We haven’t yet done a follow-on offering, so that will be a good ques-tion to ask on our next deal.

Kyte, EDC: There are a lot of additional costs that the issuers bring to bear just to issue a bond of this nature. Even though it’s coming flat to our vanilla levels, there are a lot of incremental costs in terms of analysis. It’s not immaterial. We’re prepared to invest that over the same period of time, because we believe in the future potential of this market, and we’re prepared to do our bit to see it succeed.

There’s no extra headcount necessarily, but we pull from a cross section of people in our corporation, who frankly are jazzed by the idea — they really want to get

Mark Kim DC WATER

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involved. It’s generating a lot of buzz, and the cross-pollination within the firm is very enriching. You can-not quantify it, but it’s real and it’s growing.

Reichelt, World Bank: On my team, everybody wants to work on green bonds. It’s really a motivational thing. Jim mentioned his daughter’s university course; the next generation is going to be so much more edu-cated on these matters. When they become portfolio managers, they’re going to wonder why our generation wasn’t asking these questions.

Bishopric, UN: In 2008 people started looking much more carefully at what they were buying. One of the innovations in the Green Bond Principles is a much clearer disclosure of the use of proceeds.

I used to issue bonds for a corporation and you didn’t tell investors what you were doing with the money. Unless you were doing a major acquisition, everything was for general corporate purposes. That could be buying paperclips. But here, you have a very transparent reporting process. The disclosure is setting the bar much higher for bond issuers and allowing investors a lot more transparency.

As an investor, I appreciate that. It’s going to change the bond industry and not just for SRI and green bonds. It may change it for plain vanilla bonds. And it’s for the good.

: Going back to the Green Bond Principles. Too much or too little?

Reichelt, World Bank: It’s just right.

Jose Padilla, Daiwa: We were one the first signato-ries. The overwhelming response we’re getting from accounts is that it’s too little. We came off a marketing exercise last week and the accounts were asking for a lot more information.

The Principles are a great foundation for what we’re trying to do, but everyone wants some form of cus-tomisation. In the last few years we’ve spoken about best efforts versus ringfencing and then we saw a very heated discussion about it, especially from the issu-ers because it gets very easy for them to use the best efforts approach.

But the majority of investors, the top name investors that we’re talking to, like insurers, big money manag-ers, all want ringfencing.

Lewin, Zurich: But that’s addressed by the Principles. They’re just about right. It’s important to make one distinction: there’s a process component. What is the underlying process expected to be to ringfence the money, to define use of proceeds, to report and all that. The Principles address that very well.

There’s another, potentially much bigger ques-tion: what is green? What type of sector should be eligible? Should it just be climate change? Of course, the Principles don’t say very much, but this is very deliberate.

They’re guidelines, it’s not about pinpointing that project Y is in and project Z is out. That’s not the role the Principles should play. I agree there is a bit of a vacuum with particular investors seeking guidance as to what is green. That can easily be felt. But the investor has a responsibility to define their definition of green. The Green Bond Principles can’t be the silver bullet that will in definite terms lay out what should be counted green and what not.

Sfakianos, BNP Paribas: Everyone’s complaining. Some people want more, some people want less. There is no way that you can have Green Bond Principles that work for everybody. I’m probably slightly at the rigor-ous end, rather than just letting things go because the market won’t develop unless we do. But you’re right, Manuel. Investors do have a responsibility. They do feel that they add value with their analysis of ESG.

There’s no single formula that will work for every-body. Something that is just a basic set of guidelines that can be flexibly used by issuers and investors is absolutely essential.

Jayakumar, SSGA: It’s a code of conduct. It’s not a com-pliance manual. It does not let the investor off the hook.

We have to do our homework, regardless of what the Principles suggest. In a world where consensus is very hard to come by, it’s the closest thing that you have to 25-plus diverse organisations saying that they broadly agree with this code of conduct for a burgeoning mar-ketplace. That’s why it’s acceptable.

Reichelt, World Bank: And it doesn’t preclude people from going beyond what it says.

It’s a framework that describes the process that had been introduced by the first issuers and summarises it in a way that others can use. It’s a very helpful guide for issuers, investors and all people working in finan-cial institutions.

Merli, Nomura: Think about Suzanne’s comment in comparison with the corporate world’s use of proceeds, which today includes the kitchen sink.

If you want to be more specific, investors wouldn’t expect you to tell them you’re going to build a ware-house in New Jersey. You would say capital expendi-ture and that would be sufficient.

You can give broader definitions of use of proceeds without getting down into sort of a real granular level.

Padilla, Daiwa: I agree on what the Green Bond Principles do and don’t do. But perhaps one of the big-gest criticisms is project definition, that’s been very decentralised. Issuers get to declare for themselves that it’s a green project and so therefore it’s a green bond. But the question is, who should provide that defini-tion?

: Do investors want to have rating agencies but for the ESG market? Is that something that’s going to have to happen?

Stephanie Sfakianos BNP PARIBAS

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Jayakumar, SSGA: It’s may not be in a singular body, but it exists already in an ecosystem of folks who are talking to each other trying to figure this question out, to add a little bit more colour around the broad principles of the GBP, and give better guidance to investors.

The GBP lists six broad categories. They could do a better job of breaking it down even further, but that may or may not be necessary, depending on how you, as an investor, are able to discern what category it falls into by looking at the docs and understanding the proj-ect categories.

It’s not a one size fits all.

Reichelt, World Bank: One of the good things about the green bond market is this direct link between issuers and investors. We have issuers that call us and say: “Do you think this would be considered green?” My standard question is: “Have you spoken to investors?” Because they’re the ones making the decision.

Lewin, Zurich: There’s a little industry springing up that tries to provide these ratings or these second opinions. We look at them. But you still have to make up your own mind. Green is not black and white. To give one example, what if you improve the efficiency of gas-powered power plants? Some would consider that green, because at the margin, it improves things. Other people would say no, that’s fossil fuels, which are apparently unsustainable.

Even the underlying climate science doesn’t necessarily have the authoritative answer. But even if it did, there would still be different opinions, depending on where you’re coming from, and as Heike said, depending on what your objectives are.

It’s really important as an investor to be clear on what is it you want to achieve by investment in green bonds. That will guide where you draw your green line in the sand.

Padilla, Daiwa: And most importantly your customer base. A lot of these top guys are managing money for everybody. They have their own ideas on what is green, and what qualifies as ESG. It’s a lot of work. We’ve had so many clients say they wish they had a month to go and talk to each of their customers about this great new idea we have. There’s just not enough time to go to the religious foundation, to the charitable trust, to the wealthy individual and tell them what’s happening.

Lewin, Zurich: That’s why transparency is so impor-tant. That’s what the job of the Principles is, to make sure that there is all the transparency required so that the investor can make an informed decision. That’s what we’re looking for.

Reichelt, World Bank: It’s the job of the issuers.

Padilla, Daiwa: It’s everyone, bank, issuer and inves-tor.

: Do you think the market is being held back by a lack of commonality? Wouldn’t official ESG ratings move the market forward and increase volumes to where you want them to be?

Sfakianos, BNP Paribas: It’s so complicated.

: Are they possible to achieve?

Sfakianos, BNP Paribas: Investors are slightly disappointed with second party opinions. They don’t feel that they’re robust enough, they don’t necessarily have complete confidence in them. If investors felt that there was a second party they could completely rely on it would help the market.

When you look at the credit rating agencies, it’s a case of be careful what you wish for. Because nobody thinks that model works. They dominate the market, but it doesn’t work.

It is useful to have more. Every time I see a different supplier in the market it’s a good thing, because over time they will shake down.

You will end up with some winners and some losers, and you’ll end up with some suppliers that are more credible than others.

That will help because not all investors have access to a broad range of research. They do need a quick answer. It’s important, but it’s very much a work in progress.

Merli, Nomura: I wouldn’t say it’s being held back. It has had huge growth in the last year. It’s really a mar-ket that’s having growing pains. It’s developing. It’s good that it hasn’t gone too fast. What product came out and grew like this right away without having all sorts of different things having to be worked out as a group?

: Every investor since the crisis has said, ‘yes, rating agencies guide us, but we make our own decisions’. They always say that. Surely it will be the same thing with green? Over the next five years, for the market to develop, grow and achieve its ambitions, does it not need that next step, that official rating from three or four providers to move it to the next level?

Reichelt, World Bank: There are companies that pro-vide that type of information. Cicero has a framework with other academics, there’s also Vigeo, Sustainalytics and Oekom. Others have specifically said that they will provide some sort of assurance focused on the green bond market.

As Manuel said, there’s this whole industry sprout-ing. They can provide value if they do it in a way that helps investors with their decision. But just like Manuel said, there’s no black or white, so they’re going to have different standards themselves.

Mahesh Jayakumar STATE STREET GLOBAL ADVISORS

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Jayakumar, SSGA: We can’t universally apply an ESG score, because E, S and G are very different in terms of how it pertains to an issuer. You could fail G but do very well in E and S, from lack of diversity in your board, or treatment of your employees. We can’t com-pare the world of standard credit ratings to the world of ESG.

You have to look at E, S and G separately. Any inves-tor would decide the weights of E, S and G to arrive at the combined score. You should not be punished in terms of your purpose and your mission with a green bond because of your ESG score. As an investor I feel that.

Reichelt, World Bank: I have a hard time understand-ing why investors don’t care about the ESG ratings of a company, but would buy a green bond. A company has to have some minimum of responsible and sus-tainable environmental, social and governance poli-cies for me to believe that they’re capable of doing what they say they’re doing with a green bond, don’t they?

They’re not completely separate, they’re connected.

Kim, DC Water: We sought out a second party opin-ion for our green bond issue from Vigeo. Nancy spoke about the costs of issuers’ undertaking to provide com-fort to the market. It was about a six week process from when we mandated them to when we got the opinion. They flew out for a week for onsite due diligence. They interviewed every single member of senior manage-ment at DC Water, reviewed thousands of documents, did project due diligence and went down to our site. It was extraordinarily robust — much more so than the credit rating agency process that we typically go through.

It was very rewarding. When we went on the road-show, we met one very large US pension fund that brought two investment teams. One was their tradition-al municipal fund and the other was a socially respon-sible investment fund.

Normally they would have been interested in our bond because we’re a municipal issuer, but since we labelled it a green bond, it would go in their socially responsible fund.

As we chose to label it as green, they have to do a higher level of diligence to invest, because not only did they have to do the relative value metrics and the credit work, they had to do the sustainability work on top of that. They asked what assurance we could give that we are a green issuer, that it was a green bond and that it was a green project. We were very

happy to say that’s one of the reasons why we got the second party opinion, to provide additional assurance that we are committed to doing what we said that we would do.

They ended up participating. They were a new inves-tor and had never bought our bonds before. That was a very good example of an issuer undertaking some additional burdens and costs to try to provide comfort to the market.

: Nancy, talk us through your first deal.

Kyte, EDC: We’re Canadian, so very conservative. We were very slow to bring it to market because we had to do our due diligence, talk to the market, reflect and so on.

We came with a $300m bond flat to our benchmarks in January that sold out in 15 minutes. Two thirds were new investors, which was exciting. It received a lot of attention from senior management, right through to the board, to the minister of finance, the minister of the environment, who’s going to be speaking in New York and will make mention of it.

I find it exciting that we’re getting a lot of inbound calls from issuers. Folks like Heike have been very kind with their time to educate us on how to do it and now we’re the ones that are educating market participants on how to bring green transactions to market.

We’ve had the Province of Ontario, TransLink from British Columbia, which operates a lot of mass trans-portation, and a company called SolarShare, which is targeting instruments for the retail market. We’re expecting to have more folks calling us to ask how it works, what were our experiences, the lessons learned, and so on.

We’re happy to share our wisdom with others, so that we can bring credibility and awareness to the mar-ket. The long term potential is exciting. It’s going to grow and we’ll get there. There may be a bit of turbu-lence along the way, but to me, it’s inevitable.

: Mark employed Vigeo for six weeks before his deal. Did you guys do anything similar?

Kyte, EDC: We sent our framework to Cicero. We’re a public sector institution, all our activities are audited, and in addition, we are subject to audits from the Auditor General of Canada. We feel pretty comfortable that if we can get through our own internal issues, it’s going to be something that will be well received by the market.

That’s why we took our time. We were very slow bringing it and a lot of that was educating our col-leagues internally. Fortunately, we have an environ-mental group who were pretty excited about the poten-tial of this idea. The capital markets move at a pretty fast pace and my colleagues deal in micro-elements where they want to analyse things to very fine terms.

But I remember the meeting where the penny dropped, and it was like, you know what? This is going to work. And we’ve never looked back.

: Two thirds of your investors for this deal were new. Was that because of the green element?

Kyte, EDC: Absolutely. I started in investor relations and moved to the funding side, so I wear two hats. The interesting exercise this time was that we had investors coming to us with their credentials on why they were

Heike Reichelt WORLD BANK

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green, so that we would allocate bonds to them. It’s a reverse roadshow. And all of them are new to EDC, more or less.

Reichelt, World Bank: We had that too. They also went through due diligence to prove to us that they actually cared about the green part. Which is good. This is direct issuer and investor engagement, which is one of the rewards.

: We’re painting a very positive picture here for the green market. It’s been a very good 18 months. But the market’s growth and development won’t always be like this, will it?

Kyte, EDC: I’ve been on panels at universities and it’s pretty incredible what’s coming from a demand per-spective. There was a guy from an NGO sitting beside me and was challenging EDC on what kinds of projects we were involved with, and he really kept me on my toes. I appreciated that and thanked him at the end of the presentation for his valuable contributions.

But it was standing room only, it was packed — we’re talking hundreds of students. When the mod-erator asked how many people were aware of green bonds, every single hand went up. I was blown away. That’s what’s coming.

Sfakianos, BNP Paribas: The topic isn’t going away. I had to talk to a small water company in the Netherlands a while ago. They’d just done their first sustainability report because investors were calling them to ask for explanations. And the person that had written the first report was encouraged that the level of dialogue on the topic within the company had grown exponentially.

It is something that everybody recognises is worth doing. No investor puts the phone down when you try to raise this topic. Every issuer at least knows enough of what’s going on to want to engage. It’s not going to do anything other than keep on growing.

Jayakumar, SSGA: As one of the three investors in the room, I will emphatically say: why should it go away? If climate change risk is real, and we need at least $35tr by 2035 to bring the world back to a two degree cen-tigrade change, why would we not use green bonds to gather that capital? And attract those investors, raise that funding that would normally have not been raised?On the other side, why would we not provide instru-ments to provide that sustainable exposure that inves-tors want?

: If volumes are set to grow to very large levels in five years’ time, will we be still talking about green bonds, or ESG specific bonds? Or will every issuer have to put up its hands and say ‘this is what we do, this is why you should invest in us?’ Or is five years too short a space of time?

Kim, DC Water: It touches back on the question of what a green bond is. There needs to be more specific-ity or definition, whether it’s provided by the market, or issuers themselves, or third bodies put out defini-tions that are coalesced in the market.

If every issue is a green bond, then it’s a meaningless designation. We’ve been struggling with that because a lot of what we do, you could argue, is environmen-tally beneficial. So is everything we do eligible to be financed by a green bond? I don’t know.

We cherry-picked this project for our inaugural issue, as it was one that could pass muster under anyone’s scrutiny. We put it out there to test if the market works for us.

But there are lots of things we do that probably would not qualify for a lot of investors as a green bond. Our industry is a huge consumer of power. We are Washington DC’s third largest single source con-nection. It takes 30 megawatts to run our plant. We’re very energy-intensive. Most of our capital activities are driven by regulatory requirements and meeting our permits and so on.

We have the choice to spend more money doing something in a more environmentally efficient way, but there’s also a cheaper way to get to the same end that may not achieve the same environmental benefits. Is everything we do green? I don’t know.

Lewin, Zurich: There are two unique features of a green bond. The first is that there is a clear predefined approach. As an investor you know where the money is going. Secondly, there is, to different degrees, reporting back so you know what the money has actually done and what the positive environmental impact has been.

They aren’t necessarily unique to green; this is a con-cept that can apply to other things. But when I think about where I want the market to go in five years’ or more time, I ask what the advantage of green bonds is going to be.

We make investment decisions every day and we decide whether to invest in bond X or bond Y. What we’re trying to achieve is at the margin. If I don’t know much about bond X, but I know that if I invest in bond Y the money is going to go to a certain project and I value the outcome — whether it’s environmental or something else — then of course I would go for bond Y.

The more transparency we have, the more use of processes and instruments we have, the better for the investor to start incorporating additional objectives in the way portfolios are managed. They may not be the primary objective, that may still be risk-adjusted returns, but there may be a secondary objective that kicks in at that point where we are faced with two opportunities. That is where the opportunity really lies and we’re not going to run out of underlying projects any time soon. There’s plenty of potential within and outside the green space to embrace that type of thing.

Sfakianos, BNP Paribas: I have some sympathy with the issuer that says everything they do is green. From your perspective, a tobacco company could finance a wind farm and they could get placement with a green bond. I am exaggerating for effect but I have some sym-

Nancy Kyte EDC

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pathy with the view that says everything we’re doing is really environmentally focused and we’d like to be able to designate all our bonds as green bonds.

Lewin, Zurich: I disagree. Let’s say it’s a company and all they do is renewable energy. They may issue a green bond to buy back stock for all I know. Particularly for those issuers that say: “Hey, actually all our expendi-tures are green,” it should be very easy to allocate the funds to the project and report back. If everything you do is green then why can’t you do this?

Reichelt, World Bank: Some organisations might say that everything they do is focused on the environment and maybe in 10 years hopefully every bond they issue is green. But for organisations that have a broader per-spective, that also focus on health or on education for example, although they may have a climate element in many education or health projects, not all of them will. And they are still worthwhile projects.

I think we are going to see three developments. The first is green bonds because of the scale of the climate problem and because there are investors that have set up dedicated portfolios for it. That is going to stay and grow.

There’s also going to be the special use of proceeds purpose for other good things where you can report back on impact and things like that on a smaller scale.

Then there is this big transformation in the market which will be the largest and is going to take more than five years. It’s going to be the people Nancy was speaking to that later are the decision makers on what to buy. That development will cover everything. A company will be encouraged by investors to report on the impact of its projects and to act in a sustainable and responsible way.

Lewin, Zurich: It’s important to make a distinction between ESG and the specific use of proceeds. There’s an overlap but they are fundamentally separate. We look at ESG as part of the credit analysis. There are true underlying economic risks, and opportunities when it comes to the equity side. These should always be part of the analysis; that should be the starting point.

Whether or not a bond is for a green use of pro-ceeds, you still do have to do your ESG analysis. Just because a company is assessed on ESG risk, it doesn’t necessarily mean they have a positive impact on the environment or on some other thematic issue. There can be some correlation but there need not be.

On the other side, the company that issues a green bond and exhibits very strong processes in the way it handles green bonds can send a signal to the market that they are probably lower on environmental risks and maybe lower on risks altogether. That can be reflected in the pricing, which would not be specific to the green bond but to every bond by the issuer. What’s an ESG bond? A bond of a company that has a high ESG rating, because they deal effectively with environmental, social and governance risk; this is something very different from a use of proceeds instru-ment where you find very specific activities. They are complementary in a sense.

Merli, Nomura: Fast forward five years. Potentially, the development of this area could force more transpar-ency in terms of specifically highlighting the areas that you were talking about. It could be an environmentally friendly company but they are raising debt to buy back stock so they have to disclose. There could be a demand from the investor side for more transparency

and more disclosure on the use of proceeds generally.

Lewin, Zurich: This may be more than five years but we will develop better understanding of what the envi-ronmental or social outcome of a certain underlying business activity is. I don’t have a particularly good understanding now. Environmental will be easier than others. We will create a much better understanding and it will be very interesting to see how that factors back into credit risk assessment, and whether those links are being made back from the more social and environ-mental externalities to the credit risk, and how that gets internalised.

Padilla, Daiwa: When you look at an equity, do you look at use of proceeds specifically for ESG? The equity side has done a far better job developing this project than fixed income. From an investor point of view, how do you categorise an equity investment versus a debt investment? Do you have a separate ESG rating for the equity side? Because you are asking for a specific use of proceeds for the bond side but you apply the same metric when you’re looking at a follow-on equity offer, for example.

Lewin, Zurich: When it comes to ESG risk and oppor-tunity, it is something that is relevant at an issuer level whether you are an equity investor or a bond inves-tor. As a bond investor, you focus on your downside because your upside is very limited, whereas if you are an equity investor you can look at the opportuni-ties from a product and growth perspective in terms of tackling environmental and social challenges, etc.

A bond investor maybe focuses a bit more on the governance and environmental risk assessment. It will certainly be important if they are a company from the extractive industries. But this is very separate as a pro-cess conceptually than judging whether a bond is green in the sense of how are the proceeds of that specific bond to be used.

When we look at green bonds we’re still doing our ESG risk analysis, but that’s a separate process that’s part of the standard credit investment process. That determines what the spread should be on the security, but that is independent of whether or not there’s a spe-cific use of proceeds.

Jayakumar, SSGA: To go back to separating ESG versus green and the causation/correlation argument. There was a great example about a tobacco company issuing a wind farm bond. I’m not sure what we would do there, but let me bring a more tangible example.

Jose Padilla DAIWA CAPITAL MARKETS

038-48 Americas RT.indd 45 23/09/2014 18:08



If you have polluted in the past and your ESG scores are not very high but you’re demonstrating that you are trying to mitigate that pollution, your ESG outlook is stable or improving and there is very clear evidence of what you are doing in terms of brownfield media-tion and so on, why would you not invest in that green bond? That’s my argument to saying you have to decouple it.

Reichelt, World Bank: But you have to have a certain level of confidence.

: And where do you get that confidence from? Do you go to an external agency or do you do your own work?

Jayakumar, SSGA: You do both. An ESG analysis score is at the issuer level; you’re looking at risks whether it’s equity or debt.

Reichelt, World Bank: So you are looking at the ESG score in terms of the outlook. They’ve got to be trust-worthy.

Jayakumar, SSGA: There’s no doubt about it, but it’s not our sole criterion.

Lewin, Zurich: I like the example because you can see the overlap. If a company has been known as a pol-luter and investors see the process whereby they are cleaning up their act, they start realising that they need to diversify into renewable energies because the other part of the business is not going to be sustainable.

We need to deal with this kind of environmental impact. It can be a true signal from an ESG risk per-spective that there’s good development. You could say that’s going to be worth a handful of basis points spread because it’s lower risk than their competitor that doesn’t care about the environment.

Jayakumar, SSGA: I’m saying that you cannot apply a blind filter that all of a sudden says ESG triple-B minus, and that’s it I’m done, aka I’m not even going to look at the bond or the equity. You need a threshold, but it could be set to remove the most egregious parties.It’s not black or white, it’s green. I’m not going to buy instruments from the most egregious low score ESG issuers, but you have to be careful because the term green bond brings with it a certain level of responsibil-ity and use of proceeds of disclosure.

We will have green bonds in five years if we main-

tain the sanctity of reporting the use of proceeds, the ringfencing and other important attributes. Not every issuer wants to do them.

Sfakianos, BNP Paribas: Some of the companies that are a bit slower coming to the market realise the num-ber of stakeholders when doing a green bond is expo-nentially different from issuing senior debt, when it’s just the treasury guys and management caring.

People start asking themselves serious questions. If we’re called to account at a roadshow, do we have the answers? That takes a lot of time and it’s very good that people have those debates because it makes everyone do a lot of soul searching. They are addressing ques-tions that they wouldn’t otherwise necessarily have addressed in an open way.

: How should we continue to grow the green market? Should allocations favour specialist investors or should issuers encourage non-green investors?

Merli, Nomura: Issuers have mentioned that investors were calling, showing their seriousness and specific monies allocated. But if you really want the market to grow you have to expand the universe. If you keep only allocating to a small universe you are not going to get the larger accounts and the bigger pools of capital that are going to help grow the market exponentially.

Reichelt, World Bank: Our role is to be a catalyst. We think it is important to grow this market so we want to provide products to investors that care about the green aspect, that value the reporting and all the extra work we’re doing.

A lot of investors are thinking about that. Those are the investors that call issuers and say they’re green, then try to prove it by bringing their ESG people on the line.

Mainstream investors are setting up strategies — that’s where the growth will come from. We’re being super-careful and conservative in the projects that we’re choosing as green bond-eligible.

They’re all on our website and we try to make it clear from the title why this is a green project. We have a lot of projects out there that have one component that’s climate-related but we are being very selective and only including those that have climate mitigation or adapta-tion — including resilience — as their primary goal.

We have about $2bn-$3bn of disbursements a year. We can issue that amount in one day through our regu-lar bonds when the big official sector, central bank-type organisations come in. Their main purpose is liquidity — they need the $5bn-$6bn bonds.

Some of them, sovereign wealth funds and others with specific portfolios, might be looking at a longer term sustainable approach. But if we’re growing the market it is important that the investors that get our green bonds are the ones that are going to be relevant in growing this market and mobilising private sector capital.

Kim, DC Water: We made a very conscious decision to allocate at least some bonds to every legitimate account that came into our inaugural green bond, specifically because we wanted them to come back for more. That’s an important commitment to the mar-ket too, particularly since it is such a nascent market in the US particularly. It is very important that the pockets of investors looking for green bonds get some allocation.

Manuel Lewin ZURICH INSURANCE COMPANY

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Reichelt, World Bank: It’s also very hard to categorise investors by green, SRI and non-green. You want dia-logue with everybody and ensure they value it, no mat-ter what type they are.

: Suzanne, are you seeing more com-petition for allocation and do you think when it’s a green bond you should be prioritised because of who you are?

Bishopric, UN: We have to be on an equal footing with other investors. But some of these green bonds have such attractive properties for their environment that governments should allow commercial investors to per-haps have tax benefits for them.

It’s not an issue for me, we’re tax-exempt, but it would be in the interest of many countries to improve their own environmental infrastructure if they allowed public utilities and similar companies to have some advantage when they go as far as our colleagues have to issue green bonds with reporting and transparency.

Kim, DC Water: We issued our green bond as a taxable corporate, partly to make sure we had as wide an audi-ence of investors as possible. But in a typical transac-tion we don’t allocate everyone bonds because there are higher quality accounts and lower quality accounts. There are accounts that come in early and commit large and help anchor the transaction. There are accounts that sit on the sidelines, waiting to see if a deal is going to get done, then pile in at the end. There are buy and hold investors, there’s fast money looking to make a quick flip. We make very strategic decisions and the same logic should apply for green bonds.

Bishopric, UN: Have you considered issuing a green sukuk in Malaysia? We have environmental projects that could have that green reporting and use of pro-ceeds language.

Reichelt, World Bank: We’re advising the Dubai Supreme Council for Energy on their green financing strategy. They might end up issuing a sukuk for certain projects that they have.

Bishopric, UN: That’s the kind of thing that we would buy, if it was priced correctly.

Lewin, Zurich: The Malaysian Securities Exchange Commission issued guidelines for sukuk at the end of August and included a section on green sukuk.

Bishopric, UN: They are quite green because you know what’s inside them already, the reporting is there.

: In the US, what’s the next kind of issuer to come on stream? It’s been pretty much dominated by supranationals. Are municipalities the next big area?

Merli, Nomura: It seems pretty obvious that states and local municipalities could specifically earmark proceeds for recycling, clean energy and for a variety of different things.

Mark mentioned earlier about issuing as taxable rather than tax-exempt. Universities have that same option within certain parameters. You could have the same thing in the green market, where certain clients will issue green bonds because the use of proceeds is specifically targeted for certain things.

Smaller municipalities would be a very US-centric investor base. If you had a major university issuing green bonds, particularly if they were high profile like MIT, Harvard or Yale, it could have an international fol-lowing.

: Mark, what was your distribution in terms of geography?

Kim, DC Water: It was mainly US — we had just one international investor. But I agree the next frontier in at least the US capital markets for green bonds is munici-pals. We were the first water utility to issue a green bond in the US. There are a lot of municipally owned power entities, a lot of municipalities are big property owners and own a lot of outdated buildings with retro-fit possibilities. Government is still one of the big infra-structure investors, whether it’s on the federal or state level, so a lot of opportunities for green infrastructure as well.

One constraint is the tax status of the bonds. As a municipal issuer we can issue tax-exempt, which gives preferential tax treatment for US taxpayers. It doesn’t do much good for an international investor. It may, as Jim alluded to, suggest a split where green bonds may naturally be best suited to a taxable corporate market as opposed to a tax-exempt municipal market.

Lewin, Zurich: Hopefully there will be growing demand from the US investor base. A tax-exempt municipal market would be a great opportunity for green bonds.

Reichelt, World Bank: For tax exemption, the market might need a government agency to certify that it’s green.

Jayakumar, SSGA: It’s already happening. State of Massachusetts are coming out with their second green bond. The first bond was $100m, their second one is $350m. They have done an incredible job in upping the game in terms of disclosure.

Massachusetts is doing it because they see the demand, not for charity. California is going to do it, DC Water already did it —there are very clear tangible examples in 2013-2014 of municipal issuance and it’s going to continue. Both Massachusetts deals were tax-exempt. There’s enough appetite for US investors to buy US taxable or tax-exempt municipalities. There is an advantage for foreign investors to buy taxable municipalities; it’s just like any other corporate bond so that appetite is there automatically.

There’s also green ABS. Toyota has printed but you can take it much further. Green ABS in its purest struc-ture should give you a full visibility to the revenue stream of what these assets are doing to help climate change.

The question is whether you have green ABS under the guise of revenue bonds from a municipality and you call it a muni bond, or you call it a green ABS. Those two are huge next steps that are going to happen in the green bond market.

: Two corporations, Regency Centers and Vornado, have already priced green bonds deeply through their own curves. Were they exceptions?

Padilla, Daiwa: No, they were marketed that way. They said they would cater to SRI investors and price inside their curves. When you’re talking about triple

038-48 Americas RT.indd 47 23/09/2014 18:08



digit issuers, and not SSAs, it works.

: Why is it acceptable in the corporate sector?

Padilla, Daiwa: Because in SSAs, it’s already a very small pick-up in relative value. Corporates — like EDF in Europe — have been able to obtain a bit of savings versus their curve and now we’re seeing it in the US.

The problem is we’re not seeing enough. There was $100bn or so raised in September alone in the invest-ment grade market and not one was a green bond. If you’re going into the mainstream bond market, what is going to make issuers comfortable enough to issue ESG product regularly to fit it into that $100bn that’s been issued in less than one month.

Merli, Nomura: Those two names don’t have as well-defined a credit curve as some of the people around this table or some of the other large institutions. Did people pay up 20bp because it was a green bond? Or, because Vornado doesn’t have a well-defined credit curve, you could argue about how much of a premium it really was vis-à-vis if they had just done a straight bond.

: The property industry already has fairly well developed standards for greenness of buildings. There are ready-made classifications and people understand them. In five to 10 years’ time will the same thing apply to other sectors?

Kyte, EDC: We built a new building and we’re a gold Leed standard. It’s not just recycling, it’s garbage reduc-tion per employee — they’re really trying to move the dial.

To rebrand a company like DC Water by issuing a debt instrument and to go from an environmental lagger to a leader? That’s a powerful message. I don’t know how you even begin to quantify that. Why wouldn’t you explore the opportunity to reinvent your company?

: What about the retail element of this market? You’ve issued something in that vein Heike?

Reichelt, World Bank: We offered green bonds to retail in 2011 through Bank of America Merrill Lynch’s wealth management network, and again a few weeks ago. We recently also issued a structured green bond, after working with BNP Paribas on developing an

equity-linked bond. The index comprises companies selected based on their CSR credentials. The coupon is linked to that index and it’s a green bond. That equity-linked bond is being sold to institutional investors, but there is retail interest as well — also because of the tangible story behind it.

Jayakumar, SSGA: Massachusetts demonstrated the need for retail very well. They made it very clear on their first bond issue. They are doing that more so this time by opening their bond for the first two or three days only for retail and then allowing institutions after that.

There is this great sense of pride in supporting your local government or state. They are trying to do the right thing for the community. It is a very powerful message to the retail base, be it a basic or sophisticated investor.

Bishopric, UN: But there’s some headline risk to pric-ing it differently for the retail from the institutions?

Merli, Nomura: There’s a retail period, it’s the same price. But if you separate retail-targeted versus institu-tionally targeted you could have different prices.

Sfakianos, BNP Paribas: There are huge geographic variations. Belgium has an exceptionally well devel-oped retail market. In the US it’s more family wealth management. There is a slightly more retail and phi-lanthropy focus perhaps than the UK, which is mostly institutional. In Japan, a lot of issues have had some retail influence.

Padilla, Daiwa: Ultimately all the bonds are bought by retail even if they are bought by institutions originally. If there is no differential and you’ve got two double-A rated credits, one is offering a green bond and one’s not, at the same price, why wouldn’t you go ahead and buy the green bond?

You are getting corporate governance, environmental, social benefits, you’re getting better disclosure and all of these other things at the same price for the same risk. It would seem it would be a no-brainer to buy the green bonds.

: Will the ‘S’ and the ‘G’ be a harder sell to the retail market? It’s harder to define.

Bishopric, UN: The green bond structure has raised the bar for transparency and disclosure for the bond mar-ket in general. ‘S’ and ‘G’ will come and maybe others.

Lewin, Zurich: I would say ‘S,’ I’m not quite sure on the ‘G’. How do you define use of proceeds for a gov-ernance project? But on the social side there’s lots of potential. We’ve seen IFC, IADB and Lloyds. The pro-cedural principles laid out in the Green Bond Principles can apply there. When it comes to what is social and measuring that, it will be an even more complicated discussion because it covers so many more potential issues and there may be even less consensus around what is the social cause.

Jayakumar, SSGA: The social impact bond that gets cited most is the UK prisons example, but it’s not a bond. It’s a multi-risk, multi-participant financial instru-ment. We have yet to see conventional bond structures applied to social problems and that translating into a pay-out and cash flows. s

Jim Merli NOMURA

038-48 Americas RT.indd 48 23/09/2014 18:08

BANKS


AS INVESTORS PAY ever more atten-tion to environmental, social and governance issues, banks are finally catching on to the opportunities this offers in the fixed income market.

Supranational and agency bor-rowers — and latterly industrial companies — have left private sec-tor financial institutions far behind in exploring how to fashion bonds specially tailored to investors’ ESG needs.

But the gap is beginning to close — and some believe that banks and insurance companies could ultimate-ly prove the biggest suppliers of spe-cially structured socially responsible investment bonds.

In November 2013 came the first public syndication of an SRI bond by a bank in the US, when Bank of America launched its $500m green bond.

Since then, Toronto-Dominion Bank has issued a C$500m three year green bond in March, Lloyds Bank sold a sterling ESG bond in July and Münchener Hypothekenbank intro-duced the first ESG Pfandbrief in September.

Banks’ sluggishness compared to public sector issuers and companies is understandable, according to Nick Dent, head of EMEA syndicate at Nomura in London.

“It’s only very recently that we’ve actually seen a credit element intro-duced to SRI bonds,” he says. “The market started with the SSAs. Hav-ing it limited to the top tier of qual-ity meant investors could focus on the bond and not the issuer. Then the corporates with obvious green credentials came in, and finally the banks.”

Nevertheless, bank treasurers can-not be held blameless for their slower progress in this field. Their lack of engagement on what socially respon-sible investors want to see has had a chilling effect on bank activity in this space, according to investors.

“Some issuers seem to have rath-er daunting preconceptions of what they think socially responsible inves-tors are looking for,” says Stephen Liberatore, lead SRI fixed income portfolio manager at TIAA-CREF Asset Management in New York, which manages about $6bn of SRI fixed income mandates. “But really, it’s just about having a clear under-standing of what the proceeds are getting used for.”

Once banks become more com-fortable with the culture of openness necessary for socially responsible investing, the market is likely to pick up momentum.

“In terms of impact reporting, banks are often reluctant to give out too much information,” says Libera-tore. “Every issuer has the data on how the proceeds are being used — they don’t borrow money and lend it on without knowing how it’s being used. It’s just a matter of getting them comfortable with sharing the data they have.”

Transparency is likely to be even more important for banks than for public agencies, because they have a trust deficit. They are profit-mak-ing entities that have been dogged by many controversies in recent years, and do not have the luxury of investors taking their good inten-tions for granted.

“Financials have to be the leaders in setting the standard for trans-parency,” says Dent. “If you’re an investor buying a green bond from a supranational you’re comfort-able with what that money will be used for. But if you’re buying an SRI bond from a bank, you want a bet-ter idea of what the proceeds will be used for. Financials need to embrace the highest standards of accountabil-ity.”

Having an ESG consultancy or environmental research organisation, such as Cicero, Vigeo or Sustainalyt-ics, check over the issuer’s plans for

using the bond proceeds is crucial for private sector green bond issuers, in many investors’ view.

Ignored no longerIt’s not all about investor worries, however. In some cases, banks have been too busy worrying about other things. Bank treasurers are dealing with the aftershocks of the global financial crisis and complying with ever stricter regulatory demands. It’s no wonder branching out into ethi-cal borrowing is low on their list of priorities.

However, this excuse seems to be weakening. Bank treasuries are grow-ing more aware of the opportuni-ties on offer in the SRI market. Social responsibility isn’t seen so much as a bolt-on to a normal funding pro-gramme but as a way to diversify and deepen a bank’s investor base — and to rehabilitate reputations tarnished during the financial crisis.

“Bank treasuries have a lot to focus on and limited resources,” says Dent. “There was a sense that focusing on things like SRI bonds was a luxury, but that’s changing. There’s more

focus on the social and governance side of the business. We’re moving out of the dark days of the banking sector carrying a stigma.”

Socially responsible investment going mainstream means that even bank treasurers doubtful of its worth may have no choice but to look at it.

The market for bond issues tailored to the specific needs of socially responsible investors has hit its stride since 2013. What had been a niche product for specialist investors suddenly became mainstream. However, banks — so often at the forefront of innovation — have so far been behind the curve. That looks like it’s about to change, as Nathan Collins finds out.

Economic powerhouse couldone day lead in ethical issuance

“Some issuers seem to have

rather daunting preconceptions of

what they think socially responsible

investors are looking for”

Stephen Liberatore,TIAA-CREF Asset

Management

049-50 Bank Issuers SRI.indd 49 23/09/2014 18:15

BANKS


There are plenty of specialist inves-tors that only make ethical invest-ments, but the much larger ranks of conventional investors, too, are beginning to set up funds for ethi-cal investment. And banks need to please these institutions, which buy most of their debt.

“Now that the market has hit criti-cal mass it’s something an increas-ing number of borrowers will be looking at, even if it’s just to see if it makes sense for them,” says Vince Purton, head of debt capital markets at Daiwa Capital Markets in London. “It’s moved beyond the initial growth period and it’s here to stay. It’s going to differ from bank to bank how much of a focus they want to put on it, but it’s definitely part of the gen-eral strategic dialogue now. That’s a recent, and important, development.”

Not just greenWhile green bonds — focused on the environment and sustainability — have been a large part of the market so far, bankers think banks will also explore deals that appeal to other currents of ethical investment.

Socially themed bonds — pro-moting agriculture, water improve-ments, poverty reduction or women’s empowerment — have long been a feature of Japan’s retail-targeted Uri-dashi bond market and are beginning to appear in other markets, largely issued by public sector bodies.

In September, the Inter-American Development Bank sold its first edu-cation, youth and employment (EYE) bond, highlighting a strand of its work that has been overlooked.

“The expansion from green bonds to a wider range of socially responsi-ble investment topics is a helpful one for banks,” says Purton. “As the diver-sity in the market grows, more issuers will see it as relevant to them. We’ve spoken with funding teams who say a green deal might not fit what they do, but that other types of socially responsible bond could.”

Lloyds’ £250m ESG bond, sold in July, showed just how varied are the ethical elements in banks’ activities, and hence the opportunities for tai-loring bonds linked to them.

The proceeds of the 4.4 year deal were ring-fenced for four distinct purposes. One was agriculture and small scale renewable energy produc-tion, certainly a green cause.

But the three other purposes — healthcare lending, lending in accor-dance with the UK’s regional growth fund, and small and medium-sized enterprise lending in the UK’s most deprived areas — can claim to be eth-ically beneficial, but not green.

“It was clear to us that investors have interest in investments across the ESG spectrum,” says Adam Mac-Donald, director in asset-backed solutions at Lloyds in London. “So rather than focus purely on envi-ronmental assets, which has been the focus of recent ESG bonds, we decided to look more broadly at what would appeal to these inves-tors.”

One purpose of the deal was to create a chance for Lloyds to talk to investors about all the ethical things it is proud of doing, after a long period in which its name has been linked with scandals such as mis-selling payment protection insurance and derivatives to small companies.

Unique skillsetIt is the enormous scale and diversity of banks’ operations that make them promising territory for carving out sub-portfolios that can appeal to ethi-cal investors.

After all, the five biggest UK banks hold about 87% of current accounts and 93% of small business loans — they are engaged in pretty well all the country’s economic life.

A ground-breaking deal in Sep-tember took SRI bond issuance into a new, vast territory: residential mort-gages.

Münchener Hypothekenbank’s €300m ESG Pfandbrief was the fruit of long, hard work — and faced some opposition in conservative quarters. But its introduction of ESG-themed bond issuance is not likely to go unnoticed in the world’s huge and diverse mortgage bond markets.

For MünchenerHyp, unlike Lloyds, the deal was not about moving its reputation forward and leaving past shames behind, but about connect-ing ethically minded investors still more with the co-operative bank’s well-publicised social values. The assets tied to the deal are loans to 200 co-operative social landlords, partly to make their buildings more energy-efficient.

The German bank made much of

its own ESG virtues as a whole insti-tution, not just to the sub-portfolio — it has a Prime rating from Oekom, the German sustainability research group.

Future bank issuers should expect investors to study their overall cre-dentials carefully. “There is diver-sity of opinion among ESG-focused investors, but we found that they are most interested in two things,”

says MacDonald at Lloyds. “First, what bond proceeds will be used for and how this will be evidenced and reported. And secondly, how this fits in with the issuer’s broader ESG pro-file.”

Explaining the target use of pro-ceeds was the easy bit. “Much of the focus was actually on how the bond fits with Lloyds’ broader responsi-ble business strategy,” MacDonald says. “This was a positive for us, as we brought in a lot of new investors, particularly from SRI investors that are often underweight mainstream banks.”

The investor dialogue around ESG that themed bonds can stimulate has clearly worked for the bank issu-ers so far. So it is unlikely to be long before more issuers investigate these possibilities — if they are willing to shoulder the cost of choosing and ring-fencing the necessary assets and paying for third parties to assess the ESG credentials.

“If there’s one thing that sets the banks apart from other issuers it’s their ability to innovate,” says Nomu-ra’s Dent. “Banks have expertise and the ability to efficiently allocate the capital, particularly through struc-tures like covered bonds or securiti-zation.”

The last segment of capital market issuers to begin exploring SRI issu-ance may ultimately come to be its most eager proponent. s

“Rather than focus purely on environmental

assets, which has been the focus of

recent ESG bonds, we decided to look

more broadly at what would appeal to these investors”Adam MacDonald

Lloyds

049-50 Bank Issuers SRI.indd 50 23/09/2014 18:15


Asia SRI Bond Roundtable

: I’d like to start the discussion with the question of definitions. Much has been said over the past few years about whether the various labels related to this topic are useful. Does the existence of terms such as SRI, ESG or green bonds serve a purpose? Does it help investors and issuers? To get an issuer’s perspective first, perhaps we might start with the World Bank.

Yoshiyuki Arima, World Bank: Any definition must be simple, easy to understand. So I would say that any investment contributing to society should be regarded as SRI.

There are of course many brands, like green bonds or ESG, but the core thing is that are we sure that the money will be used for something good for global soci-ety. I think that’s enough.


Masaru Arai, chair, Japan Sustainable Investment Forum (JSIF)

Yoshiyuki Arima, lead financial officer and representative, Japan, capital markets department, World Bank

Alexandra Boakes Tracy, chairman, Association for Sustainable and Responsible Investment in Asia (ASrIA)

Thierry de Longuemar, vice president (finance and risk management), Asian Development Bank (ADB)

Kang Sung Ho, managing director, head of sales department, FICC, Daiwa Securities

Mariko Kawaguchi, chief researcher, Daiwa Institute of Research

Ian Lewis, associate managing director, corporate finance group, Moody’s

Yasusuke Mitani, general manager, funds and securities department, The Chugoku Bank

Akihito Nagata, director, capital markets, treasury department, Japan International Cooperation Agency (JICA)

Hiroshi Ozeki, chief investment officer, Nippon Life Insurance Company

Kenichiro Shiozawa, senior financial officer, IR Tokyo, treasury department, International Finance Corporation (IFC)

Kazuyuki Takigawa, foreign fixed income chief fund manager, asset management division, Resona Bank

Saori Tanaka, associate, syndicate department, Nomura Securities

Mark Baker, moderator, GlobalCapital

Projects and pricing: issuers and investors debate the future of Asian SRI

Japan has played an important part in green finance, with its retail investors enthusiastic buyers of themed Uridashi bonds. But the institutional investor base there and in the broader Asian region has been slower to build.

For its Tokyo roundtable, GlobalCapital gathered together representatives of prominent Japanese investors, key supranational and agency issuers, as well as Asiabased SRI experts to discuss the regional challenges in the area of sustainable investment and green finance.

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Thierry de Longuemar, ADB: I would agree on the simplest method, particularly given the communication objectives around this new category of bonds. I would refrain from using acronyms like SRI or ESG, which can create confusion among investors. I would favour a simpler definition: green bond is OK provided there is a good definition of what is green and not green.

We know that some aspects of climate finance are dif-ferent — mitigation or adaptation, for example — but generally speaking I would favour the term “green”. I think there is a need to have some common practice and definition across the world of capital market activities in green finance.

Alexandra Boakes Tracy, ASrIA: We speak to people working at public and corporate pension funds in emerg-ing markets and one of the reasons that they may not have an appetite for green bonds or clean tech is because the concepts are unfamiliar and they are not quite sure where they might fit from an asset allocation perspec-tive.

As far as the labels go, green bonds is a relatively straightforward one, although there would be a debate about whether it should include technologies like nuclear or CCS [carbon capture and storage]. But others like “cli-mate finance” are more complicated to define.

Ultimately the debate over definitions reflects the immaturity of the sustainable investment market, and I suspect it will fade over time. But now I think hav-ing some kind of standardised definition or vocabulary would be helpful.

: How formal does the panel think that this needs to be? ICMA’s Green Bond Principles, for example, are voluntary. Is there a need for investors and issuers to have a firmer set of guidelines, or even rules, to give confidence?

Arima, World Bank: My impression is that the Green Bond Principles are like a manual, a guide to the mini-mum requirements for issuers. It is still in the process of being developed further to give better guidelines for investors.

Kenichiro Shiozawa, IFC: We agree with Mr Arima’s opinion. This is just a starting point and the green bond market is still a new area for all of us. This market is

expanding and will continue to expand in the future. As Mr Arima mentioned, we can use this as a standard or definition for now, and with further development and better understanding, a few years later we can revise the Green Bond Principles to be better or more appropriate. But as a starting point, it is a good refer-ence for us.

: I’d like to ask the investors here to explain how they approach the topic of SRI, and what you find useful in terms of definitions.

Hiroshi Ozeki, Nippon Life: From the investor side, I would like to emphasise that whether it is called SRI or green bond, the concrete image of those investments is extremely important. As investors, it is important to strike a balance between the pursuit of profit and the contribution made to society. If you are an individual investor, the investment can be made with tax relief and can be considered as a type of donation. But if you are an institutional investor, gaining understanding from stakeholders is very important when making such an investment.

In order to provide the information there are two approaches: one is from the economic rationale point of view, and the other is in terms of the contribution to society. For the latter, aspects from both the public inter-est aspect and the global environment should be taken into account, and if the social responsibility is clear the investment can be made.

In order to gain that understanding, disclosure to investors will be important and should clarify what the investment is for. The World Bank and others should provide a standard for green bonds or SRI bonds that we can rely on.

: To pick up on that last point, do you feel that even an issuer such as the World Bank needs to provide an additional green certification or label to give you confidence, or is it sufficient just to look at the identity of the issuer and make an assumption about your ability to invest?

Ozeki, Nippon Life: Certification is not required, so the establishment of a code or a principle that would be a standard for the industry, which issuers can respect, will be sufficient. Also we would like to see a separate disclo-

Thierry de LonguemarASIAN DEVELOPMENT BANK

Hiroshi OzekiNIPPON LIFE INSURANCE COMPANY

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sure on the type of green investments that the issuers are making, so we can monitor if they are fulfilling the purpose of a green bond.

De Longuemar, ADB: I think this raises an issue which could be confusing. The World Bank, IFC, ADB and JICA are institutions that by definition are socially responsi-ble. By differentiating some of our activities from others, one can create confusion that some could be considered socially responsible and others not.

Therefore, I caution those who would want to push us in that direction, which could lead us to be not as active an issuer of green bonds as other issuers which are not as socially responsible with respect to their mission or their definition. Market participants have to be cau-tious about pushing the supranational institutions in the wrong direction.

Akihito Nagata, JICA: We do not issue green bonds — we always say that our bonds are recognised as SRI, as our Official Development Assistance or ODA operations on the whole are regarded as such. We always make that point to investors, and they are satisfied by the explanation.

De Longuemar, ADB: We have issued $2bn of what we call thematic bonds since 2010. They were water bonds and clean energy bonds, but like JICA, we have not issued green bonds as far as they are currently defined. But this can also be related to a question that perhaps we can touch upon later, which is the potential pricing dif-ferential between green bonds and other bonds.

Mariko Kawaguchi, Daiwa Institute of Research: From the standpoint of looking at all SRI investment, not just bonds, communication is the key element of the concept of sustainable finance. If you are looking at a car, you could say that it’s a green car — which could mean a hybrid, it could mean it runs on green diesel, it all depends on the make or the manufacturer. But you get the image: it’s a green car, and different from a con-ventional one.

But there’s a double stage: for the general public you can have a rough idea, but for professional investors you have a more precise definition. I think Mr Ozeki would like to see those precise definitions.

Boakes Tracy, ASrIA: The industry has evolved. It start-ed off with sector-screening — not investing in certain sectors. Now a lot of people have moved on and don’t want to limit the investible universe in that way, so it is becoming more about best of breed, investing in compa-nies across sectors that are doing the right things.

: I’d like to ask our other investor repre-sentatives here today to outline what sort of assur-ances they require in order to make an investment. What information do you want from issuers in order to be able to feel comfortable?

Kazuyuki Takigawa, Resona Bank: There are two points that are important. One, a simple definition, and two, differentiation from existing bonds. If those two are clear then it would be much easier for us to invest.

: I suppose it is that differentiation where some issuers would have difficulties, which we will discuss later when we talk about pricing. I’d like to ask who bears the responsibility for implementing some sort of standard? Is it the role of SSA issuers to take a lead?

Arima, World Bank: Since the World Bank issued green bonds several years ago, we have been thinking of a rigid standard and what kind of bond can be called green, and we set a lot of internal standards like how we choose our projects, how we ring-fence the money we borrow and keep a separate portfolio internally to make sure we use that money for green projects.

Reporting is also important, so from time to time we report an update on green projects. For example in May we offered a green Uridashi bond through Nomura’s network and that time I worked closely with Tanaka-san to give information to retail investors. The kind of reporting that Ozeki-san mentioned is very important. We put that information on our green bond website and I hope that corporate issuers will learn from how we are handling these issues and use this knowledge base to issue green bonds by themselves. Because of our DNA, it is easy for multilateral development banks, including ADB, JICA and IFC, to do so.

Boakes Tracy, ASrIA: The World Bank and other multi-laterals have done a lot and contributed a huge amount

Mark Baker GLOBALCAPITAL

Mariko KawaguchiDAIWA INSTITUTE OF RESEARCH

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in setting precedents with their methodology. They obviously have a policy mandate and they are setting a benchmark — even a yield curve of some sort — and I think they are really trying to drive the market. But for a corporate I think the rationale may be more to do with diversification of the investor base.

: For issuers like the multilateral devel-

opment banks, it is a different proposition to what it is for corporates. Does that suggest that there should be perhaps more attention on issuers aim-ing to sell bonds targeted at a certain project rather than saying “this is a bond issued by this issuer and it’s green”, which then throws up all the problems we’ve discussed?

De Longuemar, ADB: I think it is more complex. You can assess the environmental impact of a green bond but there are other strategic objectives that we want to meet when financing a “green” project than the environmental impact. I would favour a more flexible approach that would not limit the definition to the environmental impact but also incorporate the overall objective of the projects.

The issue with a straight definition is that it would limit the bonds that would be able to comply. We need to keep an open mind and give more consideration to the need of educating investors on how this money is used. This will improve the objective of more funding diversification.

: I want to bring in a ratings angle to this. Ian, could you outline for us how Moody’s approach-es this topic and what you think are some of the likely challenges?

Ian Lewis, Moody’s: We don’t differentiate at the moment between green debt and ordinary debt. But we are observing what is happening in this market, which is very fast moving, and we are very interested to facilitate the ground between issuers and investors. I think we are keen to understand how we can add value to investors in the process and we are setting up a group globally to tackle that question. Some of the concepts that have been raised today — such as simplicity, certainty and transparency — resonate for us.

: And that value would be playing a part in the assessment of whether something met what-ever standards were chosen? Do you see parallels between the credit rating process as it exists now and the process of evaluating SRI investments in terms of their compliance?

Lewis, Moody’s: That’s a very interesting question. Obviously investors are going to drive those sorts of requirements on information and financial metrics, and I don’t see the agencies as stepping in to rate the process. But certainly it is an area that we will be keen to look at in terms of whether investor requirements are being fulfilled.

De Longuemar, ADB: I have a question for Moody’s: how would you envisage the concept of green default? I mean when an issuer is setting objectives and then those

objectives are not met. A credit default is clear, but a green default…

Lewis, Moody’s: Certainly in the investment grade space I think this would be quite difficult. I can’t see an invest-ment grade issuer swallowing that kind of language.

De Longuemar, ADB: But before that, you may need to create a green rating scale?

: It’s an interesting point, and I’d like to ask the investors here what would you do if an investment you have made no longer turned out to conform to the assurances you were given at the start. Do you discuss at the moment what you would do in that situation?

Ozeki, Nippon Life: We haven’t had that experience so far, but if it were to happen we would have to scrutinise the terms and conditions of the bond and look at it in more detail. Once a green default occurs the image of that organisation would deteriorate significantly so it would be extremely difficult to continue investing in the green bond, as well as the issuer’s other bonds.

Kawaguchi, Daiwa Institute of Research: I’d like to look at it from a different angle, because the impact of green can be difficult to quantify when you issue the bond. You may be targeting this or that, you are planting trees in a certain area or you are educating people. But this is more difficult to predict than just financial results.

It can be difficult to accomplish all the social targets so I think what is more necessary now is transparency. What are you doing, what is the impact and how far did you achieve your targets?

If it is acceptable then investors will say so, but if you do not explain then you will fail and damage your image.

: I’d like to move on to whether the panel thinks there are specific challenges faced by issu-ers and investors in Asia. Are there regional issues that make the concept of SRI problematic? Are there challenges related to the level of development of different economies that make standardisation dif-ficult to achieve?

Ian Lewis MOODY’S

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Shiozawa, IFC: Since I have been involved in Uridashi bonds in Japan, I’d like to speak in the context of my experiences in Japan. I believe the Green Bond Principles have been very important in facilitating a common understanding between investors and issuers, and there are four areas that the Principles stress as key points. The first one is with respect to the use of proceeds, the sec-ond is the process for project evaluation, the third is the management of proceeds and the fourth is the reporting thereafter.

In terms of the use of proceeds, we declare the eligible project categories in the legal documentation. Also, in terms of the nature of the project, we share the informa-tion, while in terms of the management of the funds we have set up a sub-portfolio and ring-fenced the proceeds from others. And in terms of the reporting, we have most recently started SRI newsletters distributed annu-ally on our website. This is what we are doing and as the initiatives expand going forward we can share our expe-rience with other countries.

Arima, World Bank: We have a pretty long history of SRI bonds, and we also believe that conventional World Bank bonds are also SRI bonds, as the ADB mentioned. Since the mid-1990s interest rates in Japan have been very low, almost nothing for decades, and investors were looking for extra return by taking additional risk. In that process we issued many structured bonds that were driven by demand.

Our first themed bonds were the ‘Cool’ bonds arranged by Daiwa Securities in 2006, which were linked to a hydro project in China. If the project pro-duced certified emission reduction, or CER, and if the market price of that CER was higher than a certain set price, then investors could get an additional return.

So I think the starting point was a background of really low returns, the equity market not being good, bank deposit returns being almost nothing. In that situation dealers and investors look for more risk and more return.

De Longuemar, ADB: In this discussion you need to dif-ferentiate between developed and developing countries. The level of awareness and interest from investors in developing countries is lower. It’s lower for financial or other reasons, such as the level of interest rates in their local currency. In this case they don’t necessarily care about getting a green label if they already have an accept-

able yield in their own currency. But it’s also a question of culture, education and perceived needs. In Asia you would have more demand for SRI or green bonds from more sophisticated investors in Japan, South Korea, Australia, even maybe Hong Kong, China and Singapore. But when you speak with, for example, Chinese, Indian, Indonesian or Thai investors, frankly the main interest remains the yield and liquidity rather than the green aspect. This differentiation is important.

That does not mean that more should not be done in developing countries, because their role in address-ing climate change challenges is crucial, and therefore if green bonds are a good way to catalyse more financing in those countries and target those investors, we should do more. This debate started in the US and Europe, which are more developed, but we should not forget developing countries, whose role is increasing.

: That presents a challenge. How does one go about broadening and deepening the aware-ness in developing countries?

Kawaguchi, Daiwa Institute of Research: I think inves-tors in equities and bonds are a bit different, especially in developing countries. If you are looking for com-panies for growth, the company must do well in ESG. China is suffering from air pollution and water scarcity, others are also. So a company that wants to be successful has to care about this. I think ESG criteria are indispens-able. What I think is an important area is that of admin-istrators and stock exchanges, which can set criteria for companies to develop in an environmentally friendly way. That’s what’s happening through the Sustainable Stock Exchanges Initiative, with exchanges such as Johannesburg requiring CSR reports for all listed com-panies. I think that kind of movement is going forward in developing countries because they are suffering more from ESG issues. If that can work on the equities side, why not take it to the bonds side?

: On the bond investor side, Japan is an interesting example of where there has been histori-cally a lot of interest at the retail level but it’s been more of a challenge to develop a deep institutional investor base. Why is that and what might be done to resolve it?

Kang Sung Ho DAIWA

Kenichiro Shiozawa INTERNATIONAL FINANCE CORPORATION

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Kang Sung Ho, Daiwa: We have the biggest track record in terms of bringing SRI related bonds to the retail market so far. The first SRI bond that we arranged was issued by IFFIm [the International Finance Facility for Immunisation] in the form of a vaccine bond in 2008. At the time this was referred to as impact investment, and at the time the objective was to create a social impact by issuing such bonds.

This product was launched against the backdrop of the prevailing significant household assets to the tune of ¥1,400tr to ¥1,500tr and a need to diversify this inves-tor base. This was promoted by Japanese securities firms by way of providing SRI bonds in Uridashi format and as a result we believe that a large market has been created. I believe that issues like green bonds and vaccine bonds from international agencies have led to individual inves-tors having a real feeling about contributing to society. It is important for the individual investors going forward that the funds they have invested are truly contributing to society.

It may be a good idea to develop initiatives such as a lottery among retail investors, where you select 10 winners who then go to a project site to get a first hand understanding of how their investments are being put to good use. But I understand that there are still challenges to be overcome with respect to soliciting the interest of institutional investors.

Yasusuke Mitani, Chugoku Bank: To give an institu-tional investor point of view, we started investing in green bonds two years ago, and that opportunity was provided when we met with Arima-san to have a discus-sion about funding. Two years ago we didn’t even know about the existence of such bonds, and one of the points I wanted to make is that it’s not just us — there may be many institutional investors that are not aware of the existence of green bonds.

Another aspect that is important is the economic ratio-nale. We need to explain to our depositors why we are making investments in something when the terms and conditions are not necessarily good, for instance in terms of liquidity. In that regard, issuance from the World Bank and ADB would help in that the use of proceeds is clearly explained and we would have more comfort in investing in such bonds.

One of the themes we are trying to develop at our organisation is altruism, so this matches that theme and it has been helpful that we have had people at our

management level who understand the concept of these investments.

Arima, World Bank: Since September 2010 we have been issuing a lot of private placement green bonds for Japanese institutional investors, as many as 18 transac-tions. All were private placement bonds. In the past with such deals issuers and investors never announced what they purchased, because the deals were private. But for our green bond private placements we always made joint press releases saying that the World Bank has issued the bonds and that the investor bought them to climate change issues. This kind of reporting transpar-ency is important to develop this particular market.

Nagata, JICA: For the benefit of a better understanding by investors every year we organise a tour to a country to introduce and explain our activities, so last year we went to the Philippines and showed the JICA-financed infrastructure projects and had meetings with Japanese companies working on the ground. That’s one of the activities that we are trying in order to give a better understanding to institutional investors.

And we have contributed to the development of the Japanese domestic retail market. In the past we have seen many bonds from multilateral development banks denominated in foreign currency, but my understanding is that retail are looking for yen bonds from a Japanese name, and we think JICA was the first government agen-cy to sell to retail bonds in the domestic market here.

Saori Tanaka, Nomura: We have done a number of transactions involving Uridashi bonds. In March 2011 the Great East Japan Earthquake struck the country, and six months later we had an opportunity to handle a clean energy bond issued by ADB. We tried to explain what it was about — green, clean energy — but the question we had from investors back then was: was it going to be used for the reconstruction of nuclear power plants?

Of course we prepared leaflets and other marketing tools to provide as much information as possible for retail and an explanation of how the issuer intended to use the proceeds of the bonds, but with such a touchy issue we ended up getting these questions. So despite the fact that this market is growing nicely in green and clean energy, we need to continue to provide as much

Akihito Nagata JAPAN INTERNATIONAL COOPERATION AGENCY

Yasusuke Mitani THE CHUGOKU BANK

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information as possible, and looking back we could per-haps have gone a step further in providing information to retail investors.

De Longuemar, ADB: This was a rather challenging transaction because of the timing as it was conceptual-ised before the Fukushima disaster. We decided to delay it by a few months because of the sensitivity of the situ-ation. Sometimes circumstances do not help when you want to be active in the green space.

I would like to come back to the general discussion. Yes, we have and we will continue to benefit a lot from the Uridashi market, which is a very cost efficient mar-ket, as we all know. But we must not forget the reality and the reality is that the majority of our supranational debt is held by central banks. They hold our debt because of three reasons: liquidity, maturity and quality of credit. If ever central banks were to decide that part of their reserves should be invested in the green space, I am not sure that we would be able to address their needs in that space, particularly given the potential dif-ferentiation of price — something on which I don’t see central banks compromising.

: You’ve raised the issue of pricing, so let’s tackle that. Investors want a reason to invest in a product and they need to have something to convince them since it is new and something that is still quite uncertain. At the same time, issuers want to be rewarded. How do we bridge the gap? I’d like to start from the issuer side. What in your view is the justification for more favourable pricing from your perspective?

Arima, World Bank: Of course we would like to borrow at a lower interest rate through a green bond, because then we can help our client borrowers better. And of course the monitoring, reporting and ring-fencing brings more costs. However, that spread should be decided by the market — demand and supply, right?

At the moment we don’t see any price difference in the secondary market, so that’s the short term answer from the market right now. Investors do not pay up for the green brand, that’s the reality. Hopefully MDB issu-ers can make more efforts in reporting and so forth, and then investors will see more value in the primary and secondary market. Then the supply should increase. But

the portfolio for green at the MDBs is limited, which means the total outstanding balance of bonds should also be limited. If the demand is larger than our portfolio then the spreads should be tighter.

De Longuemar, ADB: I agree. When you buy organic food you pay more. When you buy a hybrid car you pay more or it is subsidised by a government. Why shouldn’t you pay more for a green bond? As the World Bank said, it is a question of supply and demand. Today, there is more demand than supply and that gap may increase. At some point, we will reach equilibrium of price that will lead to a yield haircut on green bonds versus ordinary bonds. It is the market itself that may lead to a differen-tiation in price.

Lewis, Moody’s: We too have observed that green senior unsecured bonds have continued to price in line with other offerings from the same issuer with the same rating, size and maturity. We would question perhaps in the debate over pricing, if the probability of default or loss given default track record for green bonds is no different from standard bonds of the same debt class, rating, size and maturity, why they might price differ-ently?

Moody’s will continue to observe this fast moving space for the ability of such things as different costs of issuance and codification of binding requirements, for example in relation to use of proceeds, reporting and standards, to lead to variation in bond pricing.

: How do investors approach pricing? What are you prepared to do to compensate issuers?

Ozeki, Nippon Life: I was very surprised to hear that there is no difference in the secondary market between green bonds and ordinary bonds, in terms of pricing, because if there was a choice it will always be the green bond.

Arima, World Bank: But when you are offered both a World Bank green bond private placement and a conven-tional World Bank bond, if the liquidity of the green PP is lower, would you still buy it?

Ozeki, Nippon Life: Nippon Life is a long term investor, and we don’t care much about the liquidity of a bond.

Yoshiyuki ArimaWORLD BANK

Saori TanakaNOMURA

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So if we are looking to get a certain maturity and hap-pen to find a suitable yield in a green bond, then we can buy it.

Masaru Arai, JSIF: I’d like to just add to what Mr Ozeki of Nippon Life said, based on what we are talking about in the SRI investment community in Japan nowa-days. The introduction of Japan’s Stewardship Code in February this year has had a significant impact for Japanese institutional investors. 160 institutions, includ-ing the GPIF — the Japanese national pension fund and the largest in the world — have declared that they will follow the Code.

Nissay Asset Management, one of Nippon Life’s arms and a leader in the SRI community, has disclosed its policy on the Code, such as its long term investment strategy, the importance of non-financial information and of ESG.

Nissay Asset Management is also a signatory to the UNPRI [United Nations Principles for Responsible Investment], which looks to integrate ESG approaches into conventional investment approaches. We are sure that many Japanese institutional investors are committed now and watching not only the financial returns but also the ESG returns.

In the case of equity investment, the situation is a little more clear than with green bonds. We have expe-rienced some bad disclosures. One such case was by a South African listed company. When it became obvious that the ESG disclosure was incorrect, investors faced the challenge of how to ensure the accuracy of the disclo-sure. Green bond issuers might face similar issues, and some kind of guidance on this is quite important.

De Longuemar, ADB: What investors have today when they buy a triple-A ADB or World Bank bond is no credit risk, a certain yield for a given maturity and a reasonable liquidity. Today with a green bond, they are getting, in addition to these, a green label for free, so the question is would they be willing to take the green project risk?

The reality is that they want to be more involved in green finance but without taking the project risk. My question to investors is if we were considering green project bonds, which means sharing the project risk in addition to other risks, would they be interested in doing that? In that circumstance the yield would likely

be higher to better reflect the underlying risks, an incen-tive maybe?

Kawaguchi, Daiwa Institute of Research: I think in the longer term green could actually be less risky. People have traditionally assumed that it is more costly and they used to say that SRI meant sacrificing return. It used to be the case, but in equities if a company now doesn’t care about stakeholders, the environment or child labour, you will lose money on your investment in the long term. The concept is changing. Unless a company is green and sustainable, you will make lower profits in the longer term.

If you are not green you may damage the environ-ment, for example, which could lead to being forced to exit a country or being taxed, so there is a heightened risk. This is being better understood on the equity side. Companies cannot grow in the long term if they have issues on the environment or human rights.

We are currently in a transition period from green being considered negative to not being green being considered a higher risk. So on the bonds side investing in a green project could be more profitable in longer term.

Arima, World Bank: So you think investors are willing to take more project risk if they can put their money into green projects?

Kawaguchi, Daiwa Institute of Research: If they can be persuaded that risk is lower in the long term.

Arai, JSIF: I would like to ask the issuers, when you say the risks are higher on green project bonds, is this because of the green element or because of the project risk? I think it’s important to separate the two. We need to clarify the pricing relating to the project risk and from being green.

De Longuemar, ADB: The bottom line is to identify properly the project risk. Green project risk would include a green component that would not be included in a non-green project risk. Then you have to evaluate the core risk and the green risk; so your assessment is correct.

But the fact is that we are talking here of a different space, which is the project bond space as opposed to the traditional bond space.

Shiozawa, IFC: Conventional green bonds have recourse to the issuer and so it all comes down to credit risk — as long as there is recourse it just comes down to credit risk and liquidity as far as pricing is concerned. But now we are talking about the possibility of non-recourse green project bonds, or it could be a project-backed ABS-type bond.

In that case it may be that a different type of thinking is required. We have been doing project risk assessment conventionally but the problem is how to go about assessing the green component of the risk as well as the project risks.

: To conclude, I’d like to ask the panel what they consider the key future developments in this sector to be. We’ve discussed one of those just

Masaru Arai JAPAN SUSTAINABLE INVESTMENT FORUM

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now, the possibility of green project bonds, but are there other developments that the panel thinks would move the industry forward?

Arima, World Bank: We are almost finishing the first stage of Green Bonds or SRI bonds, because triple-A issuers like the World Bank and ADB are already active. Those bonds are basically producing the same return as conventional bonds issued by us, and investors are get-ting a free green brand over conventional bonds issued by MDBs. But in the future I do believe there will be many other types of green credits. Green ABS could be issued, responding to investors’ demand for higher risk and high-er return for green bonds. They may not be triple-A rated, but those could be important products for the next stage.

Arai, JSIF: I’d like to mention the Japanese market of the future. What I am most interested in is the changes in pension funds, especially the public sector pension funds — and they may be followed by corporates. The Abenomics policy introduced last year includes various words that the SRI community was talking about, like climate change, the environment, human resources or co-existing with nature. This policy is quite important because it is the policy to expand the Japanese economy and to re-strengthen Japanese industries.

Various ministries and the cabinet itself have embarked on specific tasks such as the reorganisation of the GPIF, the introduction of the Stewardship Code and a review — Competitiveness and Incentives for Sustainable Growth: Building Favorable Relationships between Companies and Investors. The GPIF has also started to study engagement and ESG.

We in the SRI community have observed in the last 10 years how retail investors were the target for SRI and green issues, but now institutional investors are thinking of ESG investment strategies. I am quite interested to see the result. It might be easier for them to apply ESG policy to bonds rather than to equities.

De Longuemar, ADB: I am coming back to my point of considering developing a green bond culture in develop-ing countries. I believe that one way to achieve it better is by introducing local currency denominated green bonds. And why not go further, given our discussion of project green bonds, by considering local currency denominated project green bonds? This is my suggestion.

As a more general conclusion, despite some scepticism I expressed on the expansion of a green bond market, I believe that the supranational institutions like those represented around this table have a real catalytic role to push this market forward in order to push green finance, because our common objective is the need to increase financing support for green growth, and it is clear that ADB, the World Bank, JICA and others have a role to push this space further.

Boakes Tracy, ASrIA: Over time I would like to see the involvement of the mainstream rating agencies in this sector, perhaps working in close partnership with spe-cialist advisers. In my experience what helps new prod-ucts to be successful is when they can be as similar as possible to traditional products from the investor’s per-spective. If you can get the kind of report that you are already used to on the credit side — and perhaps those

reports would be backstopped by climate experts — then it will help to persuade your credit committee.

: A final comment on the most attractive potential development from the investor side?

Ozeki, Nippon Life: For our organisation, we are not just interested in green investment but also in areas such as infrastructure financing, because there will be a shortage of financing given that governments will have increasing problems in financing projects, so we would like to capture and identify investment opportunities in those areas.

As Mr de Longuemar said, there are many develop-ing countries here in Asia. To provide assistance for the development of these countries we would like to invest in something green and environmentally friendly.

Takigawa, Resona Bank: As a pension fund manager we have to be mindful of two objectives: one, to provide the return that we have promised to our pensioners, and two, to channel our funds into better issuers. By better issuers I mean a project or issuer which can assist in the sound development of the world economy. If we can invest in such projects or issuers we would be able to provide a better return to our investors.

Mitani, Chugoku Bank: Mr de Longuemar mentioned having emerging currency denominated project bonds, and of course if each country can undertake such a proj-ect then that would be best. But if it is difficult then the World Bank and ADB could provide a guarantee to help such an effort, and by so doing perhaps we will be able to help raise the awareness of such governments or peo-ple in those countries. And if that happened we would be keen to invest.

Kawaguchi, Daiwa Institute of Research: My sugges-tion is to develop the concept of SROI, or social return on investment. A green bond has a social outcome but it is rather vague, and if it were possible to quantify or qualify a certain level of ideal SROI on top of ROI in a more concrete way, and if you could show this to inves-tors, they could make a decision to invest with a finan-cial return of this much and social impact of this much.

The world is changing and investors want to be able to make a social return as well as a financial return. s

Kazuyuki TakigawaRESONA BANK

051-59 Tokyo SRi RT.indd 59 23/09/2014 18:09

CORPORATES CORPORATES


THE GREEN BOND craze has been slow to spread to the corporate sec-tor. Sovereigns, supranationals, agen-cies and municipalities have led the charge but, after a spurt of issues by companies in November 2013 and spring this year, the European cor-porate green bond market has been quiet, with only GDF Suez launching a deal since the end of April.

Nevertheless, the deals that have come to market have mostly been successful, and some observers have been impressed by the progress since last year, when Electricité de France and Vasakronan became the first companies to launch labelled green bonds.

“I don’t think anyone would have predicted that we’d have seen this much issuance in the first half of 2014, so it’s been a positive surprise,” says Manuel Lewin, head of respon-sible investment at Zurich Insurance Group in New York.

Not a new topicGreen bonds offer corporate borrow-ers another channel through which to advertise their efforts to combat climate change, or help the environ-ment in other ways.Most large companies have sustaina-bility policies in place, which they are eager to publicise, and no CEO wants to endure the stigma that arises from being exposed as negligent in this regard.

“Most of the companies we’ve been talking to are at early stages with regard to [green bonds], but for dec-ades have had internal programmes or green projects to improve their sustainability. It’s not a new topic in general,” says Bettina Streiter, head of corporate debt capital markets origi-nation at DZ Bank in Frankfurt.

Apart from the good publicity afforded by a green bond issue, the other motive commonly given is that it can reach a class of investors that would not normally invest in the company.

For example, more than 15 socially responsible investors that had never bought GDF bonds before participat-ed in its first green bond in May, and 60% of Unilever’s green bond debut was allocated to SRI accounts.

“While we believe that some of these SRI investors would have invested in our bond anyway, we were happy to widen our bond investor base,” says Michel Pinto, vice-presi-dent, treasury at Unilever in Schaff-hausen.

The companies leading the first wave of corporate green bond issu-ance have been eager to play a lead-ing role in creating more sustainable capital markets. Nevertheless, when considering whether to issue a green bond, companies must weigh up the economic advantages against the costs and difficulties associated with the novel product.

EarmarkingGreen bonds are more expensive to issue because of the work involved in structuring the transaction to ensure that the funds raised are allocated to worthy business objec-tives, such as renewable energy pro-jects.

A whole industry of independent second opinion providers is growing up around the nascent market, with the Centre for International Climate and Environmental Research — Oslo, known as Cicero, DNV GL, Oekom, Sustainalytics and Vigeo all vying for the opportunity to certify bonds as green.

The various approaches to earmark-ing taken so far illustrate why some industries are more naturally suited to green bond issuance than others.

GDF Suez raised €2.5bn with its first green bond, despite only having €1bn of eligible projects up to the end of 2014 to use the funds for. The rest will have to be kept in money market investments until more eligible pro-jects arise.

Being a large energy firm, GDF

Suez can be very confident that such opportunities will present them-selves, but not all companies have that luxury.

“Outside of the larger utilities, not all issuers have a selection of big proj-ects which will justify a benchmark issue,” says Stephanie Sfakianos, head of sustainable capital markets (fixed income) at BNP Paribas in London. “It becomes more cumbersome to man-age a wide range of small projects.”

Next to the energy sector, construc-tion and property development has been a big area for green bonds.

Vasakronan, the Swedish property company, was early to the party, issu-ing a Skr1.3bn green bond in Novem-

ber 2013, the proceeds of which could only be put towards buildings with an energy efficiency standard of LEED Gold.

Unibail-Rodamco took a much more structured approach three months later when it issued its first green bond, a €750m 10 year. Besides having Breeam certificates of Very Good or better, the buildings financed with this bond will have to meet five stringent environmental, social and governance criteria, to be assessed by Vigeo.

“The money raised with a green bond has to go into a project that pro-vides tangible environmental ben-efits,” says Lewin at Zurich Insurance. “Some sectors are more suited to this: the energy sector, utilities, anything which involves a lot of manufactur-

This time last year, no corporate green bonds had been issued, and only one corporate SRI bond. Since then, a dozen companies have issued them, mostly in Europe. The flow of corporate green bonds has resembled a stream rather than a torrent, but as the product edges towards maturity, more and more companies are expected to join the ranks of green bond issuers. Richard Metcalf reports.

Corporates take up the green bond baton

“Rail projects, including mass

transit systems are the most fascinating

area, because the green advantages

there are less debatable”

Nick DentNomura

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CORPORATES CORPORATES


ing or transport, housing — that’s where the CO2 comes from. You can only mitigate CO2 emissions where you produce them. But as an investor we are generally open to any activity that can deliver tangible environmen-tal benefits.”

In March 2014, Unilever showed the market that even a consumer goods company could issue a green bond, by identifying six investments it planned to make which would bring environmental benefits, and associat-ing funds from the £250m bond with them.

Five of the projects were new fac-tories or the retrofitting of old facto-ries, with targets on greenhouse gas, water and waste reductions. The sixth involved the introduction of more environmentally friendly freezer cabi-nets in Russia, Turkey and the US.

This earmarking feature of the green bond adds a degree of complex-ity which requires a certain amount of investor education. It is worth noting that Unilever’s green bond prompt-ed the issuer to organise its first bond investor roadshow for 14 years.

Surprises in store?Speculation abounds as to which industries will be next to produce corporate green bonds, and where, if anywhere, the limits to the prod-uct’s expansion lie. One sector clearly in the forefront of people’s minds is transport.

“Rail projects, including mass tran-sit systems, are the most fascinat-ing area, because the green advan-tages there are less debatable,” says Nick Dent, head of EMEA syndicate at Nomura in London. “Over time people will become more accepting of areas like air travel if the issuers can show that they are doing the right thing and how, but it’s more of a grey area.”

Shipping, too, could be a ripe area for green bonds. Jan Kjærvik, head of group finance and risk management at AP Møller-Mærsk, says his com-pany has not decided to issue a green bond, but that the Danish shipping firm would “follow the development of this part of the market closely and see if any interesting opportunities might arise in the future”.

“There are bound to be surprises,” says Sfakianos. “I speak to issuers in what could be considered contro-versial sectors, but they don’t realise

that this is the perception of their business. They feel that what they’re doing is very green, but because of my dialogue with investors and NGOs such as the Climate Bonds Initiative, I’m aware of some of the controver-sies. Such issuers then go away ener-gised about using a green bond to focus attention on the environmental aspects of their business.”

But the eagerness of market par-ticipants to encourage the segment to grow is tempered by a desire to main-tain its integrity.

“If you’re in an area that is too con-troversial, participants would discour-age you from going to the market,” says Sfakianos.

“It’s a question of credibility,” adds Streiter. “If you can single out [invest-ments] within your sector and opera-tional focus and prove that you are contributing to the saving of energy, the saving of resources, then why not? The question is, how credible can it be?”

Pricing advantagesSo far, the additional costs of green bond issuance have been borne entirely by borrowers, as the pric-ing of green bonds has not diverged greatly from where the equivalent non-green bond from the same issu-er would price.

Whether issuers should eventual-ly be able to realise pricing advan-tages from green bonds is a conten-tious issue.

“That’s a long way away,” says Sfakianos. “We’re at the very early stages. There aren’t that many green bonds at the moment, but the more there are, the more we will see a vir-tuous circle of supply and demand.”

While some corporate green bonds have been priced very tightly, with little or no new issue premium or even through the issuer’s second-ary market curve, it is difficult to prove whether or to what extent this is attributable to the green label. It is not common for companies to price new issues at negative new issue pre-miums, but this can happen in the present hot markets.

Unilever’s was one such bond, pric-ing at what one of the leads reckoned was 1bp inside fair value. But Uni-lever’s Pinto plays down the pricing motive.

“We think the key success is that our bond will help to establish this

new market by being used as a refer-ence for other corporates to replicate in both discipline and structure,” he says. “We did not issue a green sus-tainability bond for pricing reasons.”

Some commentators, particularly investors, take a dim view of the pos-sible emergence of a two tier bond market, with green bonds pricing and trading below issuers’ main spread curves.

“That would be a very unfortu-nate development for the market because it would limit the universe of potential investors very heavily,” says Lewin.

While he concedes that issuing a green bond might reduce an issuer’s cost of borrowing, because it could be seen as a signal that the compa-ny was lower risk than another in the same sector, he believes this should be reflected not just in the green bond but all the bonds of the issuer. “Con-ceptually I can see green bond issu-ances leading to a repricing of the whole curve,” he says.

For most involved with the prod-uct, the pricing discussions are an interesting sideline. Their main urge is to help the market grow. And while issuance may have tailed off since GDF Suez’s deal, bankers say there are more deals coming.

And they may be a more diverse bunch. Vince Purton, head of DCM at Daiwa Capital Markets in London, says: “We’ve had discussions with some corporates, who said they like the SRI idea, but don’t think green is the right fit for them. So we think some of the more social themes may open up for them, such as employ-ment, health or education, or some-thing with a gender focus.” s

“Most of the companies we’ve

been talking to are at early stages

with regard to [green bonds],

but for decades have had internal

programmes or green projects

to improve their sustainability. It’s

not a new topic in general”

Bettina StreiterDZ Bank

060-61 Companies SRI.indd 61 23/09/2014 18:14


European Corporate and Financial Institution SRI Bond Roundtable

: Environmental, social and governance issues have been rising up the corporate agenda for decades now, but do you think that is accelerating?

Carine de Boissezon, Electricité de France: Over the last two years when we have done equity roadshows it has become obvious that there is no meeting without someone from the investor’s ESG team being there.

They used not to be seen as critical within their insti-tutions, but now they have their places at the table. They talk more loudly to CEOs and CFOs, who now have to answer the questions in a professional way, which they didn’t feel so much under pressure to do a couple of years ago.

So the professionalism among the institutional inves-tors is higher now and I think this is a positive pressure on corporates today.

Participants in this discussion were:

(Back row, l to r:)Rafael Scholz, head of treasury, Münchener Hypothekenbank, Munich

Stephanie Sfakianos, head of sustainable capital markets, BNP Paribas, London

Lindsay Smart, head of UK and US markets, Vigeo, London

Bettina Streiter, head of corporate bond origination, DZ Bank, Frankfurt

Dr Heinz Schimmelbusch, chairman of the management board and CEO, Advanced Metallurgical Group, Wayne, Pennsylvania

Ulf Erlandsson, senior portfolio manager credit, global macro trading, AP4, Stockholm

Jon Hay, corporate finance editor, GlobalCapital (moderator)

(Front row, l to r:) Roberta Benedetti del Rio, associate, global credit fund, Generation Investment Management, London

Carine de Boissezon, head of investors and markets, Electricité de France, Paris

Alexandre Marty, senior investor relations manager, Electricité de France, Paris

Phillip Deans, head of fixed income sales EMEA, Daiwa Capital Markets, London

Nick Dent, head of EMEA bond syndicate, Nomura, London

Sean Kidney, CEO, Climate Bonds Initiative, London (not pictured)

Companies, banks highlight hidden value, prepare green bonds for climate mission

A year ago there had been virtually no corporate green bonds. After several eye-catching deals, the product is now on the radar of many treasurers at blue chip companies in a wide range of sectors, and at banks.

Green and SRI bond issues take a lot of work, but issuers value them as a way to engage with investors and talk about the good things they do that may get overlooked. Issuers can also reach new investors that otherwise would not touch them.

Green bond specialists are wrestling with how to set standards for this fast-evolving market. They must be neither too loose, nor too strict — for the market has an ultimate purpose: to facilitate the trillions of investment that will be required to create a low carbon economy.

062-71 Corporates SRi RT.indd 62 23/09/2014 18:09



: Is it just French investors, and is it just equity investors?

De Boissezon, EDF: French equity investors are leading because of the size of assets they have, but now the green bond market has put the fixed income guys on top of the story. Ten years ago it was just about bid/ask — now they really care much more about what is behind the corpo-rate’s core business.

Rafael Scholz, Münchener Hypothekenbank: We are a prominent issuer of covered bonds in Germany called Pfandbriefe. What we have recognised in investor talks is that especially in Europe institutional investors want to recreate a link between their assets under management and socially responsible projects.

In the bond market, there are two separate worlds. We have the bond market itself, where social and envi-ronmental aspects don’t matter much, and on the other hand we have green bonds. How to link those together is something we have to work on.

: Your view contrasts with Carine’s because you’re saying that in the ordinary bond market ESG still doesn’t matter very much.

Scholz, MünchenerHyp: Well, there are church institu-tions and other kinds of socially responsible investors but it’s difficult for them to find the right products.

De Boissezon, EDF: It depends, as well, on the sector you’re talking about. Investors in the utility and energy sectors have had to look in depth into the consequences of not acting responsibly, so they have to have a higher knowledge about ESG issues.

Ulf Erlandsson, AP4: The market has made it very clear that for a lot of, for example, utilities, the amount of con-tingent environmental liabilities they have is a massive risk that you, as an investor, need to price.

If a company has an oil spill and its bonds drop 15 points, I don’t have to call myself a socially responsible investor to think of that as a loss and not want to put it in my portfolio.

So it’s just part of the normal investment process. Investors are becoming more and more aware of how society in general will penalise companies that breach basic principles. When it comes to credit, contingent lia-bilities, ESG or otherwise, is a big thing and as an inves-tor I need to be very wary of them.

Bettina Streiter, DZ Bank: This has stemmed from the equity markets over decades, but during the different cri-ses we’ve been through over the past years, the focus has shifted from equities towards bonds. That’s the main rea-son we are now talking about green bonds. Investors are getting more pressure to find green fixed income assets, partly because the overall asset allocation has changed from equity more into the bond market.

: When you’re bringing issuers to the bond market, away from green bonds, do you encounter investors asking questions, as Carine was describing, about ESG?

Streiter, DZ Bank: It’s still very selective but overall there’s a developing understanding that, as an investor, I need to check on sustainability issues.

We all agree that a company that works sustainably and has sustainable products will simply last longer. And, in the end, as an investor, that’s what I want.

I probably want to invest long term, especially when interest rates are very, very low, to get more yield. But that means I have to dig more into how sustainably the business is done and skip companies that have a very short term business view.

Stephanie Sfakianos, BNP Paribas: Interestingly, there are huge differences geographically. The Germans, in practical terms, are exceptionally green, and it’s not a sur-prise that the first green covered bond is being done in Germany. But the German and perhaps Italian investors are behind the curve.

Whereas the average French investor would never say

ESG didn’t matter, in the UK there are slightly more baby steps but everybody agrees that it is a topic that needs to be factored in.

: Heinz, tell us about your experience of ESG pressure from investors.

Heinz Schimmelbusch, AMG: Well, it’s not an investor pressure, I think, it’s a market pressure. We are an indus-trial company, in critical materials, listed in Amsterdam and headquartered in the US.

And the reason why I’m here is that we have devel-oped a method how to measure greenness in one num-ber.

Our company lives off energy saving, energy storage and fuel efficiency: that’s what we do to sell technologies.

I’ll give you an example. We build the equipment

Rafael Scholz,MÜNCHENER HYPOTHEKENBANK

Stephanie Sfakianos,BNP PARIBAS




which enables aero-engine turbine blade producers to coat turbine blades. If you coat turbine blades you can drive at 1,500 degrees Celsius, versus 1,300 degrees Celsius if you do not coat. The difference for our custom-ers is 800,000 tonnes of CO2 savings annually.

In all our company’s 35 plants we emit a total 600,000 tonnes, end-of-pipe. So we, with one product, enable the turbine blade community, Rolls-Royce, GE, etc, to save 200,000 tonnes more than that of CO2 with more efficient engines.

Product by product, we’re enabling people to become more efficient in a deep way, not in some marginal con-sulting matrix; in a real way.

So it’s not satisfactory to talk just about the end of pipe and green definitions in a retro way. You have to talk about what your products do. Once that’s a move-ment, then the environmental aspect can do a quantum step.

: But are your investors interested in this? Has that interest grown?

Schimmelbusch, AMG: Very slowly. Equity investors like short term returns, as we all know. And there is a very big discrepancy between private and public equity. I ran my own fund for a long time so I know what pri-vate equity does. There is a huge difference between private equity in its short term necessities to raise funds and long term sovereign wealth fund investors or the like.

And when you are a listed company you shouldn’t start dreaming too much about your CO2 because you had better think about the next quarterly earnings.

Roberta Benedetti del Rio, Generation Investment Management: There is truth in this. But to give a bit of optimism, in terms of the accelerating interest from investors, I think lately, with further scientific evidence around climate change and a lot of work done by NGOs on stranded assets, some youth movements, for exam-ple, have been forcing university endowments to either divest from carbon-related investments, like Stanford did, or at least to question the carbon intensity and effect of climate change of their endowments, like Yale did very recently. That’s certainly a sign of an accelerat-ing trend, even if from a low base.

Lindsay Smart, Vigeo: I completely agree that there is an accelerating positive trend. There are some excellent companies which demonstrate real leadership and genu-ine sustainable integration in their business approaches.

But at the same time, there was a Corporate Knights report that looked at Bloomberg data and of 25,000 companies on Bloomberg, 75% of them didn’t even report on a single sustainability data point.

So there is still a gulf filled with companies that may be increasingly aware of this but are grappling with how to demonstrate their activity, or perhaps even do any-thing relating to it.

: Against this background of investors raising the focus on ESG, there has suddenly been an initiative by capital markets issuers — the green bond market. Is this a distraction from ESG investing — or what ESG investors have been waiting for?

Nick Dent, Nomura: There are lots of issues we’re trying to address in a market that is accelerating very quickly.

Let’s not forget that green bonds really started with public sector issuers, where ESG is very high on all the borrowers’ agendas. There was a lot of trust involved in getting their green bond programmes in place.

Now we’re going into the second phase, which is more on the credit side. This is the fastest growth area. There are a lot more questions, obviously, in the credit market around issuers’ intentions, ring-fencing, specific projects. It’s a much more fractured market.

But a number of bonds have come extremely success-fully. The issuers have taken a lot of the factors the pub-lic sector issuers had put in place and that’s been really helpful in trying to get some governance of the market.

More broadly, all this issuance connects the issuer and the investor a lot more than ordinary bond issues. It’s fantastic for a borrower because you feel that you bring something to market which is for the good of the envi-ronment, but now you’ve got the investor buying into it more deeply, on a much longer term basis. They want more information from the company.

So they’re moving away from “is the market going up or down, I like the credit?” to “I like the credit, I’m going to hold it, I don’t really care where the market is”.

It’s opened up a much more interesting discussion with investors than any of the usual bond channels.

Phillip Deans, Daiwa: Investors are looking at the space quite clearly and in depth now. It’s a growing area and quite a new sector, and new investors are coming in all the time.

The Uridashi retail market in Japan was the first major market to really embrace SRI. They have taken a huge variety of projects ranging from environmental to social bonds.

Bettina Streiter,DZ BANK

Lindsay Smart,VIGEO




When you look at the overall issuance of SRI deals, 90% are environmental. But I think investors will want to see a bit more variety. They will have their stakehold-ers to report back to, their objectives to meet, require-ments for funds and allocations of funds.

So, to have all your eggs in the environmental basket is a little bit limited and a greater variety of underlying projects would be very interesting for those investors.

But transparency is very, very important. Reporting throughout the life of the project is absolutely essential to the success of any issue.

: Sean, your organisation has been pushing the idea of bonds for the climate for some years. You’ve seen this labelled green bond market appear. Is this what you’ve been waiting for?

Sean Kidney, Climate Bonds Initiative: There is an enormous pipeline of capital investments in things like green infrastructure we have to do between now and 2050 to avert catastrophe, as the International Energy Agency says: the alternative scenario is catastrophe.

A lot of the investments to be made are ideally suited for bond finance. We talk about tripling rail kilometrage round the world and greening electricity systems in China: these are all things that have long payback peri-ods and high capex; perfect for a bond.

That is what got us interested in the first place, apart from the fact that a lot of the discussion around invest-ing in climate solutions had been caught up in the SRI, ESG kind of equities discussion which is all about risk factors and investors taking risk for the good of the planet. Pigs will fly.

What we need to do is ensure that our pension funds, our insurance funds are able to do both — are able to give us our pensions and also address climate risks by investing in these kinds of green infrastructure.

That’s how governments have run infrastructure for-ever. You create the right kinds of settings to ensure the infrastructure you need will provide a payback to the investors. So our argument, essentially, is that a flat pric-ing model is the right model — investors should get a commercial return. So, yes, I’m pleased with the current market for that reason.

: Carine, why has EDF embarked on using this labelled green bond product?

De Boissezon, EDF: We issued our first green bond, hopefully not the last, back in November 2013 and it was a €1.4bn deal.

People talk about stranded assets, but I think it’s good to talk about hidden value. For big corporates, it’s hard to focus equity investors, who are short term focused, on the value of all your assets.

We are the largest renewable energy company in Europe but nobody really knew it before we did the green bond. It was a way for us to show the value of this activity, and also make a link to our ESG policy.

Also, when you are a vertically integrated company, it’s a zero sum game. If you put too much renewables in the wrong place it means your power prices come down and we are a generator, as well.

The green bond was really showing the hidden value of EDF to investors and we clearly overachieved on that side. We met investors who didn’t know anything about our renewable policy or our sustainability policy.

: Is this really just an exercise that will convey this message to the bond market or do you think it also filters through to your equity investors or the public at large?

De Boissezon, EDF: Yes, in France, for sure. For the rest of Europe, probably it will take more time.

When we did the roadshow, the UK market was not as mature as, for example, the Dutch or French markets. There is education, clearly, that still needs to be done on the equity side.

But the more you do, the more people will care about what your policy is and the results of it. You have to demonstrate that what you say is happening and win their trust.

: Another benefit, presumably, was to reach new investors. Are they only in there for that one bond or are they now going to become your supporters more broadly?

De Boissezon, EDF: We raised €1.4bn in a long seven year maturity. We could have done that in 30 minutes, but we did almost a week of roadshow, with two teams. And we met investors we had never met before, in Holland for example. We had Scandinavian investors coming to the bond which we’ve never seen before.

We had both new investors and investors putting in bigger orders than before.

What was interesting was that, for the first time, investors with very strong ESG criteria had to make deci-sions for their investment committees on differentiating between the project and the company.

It’s not just the fact that we are a nuclear company.

Heinz Schimmelbusch,ADVANCED METALLURGICAL GROUP

Ulf Erlandsson,AP4




We are also a state-owned company, and have some spe-cific governance issues. Some investors’ filtering on gov-ernance was not especially strong for EDF. But because they loved the pipeline of our renewable assets so much, they managed to convince their investment committees to invest in the green bond.

This is a strong success for us and means they will come back.

Scholz, MünchenerHyp: That makes me quite optimis-tic, because we are now roadshowing our forthcoming transaction — the first sustainable covered bond, which we call an ESG Pfandbrief.

But let me outline the story. Münchener Hypotheken-bank is a cooperative. That means we have a very demo-cratic shareholder structure: one person, one vote.

The company is not listed and, as we decide who can have shares, profit maximisation is not the key element.

Second, more than 80% of our business is residential mortgage lending in Germany. The Germans are very, very cautious people. The typical German takes a long term, fixed rate loan, with 1% or higher amortisation, so we compare it to a kind of rental cost.

And the Pfandbrief is the most important source of funding for our institution. With the legal framework behind it, the Pfandbrief is sustainable per se.

And now we are trying to combine the two aspects: our ethical structure and mortgage lending.

Our institution has for years now been committed to sustainable business and our long term goal is to trans-form all these sustainability aspects into our core busi-ness, mortgage financing.

Investors have helped us because they told us they were interested in both. They want to have the same credit quality as a typical MünchenerHyp Pfandbrief, which is Aaa rated by Moody’s. And, second, they would like to have certainty that an equivalent amount to the proceeds is dedicated to socially responsible assets.

With the concept we have created, we can put both objectives together. And I hope and believe that with this transaction we will help to develop a new market.

: Are your socially responsible assets a specific subset of your overall assets?

Scholz, MünchenerHyp: Yes, but they are not legally separated. In the legal concept of the German Pfandbrief, you can’t separate out some assets.

But it’s not necessary from our perspective. If you invest in a senior unsecured green bond, in the case of a default, you would have a claim on the issuer’s overall pool of assets. That is no different from a covered bond.

The important thing with a green bond is that you have a story behind it and a cover pool or sub-collateral pool which you report on regularly, as you do in your common business.

What we have tried to adapt from the German Pfandbrief Act is to report in more or less the same ways as we do for the whole portfolio.

We also — let’s call it guarantee — that the amounts we raise with these bonds will always be backed by existing and new assets. This is validated by a second party opinion.

Schimmelbusch, AMG: I have the bad feeling that around this table there are a lot of different definitions of what green is. That is a structural deficiency and a limiting factor of this whole debate, because if you want to bring together investors and issuers you need a price.

We are in the centre of the storm for green infra-structure. For example, you’ve read about Elon Musk’s battery plant in Nevada. Now, Mr Musk will use in that plant, at full capacity, more than 120,000 tonnes of very high quality natural graphite, which is thankfully one of my main products.

The total market in the world today is 120,000 tonnes, so this one plant will double that market.

We haven’t even addressed the investment necessities created by these big trends, like moving to low carbon energy, because these big trends hit bottlenecks. The investment necessities to remove those bottlenecks are gigantic.

To unlock more investment on a large scale, you need to see the investment in its proper context, which is its effect on the climate.

And how do we define that? By CO2. Every human activity creates a CO2 emission. In the past you measured greenness at the end of the pipe — less emissions was better than more emissions.

But that’s, of course, completely wrong because it’s marginal and unimportant. What is important is what you do as an entrepreneurial activity and what impact that has on global CO2 emissions.

We have done this throughout our company. In 2013 I think we emitted 600,000 tonnes, and enabled our cus-tomers to save 18m tonnes.

The net saving is 17.4m tonnes, so we are definitely green. We are so green that you can’t see us in the green grass.

So CEOs of companies should start to think in terms of “am I green or not green? And if I am green or sus-tainable, what is my definition?”

And they should start to measure themselves accord-ing to that definition, year by year and against their competition.

And then I want to take my superb greenness and go to all these investors who are seeking a real green invest-ment and convince them that I’m green, in order to open investment for these very large investment oppor-tunities ahead of us.

It has to be one number like an interest rate, a price, a number — not some cake where you can slice it subjec-tively in various ways.

Benedetti del Rio, Generation: It’s very interesting and important to talk about definitions, measurements and standards for green bonds and sustainable invest-ments in general.

In fact, it’s very rare that a project or business activity is black or white, green or non-green. Think of insula-

Roberta Benedetti del Rio, GENERATION INVESTMENT MANAGEMENT




tion, for example. Insulation in a building saves a lot of CO2 by reducing the amount of energy required for heat-ing and cooling, but the process of creating the insula-tion products itself is very carbon-intensive.

So there needs to be a proper, in-depth analysis and measurement done, and due diligence, ideally from a third party, to understand the whole process through a kind of lifecycle assessment.

However, if we reduce everything to one number, there remains the question of how to think about gover-nance and social aspects.

Another point is materiality. A project can be very, very green but not be very material to the overall busi-ness activities of a company, so really makes very little difference overall.

But I agree that this kind of assessment is absolutely important, overall in a bond issuance process, where investors need to make a decision whether to invest in a short timeframe.

Erlandsson, AP4: Roberta makes a good point: this third party verification process is very important. It’s a very immature market so far and at the same time, in terms of CO2 emissions, the house is on fire.

So we need this market to grow exponentially. In the meantime we can’t get too bogged down in details or different protocols of what is green, what is not green.

There might be a lot of solutions out there that are not ideal, but they are actually good. “Let not the best be the enemy of the good” — that’s my approach to these things.

: What purpose do green bonds serve for you?

Erlandsson, AP4: We’re the Fourth Swedish State Pension Fund. I’m a bond investor with a whole broad portfolio of credit and triple-A bonds. We have a bigger, broader, socially responsible mandate strategically on the fund, and one way I can address that is buying green bonds.

So, when EDF comes with a deal, I can look at it as a green bond and compare it with everything else in EDF. If I find it attractive on my usual P&L criteria it may be a risk I’d like to take on.

Something I really want to push is that we don’t want green bonds to be pigeonholed. We don’t want them to be a separate asset class because that means portfolio managers like myself will not be as active and will not be able to apply the same amount of capital in the sector as we are today.

If investors put up targets that they’re going to have a certain percentage of their portfolio in green bonds, I am afraid that will mean the green bonds becoming a fairly junior part of the portfolio.

You’re not going to give it the best attention and you’re going to put it in some sort of vehicle which has a lower yield than the rest of your portfolio.

And at the end of the day a lot of your investors are going to say “actually, this green bond thing, it’s all nice but it has got all these issues and it’s not returning the same amount of money as the rest of our portfolio”. And that will be to the detriment of the growth of this market.

So, it’s extremely important to make green bonds like any other bond.

And I’ll oppose Nick here a little bit, when you were saying earlier that green bonds put you in a long term engagement with a company.

Actually, I don’t want my green bond to commit me to do something differently from what I do with other exposures in my portfolio.

I want to treat it as any other corporate or suprana-tional bond, because that means I can put a lot more capital into the asset class.

Sfakianos, BNP Paribas: One of the challenges when we speak to issuers is that there is a lot of work to put these transactions together.

The reporting and setting up the projects are quite onerous and once you start talking to internal corporate social responsibility departments, you realise that people need to be comfortable that they can answer the awk-ward questions.

Issuers have to ask themselves: “If we’ve agreed that we’re going to go through that process, what are the things that would add value for us?”

One would be better pricing on a green bond — but I think we’re all agreed we just don’t even want to go there. We want to park that decision for the time being.

The second is diversification of investors. But if you decide to eliminate a lot of the green specifics, then you run the risk that your paper basically gets placed with the best-in-class investor who likes your ESG perfor-mance but who would buy your debt anyway.

So I think there is definitely a place for dedicated green portfolios. Mirova is one of the pioneers and Zurich Insurance is another that is specifically looking for something with an environmental flavour.

That does give the issuers comfort that they are really getting diversification because the buyer could not buy their straightforward bonds.

Deans, Daiwa: Those with dedicated SRI portfolios really need to have a tangible project behind the deals, so they can report back to their stakeholders and say, right, we are diversified not only with environmental investments but in education, in health, in creating bet-ter opportunities for women and in employment. There are lots of projects out there under the green or ethical banner.

For investors who just take a bond and put it in with their general portfolios, it’s not so important.

The two kinds of investment can and should run parallel to one another but there are investors who do require some sort of tangible project they can analyse and report on.

So going back to Heinz’s comment about specify-ing the numbers on ethical and green bonds, I think it’s probably easier to define on environmental issues

Carine de Boissezon and Alexandre Marty,ELECTRICITÉ DE FRANCE




because you can measure CO2 emissions, recycling tonnes of plastic, etc.

But on the social side, to quantify the benefit is much harder because some of the benefits go on for much longer than just the term of the bond or the project.

: Lindsay, your company specialises in quite complex analytics of ESG, with big spread-sheets and numerous calculations. So, what’s your reaction to Heinz’s idea that greenness should be boiled down to just one number?

Smart, Vigeo: Well, I can understand the desire for it. Because it’s a new market and there are a lot of unknowns, the desire is to quickly crunch it down to something we can easily grapple with.

But as Roberta said, it’s difficult to find projects that can be summarised in a single carbon figure.

Vigeo is an environmental, social and governance research specialist. Our philosophy is that any project is a combination of ESG factors.

However much you might want to unravel all those into a single perspective and just take one of them, you can’t. They are all intertwined. Whatever any of us do is within a complex system and they’re all interacting at all times.

So to try and present the truth about a project is to assess it on all three of those pillars, with an apprecia-tion of the complexity involved.

I think crunching it down to one number risks nar-rowing the market so much that you remove lots of potential opportunities that could provide transparency.

As long as people know what they’re buying, and can see, what is the benefit being offered by this proj-ect? How is it being managed? How are they going to report? What are they going to report and what is the benefit they’re going to tell me about in the future?

Providing that transparency is given, the investor market is very heterogeneous and they can all deter-mine what is right for their different needs.

Dent, Nomura: I think the market needs standards. Having one standard would have a clear benefit in terms of absolute clarity and the transparency we’ve talked about. But there are also downsides. You need the inves-tors to think for themselves, and not just react to a single number.

A lot of the developments in the market have been quite good because they are bringing in similarities to markets that are already mature and functioning.

The Green Bond Principles are similar to some of the market-related activities that ICMA and other trade bod-ies provide, whether it’s the internal governance issuers are setting, or the external counterparts they’re using to try and kitemark a bond.

I don’t necessarily think it has to be a single standard — actually I think you need a pack of them for the mar-ket to really expand.

Sfakianos, BNP Paribas: But it would be great if, in addition to knowing that the governance was sound and all the other boxes had been ticked, for the green component someone could say “this is green” or “this is not green”.

Schimmelbusch, AMG: Among many criteria. I’m not saying that this should be one and only. I’m not arguing for simplicity here.

To take a company and put it on an accounting sys-

tem for CO2 is not simple. It’s extremely complicated — it took us years.

It was very motivating, by the way, for the staff, because suddenly they find out that they are angels.

But if there’s no accounting, we will not have a mar-ket. Every market in the history of mankind has needed a price and therefore this has to be the guiding element.

There are other elements and it’s very complex but you need to be able to say: “I have a concept here and I am green at 37 and last year it was at 34 and I have improved and my competitor is at 31 and I’ve beaten him and next year I will beat him again”.

Then, the investor has the comfortable feeling that you know what you are doing.

I talked to one of these consulting firms who tell you whether you are green or not. It was a black box — they wouldn’t say how they worked it out. We need a transparent measurement.

Alexandre Marty, EDF: If you discuss how to have one number that quantifies the greenness of an investment, anyone would say that should be the CO2 emissions avoided, that’s what you hear commonly.

The CO2 metric is very important to EDF. We are one of the lowest CO2 emitters in the utility sector. Our head of sustainability talks a lot about how without EDF the electricity sector would emit 20% more in Europe. So, CO2 is critical to the EDF story.

Nonetheless, we are very cautious about measuring the benefits of a green bond portfolio or a project fund-ed by a green bond only from a CO2 perspective.

Take the example of the Scandinavian or French elec-tricity systems. Adding 1MWh of renewable electric-ity or saving 1MWh of electricity will bring very little benefit in terms of CO2 emissions because the emission factor of the local generating plants is already so low. So if you used only that metric, you would ignore projects in France or Scandinavia.

Kidney, Climate Bonds: That’s why we’re a great fan of having some simple metrics and simple rules out there.

One investor told us the story of buying the Iberdrola bond. They had a one hour sale window. Iberdrola hadn’t done a roadshow. They had to make a quick decision. Their SRI people couldn’t examine the second opinion in detail so they chose not to buy it on green credentials. But afterwards they said they would have.

Bond markets are really fast and it’s a commoditised market so quick ticks help. It doesn’t mean you can’t take a deeper look when you get the opportunity.

But when it comes down to how you construct the quick tick, you have to engage with some complex issues.

Is a wind farm in Iceland bad because it doesn’t knock out much CO2? No, it’s good because it helps grow the wind industry.

Do you worry about the embedded carbon from the grid? Well, you will if you take a pure carbon perspec-tive, and the embedded carbon in a wind or solar farm is relatively high.

But if you’re doing what the International Energy Agency says we’ve got to do, which is a rapid global industrial transition, you decide actually we can’t wait for the grid to get green before we start building the solar farms.

And then, of course, there’s resilience, which is not a carbon issue at all. Some 60% of the investment between now and 2050 will be climate adaptation and climate resilience, because we already have 2.5




degrees of warming in the system. So, you’ve got to bring that into investors’ understanding of green, as well.

So, I accept what Heinz is saying and I agree with the principle of having — I’m going to call it a tick instead of a number. But I also think it’s complex to develop it and there are many different factors other than carbon.

Schimmelbusch, AMG: Clearly, a utility has a differ-ent approach. I’m not talking primarily about energy production. What I’m talking about is the millions of products of industry. If you try to measure a million products and you are subjective, you’re lost.

So, from an industrial point of view it is absolutely necessary to develop a tick or whatever because other-wise how can you measure BASF in its greenness?

I’m just putting out a way because several industrial bodies are very much agreeable on that. It will happen and it has to happen.

If you exist and work as a company it has an effect and if that can be measured in CO2 it’s convenient because it is a clear accounting system.

: Bettina, are the investors you talk to looking for guidance? Do they want to be led, with standards and a simplified structure? Or do you think they want to be able to say, this is EDF, that’s AMG, I’m going to make up my own mind?

Streiter, DZ Bank: It’s a bit of both. Dealing especially with German investors, who are a bit behind those in France, the Benelux or Scandinavia, it’s very difficult to generalise.

Every investor seems to have an individual stance, what he defines as green and what kind of criteria he needs to have fulfilled.

On the other hand, there is an openness to be guided by principles — the Green Bond Principles and other ideas that could help them define a more homogeneous measurement, to compare issuers in the same sector and between sectors.

: Roberta, your company is entirely focused on sustainable investment. Have you found it necessary to create your own set of simplified metrics, or is that something you seek from third party providers?

Benedetti del Rio, Generation: More than traditional financial skills are required to do this.

We integrate sustainability analysis and research into a traditional financial analysis, to generate superior returns for our investors over the long term.

That grows from an investment team that have their own sustainability knowledge. We have people with a diversity of backgrounds to bring all that insight together.

The way we have designed our process and main-tained it over 10 years is to start from the bottom up, looking in depth at a number of long term mega-trends — the climate, natural resources constraints, demo-graphics, ageing, inequality, etc.

We believe these factors affect the competitive advan-tages, disadvantages and risks of companies and sectors over time.

So we analyse how these trends will impact different sectors and then which parts of each sector will benefit or not, and within that, which companies will be better positioned.

Because we do such a fundamental analysis on our companies, most of our investment strategies focus on either bilateral private transactions or somewhat more concentrated investments, rather than a diversified port-folio of 1,000 names.

: So you’re not necessarily buying the obvious public bonds?

Benedetti del Rio, Generation: In our case, we aren’t. We have the flexibility to do it and we are looking at green bonds. We haven’t invested in any yet because the core of our strategy is doing private, mainly bilateral transactions, lending directly to small and medium size enterprises, with the flexibility to structure the optimal solution for their growth plans.

That definitely gives us the possibility to have a much deeper engagement with the management, do the appropriate due diligence, and understand the real impact of their activities and the risks these bear.

: By engagement, do you mean that in the ESG sense of trying to improve their behaviour?

Benedetti del Rio, Generation: We wouldn’t approach a company that had a completely different standpoint on sustainability from ours and tell them to change their business model.

We want to lend to companies where the manage-ment team is aligned with our philosophy, where they understand the risks and opportunities related to climate change and other challenges, and they are posi-tioning for those.

There are many SMEs like this and they are often overlooked by banks, both because there’s a general credit scarcity towards SMEs, but also because their business models are sometimes more difficult to under-stand. So we find very interesting opportunities to help them, and we believe this offers attractive risk/reward.

: Ulf, how does your approach compare with that? And what is your reaction to Heinz’s idea that, in working out whether a company is green, you should take account of what its products are used for once they’re sold?

Erlandsson, AP4: We’re quite different from Generation, just because of the resource-intensity of managing a portfolio the way Roberta is doing.

Phillip Deans,DAIWA CAPITAL MARKETS




I run global credit — it’s me and myself only doing that. So for me to dig into more than some specific cases is quite difficult. I’m very much dependent on third-party opinions.

Having said that, I know that, just like with the rat-ing agencies, when they tell me something, it might not always be the case. I need to be very wary of that. I always have to go back and ask myself, “is this really what it says it is, or should I do some more analysis around it?”

There has been at least one green bond issue where I’ve decided that the underlying project was green, but the issuer was so dirty or doing other things, that I’d rather call it a greenwash.

There is already some of that stuff coming through and you as the investor are responsible, whether you have a third-party opinion or not.

I don’t want green bond investors to become this pas-sive sort of investor class that will make the same mis-takes as the markets did with the rating agencies in the structured credit boom.

You always have to bring your common sense to the table when you look at this asset class, but also all the machinery to make quick decisions. So having some sort of palpable measures is obviously a big help.

De Boissezon, EDF: When we did our roadshow we started to understand that investors had high expecta-tions about the information they wanted about the projects.

But you need to find the right balance, to get your operational people on board. Because if the pricing is the same as for a normal bond, the cost for the company can be important.

The operational side of the business may not want to give up commercially sensitive information that their competitors can find out, so you can end up limiting the number of projects you can select.

So if we don’t want to kill the market we need to understand the constraints on issuers in terms of the cost and sensitivity of the information, and to find the balance with investors’ expectations, which are very varied.

Scholz, MünchenerHyp: Yes, Carine is right. The reason why we are now ready to launch the bond is that I want-ed to set up the fundamentals. MünchenerHyp is not a dirty company at all, but what are the fundamentals?

The fundamentals for me are pretty clear. You have to be prime rated by a sustainability rating agency and we had to work for that, otherwise, from my standpoint, it

wouldn’t be a trustful dialogue with an investor. Of course there are different opinions and definitions

of what is an industry leader but having a rating agency clarifying that is very helpful.

Afterwards you can go into the market and work on your project.

Dent, Nomura: The good thing about this market is that it still retains a 90% bias towards investment grade with vanilla coupons, with guaranteed rates of return.

That side of the market is quite easy to understand and the fact that it is coupled with particular ring-fencing means there is already a framework we can deal with.

As we go down the credit spectrum there may be hurdles ahead but we can deal with them. It’s great that the market is booming, but booming in a way that we can all handle.

Deans, Daiwa: The market’s young. It’s growing very, very fast. Last year the whole green sector issued some-thing like $11bn of debt. This year, to date, it’s up to about $25bn, so it’s growing exponentially.

That means any framework we put in place now has to be future-proof. It has to be flexible because the product is innovating, it’s growing. There may be secu-ritizations, emerging market issuers and investors, all of whom are going to have different requirements.

Having guidance like the Green Bond Principles is a good start but I think anything that puts things in a box and is too rigid might actually stymie growth.

Kidney, Climate Bonds: That’s true, but it’s a balance, because we are creating a market out of nothing. The first to market are setting precedents and 1,000 people are going to copy them. So we want to be comfortable that the precedents are actually scalable, even though when an issuer’s doing a deal, they’re just trying to get their own bond out.

What issuers have done already in getting second opinions and ring-fencing is so important. De facto or deliberately, these are now models for a growth market.

There’s a heavy responsibility on us in being early in this market. If we don’t get it right, it will collapse like a bad soufflé.

Smart, Vigeo: At the moment, each issuer is pushing the boundary a little bit more, and recognising that there is a responsibility not to backpedal but to push forwards.

Kidney, Climate Bonds: That’s been really good. The European issuers in particular have had a strong urge to try to do this the right way and that has been really important for the robustness of the market today.

: At the heart of all these efforts is the question: is ESG investment in bonds actually help-ing the world, helping climate issues, in particular?

One issue is additionality. The labelled green bonds so far are financing activities that the issuers would have done anyway. So, are investors looking for this additionality to start coming in?

And secondly, is the market training up investors to start looking for more challenging deals, for com-panies which don’t have such easy access to finance?

Sfakianos, BNP Paribas: There are lots of project bonds going on in solar, wind farms, etc, which create real additionality. We do a number of them. The irony of it is that a lot of the investors in those green project bonds

Nick Dent,NOMURA




are buying them on a relative value basis and not on a green basis.

Meanwhile, the green investors are buying use-of-proceeds type bonds, and probably don’t buy project bonds or securitizations because they don’t like the illi-quidity and complexity, and the structured debt market is tainted by the issues of a few years ago.

So there is clearly work to be done to bring those two together.

It’s easy to forget sometimes that it is very early days and if you are a specific green bond investor there’s not a whole lot you can buy. But every day we speak to investors who say “we are getting to the point where the critical mass will justify us doing the extra work”.

There are asset owners who want investments with a green focus. It will happen and it is already growing.

: Lindsay, do you feel that your activity is helping make changes in the real world?

Smart, Vigeo: We hope so. What we are aiming to do is help companies grapple with how to bring their ideas to the market.

We apply our assessment methodology rigorously, but in a customised way. Companies are all very different and what they’re trying to achieve with their green or SRI bonds is not always the same. Our role could evolve as the market evolves.

We’re not structuring bonds, there are people with much greater skills than ours in how they are packaged and brought to the market.

But we’re trying to help companies understand what the expectations of responsible investors are, how their business could connect to those expectations and how that can be put into a credible package to make that con-nection.

We aim to assist the companies and then bring trans-parency for the investors, so they can see what the com-pany is offering, what their project is, how it is managed and a perspective on the issuer themselves — their qual-ity and what they’ve committed to reporting on.

I agree the additionality question still remains. But it’s still a very new market and that can come in time. The opportunity definitely exists.

Dent, Nomura: We’ve been through one major change already in this market — the development from a very limited edition, targeted sort of market into a more mainstream market.

We’ve now got two tiers in it — project finance and smaller amounts of different currencies, and then bigger benchmark bonds which have brought in not just SRI investment but a broader range of investors.

I guess the next phase, further down the line to a low carbon society, is that issuers will realise: if my behav-iour is not correct then maybe I get worse access to capital markets.

Scholz, MünchenerHyp: We’ve talked a lot about inves-tors, and about issuers. But what I noticed during the long process of designing our framework is that we also have to focus on the borrower — I mean, our end cus-tomers whom we lend to.

It was not easy to have a high standard of data about them, because a borrower refinancing a property has no obligation to give you a lot of climate data.

So I believe that the transaction we are planning now will spur a development to higher standards of

information in the future. I also think we will raise the awareness of a huge investor group, the typical German Pfandbrief investor, which might become interested in ESG bonds.

Kidney, Climate Bonds: The covered bond meme is so important. We’ve been talking about it for three years

with the VDP [Pfandbrief trade body] and people have been highly resistant. The fact you’ve shown it can be done is such a pivotal moment in the market.

De Boissezon, EDF: Additionality is something that came up a lot during the roadshow.

But it should be pointed out that we have ring-fenced money that can only be spent on our renewables busi-ness. That means that if bad times come — and all com-panies go through bad times — when you have to cut capex, you cannot touch this part.

So the people in our renewables business are happy, because if it comes to discussions at the board, their business will be sacrosanct.

When we talked to the structuring team about this ring-fencing, they thought we were going too far. Yet effectively this is the standard now, and I think it is a good standard, because it really forces this capex to be spent in the right way.

Benedetti del Rio, Generation: An investor like Generation, which integrates sustainability in any invest-ment decision, wouldn’t necessarily need a green bond label to invest in a bond. If there’s a company we like, we can invest in any traditional bond.

However, I think there is a great value in the develop-ment of green bonds, in terms of the overall investor community and market education. Firstly, when you start looking at how the proceeds are invested, it puts the attention on things that are good for business in general.

For example, the Unilever green bond is for invest-ments the company is doing because it saves them money. So that puts the spotlight on the business oppor-tunity and financial value of green investments.

And secondly I think understanding the environ-mental impact of these projects should hopefully in the future make investors try to make comparisons.

They may get to a point where they believe that a lot more, if not all, of their assets under management should be assessed also from a climate and ESG point of view. s

Sean Kidney,CLIMATE BONDS INITIATIVE


CAPITAL MARKETS TIMELINE CAPITAL MARKETS TIMELINE


2006 2007 2008 2009 2010

The Green Bond Timeline

NOVEMBER World Bank sells fi rst

green bond — a Swedish krona deal placed with Swedish pension funds,

with an opinion from Cicero

NOVEMBER IFFIm sells inaugural

vaccine bonds

JULYEIB debuts Climate

Awareness Bond format

JULYWorld Bank sells fi rst

dollar green bondNOVEMBER

EIB sells debut Climate Awareness Bond in

Swedish kronor

072-073 Capital Markets Timeline.indd 72 24/09/2014 16:31

CAPITAL MARKETS TIMELINE CAPITAL MARKETS TIMELINE


20112010 2012 2013 2014

APRILAfDB sells clean energy bonds to Japanese retail

investorsADB sells water bond to

Japanese retailMAY

EBRD issues microfi nance bonds

SEPTEMBER ADB’s clean energy

bond NOVEMBER

IFFIm brings inaugural Australian dollar

benchmarkDECEMBER

EBRD environmental sustainability bond

FEBRUARYIFC sells fi rst $1bn green bond. Repeats the trick

in NovemberKexim issues green bond

JUNEState of Massachusetts becomes fi rst US state to issue a green bondSolar Star raises $1bn

project bondJULY

EIB’s fi rst benchmark Climate Awareness Bond

AUGUSTWorld Bank brings

benchmark green bond in dollars

SEPTEMBERCity of Gothenburg sells

fi rst green bond from a city

SEPTEMBEREBRD’s fi rst public listed green bond for $250m

OCTOBERAfDB’s fi rst green

benchmarkNOVEMBER

FMO sells debut sustainability bond

syndication KBN debut syndicated

green bond Vasakronan sells fi rst corporate green bond

EDF €1.4bn green bond — a record size

Bank of America becomes fi rst private fi nancial institution to

issue green bond IFC prints Women in

Business Bond

JANUARY Green Bond Principles

launchedFEBRUARY

Unibail-Rodamco makes green bond debut

MARCHWorld Bank sells first green

benchmark in eurosToyota sells green ABSUnilever issues £250m

green bond, fi rst in sterling and from

consumer goods companyAPRIL

Île-de-France brings €600m green bond

Iberdrola sells green bond without roadshow or new issue premium

JULYKfW’s debut green bond

Lloyds Bank issues £250m ESG bond

Lloyds and Rabobank make £200m green loan

to Sainsbury’sSEPTEMBER

IFC adds green bonds to its US retail platformEIB sells longest euro

benchmark green bond — a €500m 12 year CAB

AFD debuts with €1bn 10 year green bond

IADB sells education, youth and employment

(EYE) bondMünchenerHyp brings

fi rst green covered bond for €300m

State of California says it will issue a green

bond

MAYGDF Suez sells green bond — a €2.5bn dual trancher, largest ever at new issue

Regency Properties places $250m green bond 16bp through

curveJUNE

Johannesburg sells green bond

IFC debut green bond in renminbi

AfDB sells food security bond

Nederlandse Waterschapsbank

launches debut syndicated green bondVornado Realty prices

$450m green bond 15bp-20bp through

curve

FEBRUARYTopaz Solar Farm issues

$850m project bond APRIL

Île-de-France sells fi rst SRI bondOCTOBER

Air Liquide brings fi rst private sector SRI bond,

using Vigeo opinion

JUNE World Bank and Bank of America Merrill Lynch agree to offer World Bank green bonds to Merrill Lynch Wealth

Management investors on a periodic basis

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16.09.2014 18:46 (QUADRI-tx vecto) flux: PDF-1.3-Q-300dpi-v-X1a2001-fogra39

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