The initiatives proposed by UBS's joint chiefs of ultra high net worth wealth management might well work in encouraging their clients to buy MDB paper. But this won't do much for the environment.
Mobilising private capital towards financing sustainability projects is a constant theme at green bond conferences. However, shovelling yet more funds into already overfilled supranational order books is far from the best we can aim for, particularly when the only result will be to scrape an extra basis point from the already skinny yields offered by the asset class.
To make a tangible difference, green bonds must be providing capital to those who would not otherwise be able to raise it, funding projects that would not otherwise be undertaken, or offering better terms than conventional finance.
Multilateral development banks have a huge role to play in the market, but they can be most useful through providing credit enhancements, anchor investments, structuring and reporting advice… all the methods of sweetening high yield corporate deals enough to suit ESG investors’ conservative palates.
The funds required to perform such a role might be justifiably raised through the sale of green or sustainability bonds, but let’s not get carried away.
MDBs are already at the top of the capital markets food chain, and initiatives designed to funnel more investment their way are pushing at an open door. For that matter, one might point out that UBS might find it easier to drum up interest in buying SSA bonds if it still had an SSA desk.
Moreover, MDBs are more than capable of appealing to private capital under their own steam — the growing importance of their retail programmes is testament to that.
But what UBS's ultra high net worth wealth management chiefs seem to miss is that the factor limiting most MDBs’ investment in sustainable goals is not their access to capital markets.
Many could add an extra few billion to their funding programmes without a strain. If that funding were to come with a green stamp, allowing it access to the ravenously hungry green institutional investor base, we would likely not even see a move in their cost of funds.
Demand is not the problem, but supply. There are simply not enough projects for MDBs to fund. Persuading more investors to look at green SSA bonds will not magically increase the number of applications for sustainable loans they receive.
The only economic approach to boosting the number of sustainable projects is for socially responsible investors to offer a material funding advantage to projects aligned with the UN’s sustainable development goals (or whatever your favoured metric is) relative to those that are not.
While heaping more private capital on supranationals’ bonds might skew supply and demand dynamics sufficiently to allow them to price a couple of basis points through their curve, this dynamic will not last if the market receives the amount of supply needed to make a real difference.
If they want to change the world, socially responsible investors might try committing to paying a consistent and meaningful spread over conventional bonds.