Participants in this roundtable were:
Andreas Alestrøm, senior vice president, international funding, Kommunalbanken
Philip Brown, head of public sector DCM, Citi
Frank Czichowski, head of financial markets, KfW
Christopher Flensborg, head of sustainable products and product development, SEB
Stefan Goebel, managing director, head of treasury, Rentenbank
Bryn Jones, head of fixed income research and manager of Rathbone Ethical Bond Fund, Rathbones
Navindu Katugampola, vice president, SSA origination, Morgan Stanley
Stuart Kinnersley, chief investment officer, Nikko Asset Management Europe
Eila Kreivi, director of capital markets, European Investment Bank
Isabelle Laurent, deputy treasurer and head of funding, European Bank for Reconstruction and Development
Anders Nordborg, portfolio manager, SEB Asset Management
Hassatou N’Sele, manager of capital markets and financial operations, African Development Bank
Carlos Perezgrovas, executive director, SSA coverage, Daiwa Capital Markets
George Richardson, head of capital markets, The World Bank
Frank Richter, head of investor relations, NRW.Bank
Alexander Ruf, senior funding manager, Nordic Investment Bank
Raymond Seager, managing director, head of SSA debt capital markets, Bank of America Merrill Lynch
Moderator: Ralph Sinclair, EuroWeek
EUROWEEK: Why is it that environmental, social and governance issues matter to bond issuers?
Frank Czichowski, KfW: Environmental, social and governance issues are a matter for the whole organisation, so the starting point for an institution like KfW is not to look at it from the bond funding point of view but from the point of view of the whole organisation.
KfW’s prime business is to make loans for sustainable development in Germany and for the developing countries. We have worked for a long time on our sustainability credentials, making sure that what we finance is sustainable and how we finance it is done in a sustainable manner.
Themed bonds, or more sustainable investments in the bond market, have been on investors’ agendas for a few years now. More investors, including ourselves, are looking at issuers’ sustainability credentials. That changes our job in the sense that we do not just have to act responsibly as an institution in general but also to market our credentials in the bond market.
Eila Kreivi, EIB: It’s our job to promote European Union objectives. Environmental, social and governance issues are central to those objectives.
Andreas Alestrøm, Kommunalbanken: More institutional investors, in particular, have a growing interest in environmental, social and governance (ESG) factors because they affect the performance of their investment portfolios. It’s only natural for bond issuers to increase the focus on these issues as a result. Different standardised frameworks have also developed — for example the UN backed Principles for Investment — which makes it easier to measure ESG factors. As a 100% state-owned agency we are required by our owner, the Kingdom of Norway, to take environmental responsibility and to report on specific ESG key performance indicators to ensure that we are integrating these issues into our daily way of doing business.
Isabelle Laurent, EBRD: It’s in our founding agreement, which says we must promote environmentally sound and sustainable development in all our activities. We take that to mean in funding as well as lending.
Hassatou N’Sele, AfDB: We have a socially responsible mandate to combat poverty and promote sustainable social and economic development in Africa.
Our environment policy promotes the mainstreaming of environmentally and socially responsible growth in all our activities. Our long term strategy has two objectives that guide our interventions in Africa. The first is to achieve growth that is more inclusive, and the second is to ensure that inclusive growth is sustainable by helping the continent gradually transition to green growth.
Frank Richter, NRW.Bank: We made a baseline study to get our own house in order in 2005-2006 so that we could measure our carbon dioxide footprint and reduce it.
We were in contact with SRI rating agencies to receive ratings for sustainability.
We are in charge of sustainability development in North-Rhine Westphalia. We have a climate change policy, and one for water related topics like river restoration, clean water reserve maintenance or waste water treatment.
Alexander Ruf, NIB: Supporting projects which enhance the environment in our member countries is one of the two core pillars of our mandate to support sustainable growth. So it is basically in our DNA that these issues matter. For that reason all our bonds have always been regarded by investors as having a green content.
Philip Brown, Citi: We expect global real GDP to double in the next 20 years and energy consumption to perhaps triple by 2035. We are forecasting global investment in energy should reach $37tr by 2035, of which $16.9tr is for the power sector. The good news is as countries get richer they get more energy efficient. But the improvement in resource efficiency is not automatic, it requires investment. Andy Warhol said: “They always say time changes things, but you actually have to change them yourself.”
It requires a proactive approach from participants in the business of developing markets. That is fundamentally what we’re all here to do. We have to industrialise the volume of investment in climate change programmes.
Christopher Flensborg, SEB: All of the multilateral development banks have sustainability in their DNA, which has made it much easier to integrate it with investors.
Raymond Seager, Bank of America Merrill Lynch: It’s about promoting what the issuers are doing on the lending side on the funding side – putting that work into a new, wider sphere.
EUROWEEK: Is that the main point of themed bonds? After all, these are borrowers that have a mission to support sustainable development anyway.
Flensborg, SEB: When we’re talking about impact we’re talking about three different kinds of impact.
We’re talking about the dollar-for-dollar impact, the things you can do with that dollar invested. And we’re talking about a structural and organisational impact.
The dollar-for-dollar impact of many of the green bonds that have been sold so far has been fairly low, that’s fair to say.
However, the structural and organisational impact has been massive. If you had called for this meeting three years ago, you would have had three people around the table. Today you have major banks, the major issuers, and a number of investors attending both here and in New York.
All of us are building strategies around this product and developing different ways to integrate this awareness — building ways of sourcing money into new kinds of investments.
That’s the structural and organisational impact, which is eventually going to have a massive dollar impact.
It’s not just window dressing.
Navindu Katugampola, Morgan Stanley: Green or themed bonds have allowed the borrowers to diversify and broaden from their traditional investor base.
The Morgan Stanley Wealth Management network is bringing a much broader range of potential investors to look at this asset class. It is enhancing what the issuers are trying to do because it extends their reach to a whole new potential audience.
Kreivi, EIB: We hear the question, ‘aren’t these projects that the EIB would finance anyway?’ Of course, they are — one of our core priorities is to finance renewable energy.
We can’t make that financing conditional upon a certain kind of debt issuance. That would be counterproductive. Bringing issuers and investors together who see that this is important is what this product allows. We will finance the end projects anyway.
Czichowski, KfW: The awareness of themed bonds as a subject has increased tremendously. If you look at the UN’s Principles for Responsible Investment, the number of signatories has increased from 200 about six years ago now to 1,200. The amount of assets under management that are managed by the signatories has increased over the last eight years from $2tr to about $35tr. You can debate the exact numbers but it is a very visible increase.
The structural changes have already been very substantial and they will continue.
George Richardson, The World Bank: It’s recent, too. The biggest changes have happened over the last, say, 12 months and the change has been exponential. It has a lot to do with the appearance of some very large, major investors who are now adding dedicated portfolios to the class.
This market has had different stages. It was stuck in the retail market, which is where that themed bond came about but where the proceeds were not actually ring-fenced.
But now large, serious investors and their ESG departments are insisting on ring-fencing and standardisation. That’s going to change the market and professionalise it.
Stuart Kinnersley, Nikko Asset Management: From the investors’ perspective the other thing to bear in mind is that in recent history we’ve had quite a few issues with fraud and bad corporate governance in companies.
The issuers of this debt in the SSA space have very strong corporate governance, and have very good historical information about their businesses, and what they’re investing in.
That attracts some of the institutional investors, especially as we’ve just been through a banking crisis.
Investors are attracted to this sector because of the strong corporate governance. As a bond investor that’s what you need. You need to see good, strong cashflows, which you know are sustainable.
N’Sele, AfDB: Themed bonds allow us to cater to the needs of a new set of clients that have exposure to a portion of our mandate, be it water, clean energy and so forth. And that’s what we are providing.
Ruf, NIB: Issuing green bonds fits well into our mandate and there is demand from green-conscious investors — so this looks like a very good basis for issuing bonds which help financing for environmental projects.
EUROWEEK: Socially responsible investment is a concept that suits SSA issuers very well but what about other borrowers? Will those that fail to embrace the trend be left behind?
Brown, Citi: There’s no shortage of cash around the world and we see that in our markets all day, every day. Frank and George have talked about the enormous growth of investor activity in SRI. Traditionally SRI funds have been focussed on an equity benchmark and there has been very little fixed income supply that has met ESG criteria. We’re starting to see a pick-up in green bond issuance, but the sector is still very young. For the SSA issuer community it seems to be a reasonable strategy to follow the money.
When we did the IFC’s $1bn green bond it was the same in all economic respects to a $1bn regular, non-green bond from the IFC. Typically IFC’s regular benchmark distribution pattern is for maybe only 10% US investor participation at most. The green bond had 70%. It is a way to attract the enormous US investor base. Assets under management in the US are massive and they haven’t yet really engaged in the SSA space to a significant extent. Green bonds are a theme that really resonates with the current generation of US portfolio managers. For issuers, it’s a way of unlocking this huge potential source of new investors.
EUROWEEK: Is that the main benefit then of themed bonds — access a more diverse pool of funds?
Seager, Bank of America Merrill Lynch: It depends how you’re looking at it. If you’re looking at it purely as a funding tool for raising cash then there is that element to it. But you need to incorporate the other issues we spoke about too, about aligning the principles and statutes of the issuers and promoting those on the issuance side. Investor diversity is one of a handful of key reasons for issuers to look at this market.
Kinnersley, Nikko Asset Management: It’s part of an evolution. When the World Bank issued the first green bond it was a catalyst to give investors a choice for the first time.
There’s this dearth of ESG within the fixed income markets. And through supranational issuance you have liquidity and you have size. It was a very important first step but it is part of an evolution.
Stefan Goebel, Rentenbank: Every investor certainly has the right to say he wants to use his money to make a difference in a certain field or to promote certain activities.
But the alternatives to SRI bonds are not bad bonds, unsustainable bonds, illegal bonds, or anything like that.
Rentenbank finances wind energy, solar energy and bio-gas alongside other investment activities by farmers without a special SRI touch to it, simply because our promotional mandate is ensuring sufficient access for farmers and rural municipalities to long term financing to secure food production in Germany.
That doesn’t mean I feel bad about all the other things, which would not qualify for an SRI bond. Quite on the contrary, we have been around for about 65 years now and I am proud of what the organisation as a whole has achieved.
Frank Richter, NRW.Bank: That is the crucial point. All of us are doing things that are good for the public — our owners and our stakeholders.
But we are doing well in so many areas. If we are able to pool our activities into one simple sector and to refinance it with a single transaction, then the buy side has the opportunity to make its own decision. It’s a new dimension when it comes to portfolio construction.
Laurent, EBRD: One of the difficulties in looking at demand for sustainable investments is the fact that these encompass a whole range of investors. Some are focused on religious criteria; some are focused on purely environmental criteria, or ecological criteria. And in order not to subdivide the portfolio in many different ways leaving all these separate portfolios to monitor, it’s easier to drill down to the assets that they can all buy and use them to define the green portfolio.
There is also the matter of marrying an environmental with social sustainability, which sometimes has a natural tension. The pace that you want to arrive at a totally green, sustainable outcome from an environmental standpoint may not be one that suits your social criteria. It may be a case of balancing these different, competing perspectives.
Czichowski, KfW: This touches on some of the complexities that we will have to deal with in this market. To use the word rating draws comparison with credit ratings, but a credit rating measures only one dimension — the probability of timely payment in the appropriate volume.
A standard SRI rating today means you are probably talking about something like 100 or 120 dimensions to the rating and everybody around the table probably has a different view on which of these 100 dimensions is the more important one.
We have to come up with a more standardised approach of how we judge which of the many dimensions are more important than others.
I would like to question whether we really should aim at segregating our assets in order to assign them to different themed bonds. One of the dangers is that if we do this we jeopardise some of the achievements that we have made in our bond market that investors value — for instance, the liquidity of the bonds we issue. Having very small themed bond issues conflicts with the liquidity investors want from our benchmark bonds.
I don’t want to say that we are not going down that route for some of our financings but it is something, which poses a lot of questions that we have to answer.
Ruf, NIB: For NIB the main benefit is in engaging new investors, who like to invest in very high quality environmental projects and are not buying our normal bonds. We haven’t had any cost benefit so far and amounts are also fairly small.
Jones, Rathbones: We have a broad range of investors. We manage about £2bn in charity, ethical and sustainable investment assets. Each investor’s view is completely different from the next. So it’s impossible to have that full range of accreditation across the bond universe.
Reducing liquidity and it could be a significant issue. It is down to the investor to decide whether what you’re doing is ethical, or sustainable, according to their mandate.
Flensborg, SEB: There is also a regional difference. American investors will have a different set of priorities than German or Japanese investors.
However, for the first time we have managed as a society to activate mainstream mandates to invest ethically.
There is the matter of achieving critical mass. Potentially it’s a huge market. You could allocate political capital into it to shift from the 1% or 2% that is dedicated to SRI assets now to actually have an impact, by activating the 98% which is a managed by insurance companies and so on.
But to split the market into smaller and smaller divisions of SRI would potentially reduce volume in each deal, which will scare away the big investors.
EUROWEEK: Is there a view on where this market is headed between small, themed bonds and bigger deals fitted to a more generalised criteria?
Richardson, The World Bank: We have had bonds whose proceeds were not ring-fenced, which have all been environmental bonds. It has been notional branding.
That was OK for the Japanese retail market, which just cared about the story. But for the growth of the market and the funds that are under management that we’re seeing now that’s not going to be good enough. They’re going to want to ring-fencing. They want to see dedication of proceeds. They don’t want to find that they bought something called a green bond only to find the proceeds were also to be used for other purposes. The whole standardisation of what a green bond is, is something that needs to happen.
And it’s already begun. When the World Bank created our own criteria it was copied and used in different ways by the rest of the MDBs, but it may not be suitable for corporates. And so that forum of people getting together to figure out whether the current standards are good enough or not needs to happen, and it will happen over time.
Kreivi, EIB: Issuers will have to be pragmatic. It’s not very comfortable for anyone to create 10 different pools of segregated funds and then to have this theme and that theme. We all have chosen the kinds of themes that suit our lending programmes. The EIB does energy efficiency and renewable energy. So if an investor then wants to buy a water themed bond they will find a better selection from another issuer.
If investors want themed bonds then issuers will have to differentiate what they offer. We can’t dictate to investors what they want to have.
In terms of standardisation, and the rules of how we select the project, how the funds are ring-fenced, we have had very clear rules since 2007 when we developed first the Climate Awareness Bond.
N’Sele, AfDB: Each MDB has its own methodology but there is a group that has been set up to better track climate finance and which is composed of the World Bank, the IFC, IADB, EBRD, EIB, the Asian Development Bank and the African Development Banks. The purpose of this joint MDB approach is to allow practical, harmonised climate change finance classification categories. The group tries to find commonalities among each multilateral development bank’s methodology, and is an attempt to jointly report on resources mobilized for a set of commonly agreed climate finance activities.
Ruf, NIB: NIB is a small issuer, so we have only SRI bonds with environmental background. For those we have developed clear criteria and procedures, but this also means our green bonds will always be small and available mainly for specific investor groups, like green funds.
Alestrøm, KBN: So far KBN has been active in the green bond market by issuing 14 Japanese Uridashi green bonds, but it has been very quiet since 2011.
KBN wants to take an increased responsibility when it comes to the environment so we have implemented a subsidised interest rate for municipalities and counties borrowing from us for projects to improve the environment. These projects need to be part of and signed off under their environmental plan. As we have already implemented this on the lending side it would be a natural fit for us to issue green bonds. In total we have done more lending than funding, so we could do more green bonds going forward.
Carlos Perezgrovas, Daiwa: After the first SRI transaction in the Japanese domestic market, which Daiwa did in 2008, we’ve seen an increase in demand for this type of product. We have over the years evolved from one theme to another — we have done water, poverty reduction, education, and micro-finance bonds. The demographic of each type of transaction has been different. Each theme attracts different investors.
By choosing different themes an issuer can reach a more diversified investor base. That may be something that could be replicated in the wider, international market.
Czichowski, KfW: Themed bonds will stay, because there are different preferences between investors who have a very particular idea of what they want to invest in.
I still would like to advocate the issuer rating rather than the themed bonds though. An issuer rating has a greater chance of driving structural changes within organisations.
The problem with themed bonds is that an issuer can print a green bond but also have the poorest labour relations in the whole universe at the same time. But that won’t show up in an individual deal. An issuer rating looks at the whole organisation and how it deals with the different issues that are involved in ESG criteria.
At the same time it makes organisations more comparable to each other and makes them more able to learn from each other about what the best practices are.
Laurent, EBRD: I have great sympathy for what you said, but I remember looking at some of the issuer ratings in the green space before, where you had a “best in class” approach: you had best cigarette company, best armaments company, and so on.
The trouble is that one can more or less go from the extreme of a very green business with poor labour relations to its opposite.
I’m not sure how we square the circle on that.
Flensborg, SEB: The question is extremely relevant when you’re moving away from government institutions like the MDBs and the regional development banks. There is a significant headline risk if you’re going to bring a themed bond if you don’t look at the other ESG factors in your business.
Jones, Rathbones: There is a difference between sustainability and best in breed for an ethical investor. We have two, we have both types of investor at our firm and an ethical investor will say, ‘we don’t want to buy oil’, whereas the other will say, ‘we don’t mind having Shell or BP but we want the one that’s most sustainable, most ethical’.
There can be a huge difference between green bonds and the overall sustainability in terms of the bigger picture of what an issuer is doing and you will get different subsets of investors investing in both.
Kinnersley, Nikko Asset Management: It should also be captured by the investor themselves. It’s up to them to do the due diligence. They should not necessarily be buying a bond just because it’s green if they don’t feel comfortable with other aspects of the institution.
Clearly within the SSA space I don’t think there’s that conflict, but as the market broadens it will be the responsibility of the investment house to be doing the due diligence and doing a more methodical analysis on the issuer’s ethos and culture.
EUROWEEK: Can a rating of an issuer’s overall ESG credentials help with that?
Kinnersley, Nikko Asset Management: It should be implicit in the investor process to look at that. Whether investors use a third party or not, ultimately it’s the responsibility of the investor to be aware of and comfortable with what they are buying.
Seager, Bank of America Merrill Lynch: The two approaches aren’t mutually exclusive, whether you have the overlay of an ESG issuer rating, or a specific bond rating, or the investor is doing his or her own due diligence.
The opportunity an issuer rating misses is one of the end goals of this market — to develop the project finance market such that these initiatives can be financed directly by the market. This is ultimately in line with the goals of the MDBs as well. It need not disintermediate them either. It can be complementary to their lending book where they often do not want to finance 100% of a project.
Laurent, EBRD: Isn’t the corollary of that — that with an issuer rating factoring in ESG — instead of the 98% of funds joining the 2% that are SRI funds, you might get the 2% joining the 98% in looking at all of a borrower’s funding rather than just segregated pools?
Goebel, Rentenbank: The advantage of the issuer ratings is that they look at the entire organisation and not only selected parts of the lending business. They make you think about your own organisation in detail and that’s a positive.
On the other hand they have to be taken with a pinch of salt because sometimes we simply cannot answer the questions asked in such detail because we are typically not directly lending to end-borrowers, but we are by law and statutes forced to use intermediating banks.
We have limited control over the information they drum up from the end borrowers unless we want to overburden on the lending process to the extent that local intermediary banks will find it unaffordable to offer loans from our lending programmes.
Brown, Citi: The standardisation of issuance among a universe of issuers such as we have here today is perhaps neither possible nor desirable. What we’re trying to promote is a high degree of transparency. An issuer rating is a large component of that transparency. But there is no doubt, that there is a substantial set of investors who are looking to invest in green bonds which have a transparent segregation of climate friendly assets. One of the criteria by which issuers value lead managers is the extent to which we can bring new investors into the SSA asset class and that is what the green bond product is doing very successfully. It’s a tremendously powerful investor relations tool. It’s a way of highlighting to the broader investment community about the climate friendly projects which are in substantial part financed by the community of SSA issuers.
Katugampola, Morgan Stanley: This market started with investors screening out things they did not want to invest in. That has now changed to a positive screening trend with investors seeking out investments that they do like that and promoting themes they are in favour of.
The challenge around the standardisation point is that investors are looking for transparency and comparability.
Joint MDB papers on common methodologies will be helpful. But if this asset class grows beyond the SSA community, which we think it will, and involves corporate issuers, for example, how you meet the level of comparability and transparency required becomes even more important.
Kinnersley, Nikko Asset Management: Investors like to see from issuers the end product. A project list is invaluable in terms of providing transparency with methodical reviews and updates.
Czichowski, KfW: We need to do more of this. Reporting on these things is not something that you have immediately available; it’s something that you need to establish so that investors appreciate what it is that your organisation does.
But we cannot possibly provide a report for every single request. Therefore, a discussion around a standardised approach would be a good thing if only to learn from each other. We are a signatory to the Principles for Responsible Investment. This started as a number of principles but now there’s a review process and a feedback process. There is constant communication along what is best practice and how do we evolve this to a better standard and along those lines.
We don’t know where this market will end up but we have to find a way to arrive at a common framework in which we operate.
Kreivi, EIB: A standardised approach would help but we also report what we do with our money because we think there’s an interest in it. Funds with a specific investment objective in mind like to know what we did with their money.
There is always of course a delay because once we get the money from the new issue it takes a bit of time to lend it all out. If this kind of reporting criteria could be settled in a standardisation of the themed bond product then everybody would know what to expect.
NIB, Ruf: Transparency is a very important aspect, especially for the proceeds from SRI bonds. But we also think that supranational institutions should have enough credibility to report without using any external agency. Setting and following an evolving market standard is a different matter and can be a positive development.
Richardson, The World Bank: It’s clear that this market is about to move into a new stage. We just have to listen to the various constituents — the investors, the dealers, the third party providers of services. We’re going to hold a discussion forum to put all these people together. It’s in our interests to see if we can get something that is standardised not just for the MDBs but for emerging market or corporate issuers too.
Alestrøm, Kommunalbanken: Until we have this universal standardised framework, each issuer will continue getting certification from different local providers. It is important to show commitment to the environmental cause regardless of the framework. In Norway we have, for example, the Eco-Lighthouse, which KBN is a member of. The Eco-Lighthouse is the most used certification scheme for enterprises seeking to document their environmental efforts and to demonstrate social responsibility. We can start small and build on this later.
Kinnersley, Nikko Asset Management: If standardisation starts to incur a significant cost then it could deter the market from growing. One of the questions we’re continually asked when we talk about the World Bank Green Bond Fund is whether there is any sacrifice in yield because the bonds require extra due diligence and transparency.
My plea would be make the standards simple so that they aren’t costly. Because when corporates come in, if they’re faced with a multitude of standards to adhere to, it may put them off. I don’t want to see this nascent trend choked at birth — we need to be extremely careful not to create too many hurdles.
Richardson, The World Bank: Yes, the more rules-based the standards are, the more complicated they become to abide by. They have to be general. I don’t know what the right answer is but that’s the purpose of getting everyone around the table to see what overlap there is.
Perezgrovas, Daiwa: What we see among Japanese investors is that they require information about the projects bond proceeds are meant to be funding and to the same degree that they require information about the progress of such projects. Regular, sometimes annual updates, on how the project is going are necessary and therefore there is some degree of extra work needs to be done by the issuer.
Laurent, EBRD: I’m not against standardisation and I’m very much in favour of transparency. But I’m always a little concerned about the tail wagging the dog. Ultimately, we each have our principles and policies, we have a lot of environmental experts who are juggling these different factors that I mentioned before — the social, the environmental, parts of the mandate and, for instance, as Eila said, when we raise the money it can take time for it to go out of the door.
EBRD has said its green bond proceeds will fund existing projects because most of them run for longer than our normal projects — 11 years on average compared to 7.5 years. They have a very slow disbursement time — maybe three years.
But environmental investors are looking for three to five year maturity bonds. Some are looking for longer but there’s a huge concentration at the short end so if we only financed projects tied to matched and specified bonds, the money would never go out of the door. We want to make sure that when we raise the money, it’s used.
Also the results of a lot of energy efficiency projects are not always as clear-cut. You can make a house more energy efficient, and instead of heating just one room, the family might now heat many more rooms with no reduction in energy output.
What concerns me is that we shouldn’t have something that is so prescriptive that we cannot make optimal use of the money towards sustainable progress that gets things moving in the right direction.
Those with a purist bias sometimes prefer to wait for the perfect solution.
Jones, Rathbones: There shouldn’t be any extra costs for the issuers because you’re doing all the work anyway, already. You already know what you’re funding. You already know your cashflow, your expected return from that investment and what the impact is likely to be.
Beneath the standardised top level of very plain vanilla rules, the level of transparency below that shouldn’t cost the issuer any extra if you’re having to do that work already.
Richardson, The World Bank: In the case of the World Bank it has though because you take this organisation which lends to all the various different sectors and then you have to overlay a special due diligence to make sure that the projects that are assigned to the green bond portfolio are only satisfying the standard criteria that we created.
Jones, Rathbones: That would worry me if that wasn’t being done. All that due diligence should be being done by the organisation anyway.
Richardson, The World Bank: A lot of our projects have a green component but they also may be mostly something else in a different sector. We may not use that project for the green bond portfolio because it’s not purely green.
We now need another overlay of processes to pick the projects that fulfil the criteria for the green bond investor. And on top of that we’ve had the communications effort, which is the part of the transparency provided afterwards to investors.
And for us, managing proceeds separately internally has a cost to it as well.
Flensborg, SEB: Even for mainstream investors and banks you will see them define a strategy and commit to it. We need to do our due diligence. So for all involved, there’s a new layer of investment to be made in time.
But because of that, in return there’s a much closer co-operation between investor and issuer so there’s a loyalty and stickiness to the money.
Richardson, The World Bank: I agree and the cost isn’t just on the issuer side. Investors are taking on costs, for example, by accepting lower issuance sizes or bigger bid/offer spreads because they understand that the market is not there yet.
Kreivi, EIB: One point not to be ignored is that if the EIB issues a Climate Awareness Bond, it does not charge investors for the green features of the bond. But we do expect the cost of funding for a €500m issue to be lower than if were we to issue a €5bn benchmark.
Our recent €650m Climate Awareness Bond came flat to our curve for smaller euro benchmarks, which is not the same price as for a €5bn benchmark but there was a transparent reference for investors for the pricing.
Richardson, The World Bank: For the World Bank the cost I was talking about has been internal. On the bond side we haven’t seen an increase in cost. But bond pricing is a completely different thing.
Czichowski, KfW: By standardisation I did not mean that every single bond has to conform to a single set of rules but that we somehow lower the search cost that we undoubtedly incur in assessing the SRI or ESG credentials of particular investments. We lower them by agreeing on the framework in which we operate.
We run our liquidity portfolio according to a set of ESG criteria. We have hired additional people to look at the 300 issuers that are in the portfolio and assess them according to ESG criteria but it adds to our departmental costs.
N’Sele, AfDB: We are planning to launch a green bond this year and the amount of work and effort that needs to be done in terms of the selection process, methodology, tracking, monitoring, and reporting compared to a regular benchmark is much higher. We’ve decided to absorb it for the time being, but I am wondering whether this will be sustainable.
Katugampola, Morgan Stanley: We’re at an inflection point where this market could take off and my concerns are that there is a trade-off between integrity and accessibility. Issuers have brought a tremendous amount of rigour to this process, which has incurred internal costs.
My concern is that because of your success, other potential issuers might look at this market and think all they have to do is get a green label on a deal and all of a sudden, a huge range of investors are available.
There needs to be some framework around accessibility and standardisation, and rigour in order to make sure that this market develops in a controlled fashion and it doesn’t lose the credibility that we’ve all worked very hard to build up.
Jones, Rathbones: To play devil’s advocate as an investor, KfW, the EIB, EBRD and AfDB all said at the beginning that this was all within their mandate.
The fact that we are demanding this now is improving the governance of your businesses to ensure that you’re meeting your objectives that you set.
Richardson, The World Bank: It’s actually the other way around because it’s our existing ESG that is creating this market. Now we’re segregating green projects away from everything else we’re doing, and that requires extra work that didn’t need to be done before.
Czichowski, KfW: The organisations have always had this in their statutes and have reported on this. Most of us have a sustainability report that fulfils internationally agreed criteria.
The difficulty comes in an organisation where you have to separate certain assets and certain management processes from the rest of the bank.
Brown, Citi: But the benefit is that issuers gain access to this massive and increasing pot of money. Many treasury and funding initiatives have a cost associated with them which is far greater than the cost of arranging for a transparent green bond programme. This product educates the broader investing universe about some of the good work that MDBs do in your daily business. The investor relations positive has to far outweigh the incremental costs.
Laurent, EBRD: Standardisation with an issuer rating should at least limit the number of criteria you have to adhere to. We used to receive questionnaires from investors that were all different to each other, and had over 100 criteria on them in some cases.
A standardised approach highlights the things that are essential to your being as a holistically, sustainability-focused company. You wouldn’t have the additional costs of trying to respond to so many different investors who each have a different focus.
Flensborg, SEB: When we started doing this back in 2008 we had a handful of investors that were in this market this. When we had our green bond presentation at the end of last year we had 78 participants from the investment community in Stockholm learning about the work the MDBs are doing. It is hard to put a price on that but I can guarantee you that the stickiness to the money that’s coming because of it is much higher than what you otherwise see.
Nordborg, SEB Asset Management: For all the talk about increasing costs, what about all the gains that you make as issuers? These green bond vehicles are putting you on the map as a sustainable issuer. You may have been one before but you were not viewed as one. Now you’re getting all this attention.
Czichowski, KfW: We are all aware that running our organisations entails cost. The only argument is about whether our money is well spent. Are we putting investments on the table that will not satisfy the demand that is out there? In this framework we just have to be clear what exactly we report and how we do it.
Richardson, The World Bank: We all made that investment so it is fair to say we all think it is worth it. But at the same time we think it’s important to say that there is a cost because the perception could easily be that there isn’t.
Laurent, EBRD: I definitely think that it’s worth doing but again it’s a question of what are we going to measure and for how many different people?
One of the reasons that we started to produce an annual sustainability report was because one year we went from receiving about five questionnaires to receiving over one hundred questionnaires, some of which were over 30 pages long.
They focussed on all sorts of different things such as how many lights we used in our buildings, our paper and water usage and recycling within our buildings. We had buildings in every country of operation, so it would have been a lot of information to compile.
Jones, Rathbones: In the last few years the ethical bond fund that we manage has invested more in the supranational market than previously because of the extra work you’re doing.
Ruf, NIB: Our challenge is that we set the criteria for green projects financed by our bonds very high. Likewise an important criterion for NIB is the implementation risk, where the likelihood of reach the environmental benefit will be considered. These two criteria imply that our green bond issues tend to be small — we can’t issue green bonds as big as $500m green bonds. So reporting costs is an important issue, but so far we have been able to manage reporting internally.
Goebel, Rentenbank: We have been discussing costs at some length but I’m not exactly sure why. The borrowers have not said they want to pay less to issue the bonds and the investors haven’t claimed that they want a higher yield to invest in those bonds. So what exactly is the point of controversy here?
Richardson, The World Bank: We’re not talking about bond pricing.
Laurent, EBRD: Although I wonder whether over time one shouldn’t see a slight differential between the price of green bonds and regular bonds. If one can show one has a more sustainable business, it should surely make you a better credit than peers in your sector.
People will have sufficient information to say: ‘yes, I buy SSAs or rail companies or whatever else, but actually these ones are focused on a green sustainable impact and therefore we think that the outcome is likely to be better and we will maybe buy them at a tighter level than we would buy others’.
Kinnersley, Nikko Asset Management: The key word you said was maybe. From an investors’ perspective there is the fiduciary responsibility to consider — are they prepared to sacrifice return?
That maybe fine for an ethically orientated investor but we’re trying to go more mainstream, at this stage it would be a difficult argument to make — that clients should be prepared to take 10bp less because it’s a green bond. If that argument persists this sector will remain niche and never become mainstream.
Jones, Rathbones: I agree with that and also morally, what would happen if investors got paid more for the dirtier projects that they are investing in? Mainstream investors would go off and buy something with a better yield elsewhere. There is a danger that at this early stage that that would happen.
Laurent, EBRD: But already within that category there is differentiation — triple-A rated borrowers, double-A+, double-A. Investors don’t pay exactly the same for issuers of comparable ratings. They’re buying mostly on the credit story, which is a narrower criteria that relates to estimates of the ability to repay, the liquidity policy, risk management and so on.
Why is it so extraordinary to assume a world in which an additional factor creeps in which is the degree to which sustainability governs the business?
Czichowski, KfW: If we want to drive sustainability investment forward we will do this in our economic environment only by providing better refinancing possibilities for these projects.
We do this on our balance sheet day in and day out. If the Federal Republic of Germany decides on certain priorities in terms of sustainability investment it may mandate us to give appropriate incentives.
Most successes in the Federal Republic of Germany with carbon reduction came through providing incentives to replace old technology, to insulate housing and so on and so forth. So there is a price mechanism for achieving these goals.
But is it completely unreasonable to assume that other interested parties, say, contribute to this by concentrating on investments that will lead to these effects? They may be bond investors as well.
Why should we exclude this from the start? The price mechanism is important in our economy and if you want to drive this product, if you provide the margin, it should have a benefit that accrues to the projects that we finance.
EUROWEEK: The IFC’s benchmark green bond in February came flat to the borrower’s curve. There was no pricing penalty for being a green bond. SRI funds had their allocations cut to fill central banks. Are investors happy to receive small allocations or is pricing an effective way of supplying SRI buyers?
Brown, Citi: It is very important, when we’re developing this market, to think about these issues. The idea that investors can get an incremental additional return, by buying non-green bonds seems ethically inappropriate. But yes, that is an issue. The IFC deal was the first $1bn green bond, so it was a bit of an unknown for all of us. We were all overwhelmed by the result. To minimise potential allocation issues, we courageously decided to launch it on a Chinese holiday to maximise the number of Asian central banks who would be away from their desks. But the deal was still heavily oversubscribed, and the central banks who did participate were heavily scaled back. The issuer spoke to a number of these central banks and explained the product and there was a widespread acceptance and support from the central bank community to the work that the IFC was doing.
There is a debate whether green bonds should be targeted only at green investors, or whether you should attract all investors into a green bond. The objectives of the IFC transaction were to bring a liquid instrument into this asset class and to have high integrity and transparency in the product.
We targeted SRI investors, but we are also trying to crowd all money into the climate awareness arena. We spoke at the beginning about the massive amounts that are needed to be invested in this space. We need to attract a far broader, deeper pool of investment than is managed by boutique green bond funds today.
Jones, Rathbones: That’s a very good approach. As an ethical investor, it would be nice to have full allocations as with any bond but it’s up to the issuer and the syndicate, and that’s a perfectly sensible approach to placing.
Goebel, Rentenbank: But Philip, why would you want an SRI bond to be a liquid instrument? I certainly hope that all my SRI investors are sustainable and want to buy and hold.
Kinnersley, Nikko Asset Management: When we talk about the World Bank Green Bond Fund, I can categorically say that at every single introductory client meeting, the issue of liquidity has been be raised. Anything that continues to enhance liquidity in this market is a positive thing.
Goebel, Rentenbank: So you want us to be sustainable issuers, and you want to trade once you make a 20 cent profit?
Jones, Rathbones: We have our own liquidity requirements. We have redemptions from our funds. We may have to raise £2m in the space of a few minutes in order to pay someone and we don’t want a situation where we can’t do that.
Laurent, EBRD: I don’t think size, per se, always determines what liquidity means. If we have a $1bn benchmark bond and it’s bought mainly by five big central banks with a “buy and hold” strategy, then it can become impossible to find a bond within a matter of three months.
So it’s not liquid in the sense of how much it trades. But if an investor wants a bid, he can find a bid. If we were to issue a $500m dollar green bond and it’s sold to lots of different investors, it may trade more actively, in fact, than our $1bn benchmark. But is this really liquidity?
A lots of bonds traded very actively before the crisis, but when it hit actually you couldn’t get a bid for them. Is that the kind of liquidity investors really want?
Ruf, NIB: There’s a trade-off between the quality of the projects you finance with a green bond and the size of the bond. At NIB, we use the proceeds of our green bonds only in projects that have a very high internal rating on environmental impact and very high likelihood of realising this outcome.
That reduces our number of projects and is why we’re doing mainly private placements. You can’t demand the best of the issuer’s portfolio when it comes to greenness, and on the other hand, demand a lot of liquidity. Then there are only a very few issuers left who have a portfolio big enough. But I also agree that liquidity is not necessary a function of size only, we can clearly see this in our benchmarks.
Kinnersley, Nikko Asset Management: The key point is communication, about how we are trying to develop the market. The IFC was very clear about its objective to target socially responsible investors. That message was put out ahead of the roadshow.
When we did the World Bank Green Bond Fund, initially we focussed on SRI investors, however this has encouraged mainstream investors to start enquiring.
We’re finding not only are we getting SRI investors with dedicated portfolios, but also mainstream investors that have internal demand from stakeholders to set up SRI accounts.
Kreivi, EIB: One has to be pragmatic. Does it make sense to prioritise the real SRI investors if you do a deal and exclude mainstream investors?
It will be very difficult to grow the market unless we include mainstream investors.
Issuers may have different views on this depending on their size, both that of the funding programme and their green lending. EIB as a large issuer and especially a large lender in the sector can accommodate more easily a larger issue size and to include also mainstream investors.
Richardson, The World Bank: The other side of that story is that if we do a $300m or $400m Green Bond, the entire proceeds have to be earmarked for green projects.
But we have a limit to how much green lending we can do, because we also have to lend to education, to health, we can’t just lend to green projects.
So the trade-off of issuing a larger than needed bond is breaking it up into pieces and issuing different bonds in different markets to give people who actually care about the green aspect opportunities in different currencies, different maturities, at different times, giving them a freer choice.
Flensborg, SEB: Liquidity has come up as an issue at every investor meeting we have had about SRI bonds. But in all those years only $100m or so of the $3bn we have placed have actually come back to us. So they are asking about it, but they are not trading.
