Participants were:
Suzanne Buchta, managing director, green DCM Americas, Bank of America Merrill Lynch
Michael Eckhart, global head of environmental finance, Citi
Søren Elbech, treasurer, Inter-American Development Bank
Mahesh Jayakumar, portfolio manager in global fixed income, currency and cash, State Street Global Advisors
Stuart Kinnersley, chief investment officer, Nikko Asset Management Europe
Jose Padilla, head of debt capital markets, Daiwa Capital Markets, America
Heike Reichelt, head of investor relations and new products, The World Bank
Andrew Salvoni, vice president on the SSA syndicate desk at Morgan Stanley
Cheryl Smith, managing partner, Trillium Asset Management
Samantha Sutcliffe, sustainable products and product development, SEB
EUROWEEK: How do you prioritise your green bonds investments in terms of ESG criteria and what are you particularly looking for issuers to be doing? Perhaps we could start with you, Cheryl.
Cheryl Smith, Trillium Asset Management: To start on the broader subject, Trillium is an an SEC registered investment advisor that’s been entirely dedicated to the integration of environmental, social and governance factors in our investment process since 1982.
While we are best known for our equity products, we have managed fixed income assets since 1982. We are a pioneer in SRI or ESG investing, and have evolved organically over 30 years. All of our accounts are separately managed, with 23 different custodians, which creates significant challenges.
The separately managed account structure creates challenges in the purchase process. When we identify an attractive bond for purchase, we have to identify each account and each custodian for which we can place the bond, rather than deciding on a purchase amount and then allocating it across accounts after the fact. We have very specific requirements for each individual account, and no pooled fund structure in which I can place bonds.
One thing that’s very helpful to us is some advance notice that a borrower is thinking about issuing a green bond.
It’s very important that we can look at it and see whether we can put together an order for $2m — for a $179m bond portfolio that’s significant for us — but we have to identify the allocation account by account.
The separate account structure also places limitation on liquidity and marketability. We don’t benefit from the law of large numbers in terms of client withdrawals, so the marketability, the ‘vanilla-ness’ if you will, of a deal, and the transparency of it — those are all critical to us because of our structure.
Every one of our clients is with us because of their concern with environmental, social and governance issues, so the quality and transparency of ESG disclosure is critically important. By style, we look for investment grade securities at intermediate maturities. What we want from issuers is simple, transparent, investment grade, marketable securities deliverable to many different custodians.
Stuart Kinnersley, Nikko Asset Management: When we set up the green bond funds in conjunction with the World Bank there were three primary characteristics that appealed to us. One was the positive externality, another one total transparency and thirdly the generation of a mainstream financial return was imperative.
In addition to these three principal criteria it was important for us to also have the assurance of three additional characteristics.
We were constructing a fund that had daily liquidity, so clearly liquidity was essential.
Also — and this is more a function of the fact we were doing this when there was no real green bond market — that we were doing it in partnership with an issuer who demonstrated or assured us of a commitment, the World Bank was able to do that. We wanted to create funds against mainstream multi-currency, fixed income benchmarks, so we had to have the confidence that the World Bank would be flexible in issuing in currencies that we requested.
We set it up that 50% of the fund would be in emerging markets and the World Bank was able to issue in some of those currencies where there wasn’t much availability in the overall market place. So, flexibility and commitment of the issuer was imperative to us. The final factor was scalability. That’s important because when we go to institutional investors one of the first questions we get asked is how much of these bonds are the World Bank going to issue and whether they are committed to continuing this programme. Big investors want to know that if they were to give us $1bn to manage tomorrow we would have no problem investing the proceeds.
Smith, Trillium: I agree with Stuart that investment performance is critical. We need to generate investment performance that at least meets benchmark performance and industry norms. Solid risk adjusted performance is critical, because we are trying to overcome the commonly held hypothesis that investment performance is going to be worse when a manager selects bonds for their environmental, social, and governance characteristics in addition to their yield, duration, and structure.
EUROWEEK: Would you agree that with the greater transparency that you have on these issues that you tend to, or you can expect to, have better performance?
Smith, Trillium: In fixed income markets, almost all of the performance can be explained by standard, mainstream fixed income concepts: tenor, coupon structure, spread at purchase, et cetera. We believe that analysis of ESG factors helps us better understand specific security risk, and that risk related to ESG factors may not be completely priced into the market. I do want to be clear that in terms of pricing and issuance, we want what every other investor wants.
Kinnersley, Nikko: It would be difficult for us to go to the market or a potential investor and say that we’re going to outperform because we’re buying green bonds. The skill set of my fund management team and whether they can add value is through our investment process. We’re not necessarily expecting green bonds or even World Bank paper to outperform all the time.
In fact there are times when the World Bank doesn’t but it’s not because of the World Bank, it’s because of market conditions.
For example, last year a lot of the emerging market sovereign debt markets performed extremely well as there was big appetite for risk and the World Bank, because they are triple-A and more conservative, underperformed much of the market.
It’s a fairly narrow universe and in many ways we are disadvantaging ourselves because there are plenty of other opportunities out there but we do believe that it won’t, over the medium term, disadvantage us but that we can add value through active management, with a very safe credit.
Mahesh Jayakumar, State Street Global Advisors: We’re a little bit different from both of our competitors at the table because we’re trying to build a more mainstream institutional class commingled fund. We want to scale that vehicle and be able to allow institutional investors, pension funds, endowments, charitable asset institutions and others to be able to access green bonds very quickly and very easily through our vehicle in a cost-effective manner.
Our vehicle is going to be a dollar vehicle. It’s targeted at institutional investors in the US and institutional investors globally that want dollar paper and exposure in dollars.
We are very clear about the fact that we’re not trying to beat the performance of an index with the green bond fund. Our primary goal is to be able to provide green exposure to institutional clients in a conventional fixed income vehicle.
Because these commingled funds are daily cashflow funds we need to be able to get in and out of these bonds on demand and not depend on issuer-specific buyback mechanisms. We’re not going to call the World Bank or IADB and say, ‘we need you to buy your bond back’. We’re going to go to regular market-makers, our normal dealers that we deal with to sell.
It’s easier to do that when the bond sizes are benchmark size — at least $250m to match the minimum benchmark requirement in the Barclays US Aggregate Index or $300m for the Barclays Global Aggregate Index.
We ask that of issuers because the minute a bond — regardless of whether it’s green or not — meets that size threshold and the currency threshold it automatically enters the Global or US aggregate index, so then you’re picking up other market-makers who are going to give you a bid or an ask on their bond, and you’re going to have other non-SRI investors start to trade this bond and have increased liquidity in the marketplace.
We want to see a very clear credit curve, so you know exactly where spreads are trading. We want to be able to see a stable bond market for these bonds.
That is the reason why we’re a little bit hesitant in terms of acquiring smaller private placement deals. We’re just not sure what the market condition for that bond will be in the future.
Kinnersley, Nikko: Can I pick up on a couple of things there? First of all, you mentioned you’re not comparing yourselves in terms of performance versus benchmark. How can you therefore put yourself in the institutional space? Everyone, especially institutional investors, need to have some kind of relative performance benchmark, surely.
Jayakumar, State Street: We provide duration management, we’re providing exposure management. We’re giving our clients fixed income exposure in terms of the characteristics they want — in terms of duration and greenness in a conventional vehicle. That’s the value that we bring. These are spread products and spread products will outperform under normal market conditions. But they’ll underperform if there’s a flight to quality and all of a sudden Treasuries are outperforming, and fixed income investors understand that.
Kinnersley, Nikko: Are you reliant upon the issuers issuing a specific maturity at a specific amount at a specific time?
Jayakumar, State Street: That’s a great question. Right now we’re not, only because of the fact that we have other mechanisms in place in the portfolio construction process to be able to accommodate any maturity that the issuers can provide.
In the future we might — depending on how big our fund is and if there are specific gaps — we might go to the issuers to look for certain maturity buckets. But right now we’re able to use alternative instruments to fill any maturity gaps in our portfolio construction.
Heike Reichelt, The World Bank: What type of issuers? We were in touch a lot when you were setting up the green fund and you were starting with the World Bank and other issuers like us that were in the market first. Have you expanded that to other types of issuers?
Jayakumar, State Street: Our definition of green has been the narrower definition that includes SSAs. We have not gone outside that definition yet because we’re looking for certain green criteria and comfort with that green criteria.
EUROWEEK: Does that include municipalities as well?
Jayakumar, State Street: It does include municipalities and we did look at the Massachusetts green bond. We had other questions for the State of Massachusetts concerning that bond in terms of use of proceeds. That and the status of the bond — it was a muni tax-exempt versus taxable supranational bond — and those were some of the factors that went into the decision-making process. But Heike to address your question, we’re still sticking to the multilateral/international financial institutions sector in our portfolio.
But the portfolio is not bound to only include bonds from this sector so if there’s a corporate bond that comes out and we get enough documentation to look at the use of proceeds of this corporate bond, and if we were able to talk to the environmental/project team as well as the financial team and get comfort — we could include that in the portfolio.
Reichelt, The World Bank: Because the asset class of supranationals generally benefits from the flight to quality so I was just wondering about that comment that you made.
Jayakumar, State Street: It’s because it’s a spread product, there is spread built in when you are trying to measure your returns against the Treasury benchmark.
Kinnersley, Nikko: The other point I just wanted to come back on was obviously, our approach is very different from yours — we’re taking on currency risk and giving our investors multi-currency exposure — but I just wanted to comment about size and the requirement for liquidity.
We’re active managers and we actively will look to sell or buy depending upon our market view and although some of the deals have been private placements and relatively small in some esoteric currencies, it’s never been a disadvantage to us in terms of actively managing the portfolio vis à vis the benchmark.
And although it’s great that the World Bank do have a commitment to buy back if ever we wanted them to we’ve never used that facility, we’ve always sold back into the market. However it still a very positive feature to be able to explain to investors, that there is that buy-back option — very few other funds have that facility.
One real life example I often recall was during the Japanese tsunami. On the very same day the World Bank phoned us up to reassure us that if we suffered a lot of redemptions as a result of the crisis, they were there ready to buy back if we had any problems.
As it turned out, we had no redemptions and it wasn’t necessary but it was very comforting that the World Bank were there, standing behind it.
EUROWEEK: The other thing on the liquidity front is getting non-SRI investors into deals. There can obviously be an allocations issue in a big deal if you get large numbers of investors in. Would you want to be treated just the same as any other investor in a deal like that or would you want priority for being an SRI investor?
Smith, Trillium: We would like priority. We have been working for over 30 years to build the field and we don’t want to be crowded out of the field as more investors begin to consider ESG factors. We’d like credit!
Andrew Salvoni, Morgan Stanley: Maybe I can step in from a syndicate standpoint since, in conjunction with the issuers, we’re responsible for the allocation process.
You can compare this to how you would allocate any normal vanilla benchmark. When you go about an allocation process you look at an investor’s track record, their quality, your relationship with that investor and all of that goes into allocations in general. You don’t just allocate in a vacuum.
You can make the same justification for how you allocate a green bond: an investor’s track record in that area, their relationship with the issuer, their size to a certain extent.
Suzanne Buchta, BAML: And their buy-and-hold nature.
Salvoni, Morgan Stanley: Exactly, and this is all part of the way that you can categorise each investor. It’s quite important to keep that in mind when you’re doing an SRI bond or a green bond, that you don’t just treat every investor the same.
Kinnersley, Nikko: Do you use that criteria for a non-green bond fund, in terms of a relationship, commitment?
Salvoni, Morgan Stanley: Commitment, yes.
Kinnersley, Nikko: So maybe there isn’t a big difference here. I feel if an investor has an SRI credential it’s likely that you will have a bit more of a weighting towards those investors. I wouldn’t want allocations to be exclusively SRI. Maybe some bias in some way would help, but certainly it’s healthy to have non-SRI investors involved. I want the bonds that I invest in to be as liquid as possible.
Samantha Sutcliffe, SEB: Our experience is telling us that both SRI and institutional investors have an important role in the growing of the green bond market. SRI investors are used to the due diligence process of SRI investment products and mainstream investors raise new cash for impact investments.
Salvoni, Morgan Stanley: That’s where you can strike a balance between being inclusive for everyone but also making sure that you’re not turning a blind eye to the green investors or the SRI investors that this kind of product is geared towards. The key is communication and we did this on the IFC bond — we were very up-front about saying that allocations would be preferentially held for specific SRI investors and that there would have to be some sort of determination process in how we categorised who those investors were.
Non-SRI investors understand that and it’s clear that they do have interests in this space, as we saw with IFC. It’s not just central banks that came into that order book, it was corporate and bank treasuries across the globe. It’s about communication and about being fair in a green bond allocations process in the same way that you would be fair in any other kind of liquid benchmark that you issue as an issuer.
Jayakumar, State Street: I agree with this. I’m not going to say that we need preference because that happens as part of the relationship and the process — bear in mind that every time we buy a green bond we already know it’s coming, we have spoken to the issuers several times, we have spoken to the bankers who are doing the deal.
The community dealing with green bonds is small to begin with. The non-SRI folks will get their bonds and the SRI folks will get their bonds so I think the natural self-selection process will work things out and there shouldn’t be artificial parameters put in the system.
Smith, Trillium: It’s helpful for us to know that factors such as a propensity to buy and hold, a commitment the space and relationship to the issuer are part of the allocation process. Our concern is that the State Street and BlackRock elephants not trample the Trillium mouse!
Trillium’s objective is to expand the field. We want to include as many investors and issuers as possible. It is in all of our interests to have this be a very vibrant segment of the bond market and to be expanding disclosure. Heike’s group has taken the leadership in doing so, we would like to see this level of disclosure expanding to corporate issuers and to state and local government issuers.
We definitely want other investors to participate but we’d like to continue to participate as well.
Reichelt, The World Bank: What’s important for us as an issuer, is that no matter what ‘label’ the investor has — SRI or mainstream — they value that it’s a green bond. We go through a very strict process when choosing eligible projects. We finance many projects that go across sectors and may have a climate component as well as other focus areas, but climate is only part of the project.
What we’ve been trying to do with the green bonds is choose the projects that have a primary climate component because they’re all up on our website and we want to make it easy for investors to immediately see why we included that project.
We want to make it transparent and straightforward to report on the impact of that project.
We have a slightly different process when issuing green bonds. We start with the investors that we know care about the green part, it’s so important to have that dialogue. There will be investors in the transaction that I may not have had a prior dialogue with, but when they have come into the book, they’ve made the case that they care about the use of proceeds for climate-focused projects. Of course we would include them, because we, like others in the room, want to support the growth of the market.
We use the green bonds to support disbursements to this set of selected, eligible projects. And we try to have issuance keep pace with disbursements for those projects with a primary climate focus, which is about $1bn-$2bn a year. We want to be able to provide smaller issue sizes for investors that want smaller, different currencies, different maturities, and then the bigger global benchmark bonds for the investors that need the minimum size of $250m or higher.
But the market is growing and issuers have to start with how much demand there is from the investor side. You might want to try to get to the benchmark size but you need the investors there.
EUROWEEK: Could issuing green MTNs get over the problem of being trampled by the State Street elephant and the allocation process — tailored green issuance?
Sutcliffe, SEB: When talking about the structure of an issue every change made to a ‘normal’ structure needs to be explained to the investors for them to justify their fiduciary duty. Consequently, we have experienced that it’s more straightforward to copy and paste the structure of an existing index sized issue to allow easier implementation for the investors. We find that this gives investors comfort on liquidity and certainty that it fulfils their fiduciary duty.
Reichelt, The World Bank: Our green bond strategy is going to be like our overall strategy where we have the large benchmarks and then we have the more customised, tailored deals. It’s about catering to investor demand. We’ll have the larger bonds for investors who want the larger issues and then we’ll have the smaller, tailored ones for investors of all sizes interested in more customised currencies or other terms.
EUROWEEK: Of course, you don’t get the liquidity there.
Smith, Trillium: We have invested in medium term notes for green bonds and for other bonds. It’s all a balance, you have to have something that you can sell if you need to but it doesn’t mean that everything has to be a benchmark. Our orientation is buy-and-hold and we often find that MTNs are very appropriate for what we do.
Kinnersley, Nikko: The other thing we’ve been quite happy to facilitate is that sometimes we are the lead issuer in a specific currency and the World Bank will go out and increase the issuance because they saw the demand from other investors.
We’ve been very happy to play that role.
Jayakumar, State Street: We have no problem with an issuer starting out with a smaller bond size and then tapping it. If you tap it a few times and it gets to benchmark size it immediately takes on the attributes that we mentioned earlier about benchmark eligible bonds.
The reason I bring that up is one of the recent developments that I’m really excited about is that MSCI and Barclays have come up with fixed income ESG indices which are going to be slices of the US aggregate and the global aggregate indices.
This is going to propel demand for paper from the issuers that we’re talking about here.
In the process of constructing bond portfolios, some managers will use a process called stratified sampling where they’ll use some bonds to match the characteristics of a particular issuer in the portfolio against the index.
So even if you have five the World Bank green bonds in the ESG index you can own one the World Bank bond in a sampling process and then construct a portfolio that gives you a little bit more yield — so it beats the index or matches the index.
So having the access to those benchmark deals only makes the sampling process easier. Anything less than $250m will not enter those indices.
Smith, Trillium: The MSCI/Barclays Fixed Income ESG indices are a very exciting development. I’m glad you mentioned it.
Jayakumar, State Street: Yes, it’s going to make all the hard work we do promoting supranationals and green easier — it’s going to become easier for all of us.
EUROWEEK: Are there any kind of particular initiatives you’d like to see issuers, new issuers doing. How would you like to see them going about approaching a debut green bond or SRI issue?
Jayakumar, State Street: One of the things that is important to us, Stuart mentioned it, is the concept of the green bond issuances from these issuers being evergreen. We want to have issuers in our portfolio that have a continued commitment to issuing green bonds.
We’d like to see new issuance not only to meet the characteristics that we talked about earlier, but also to know what the ratio of green bonds to total issuance in any given year is and how this metric is expected to change. I would like new issuers to be able to address this and I want to see the goal that an issuer is setting for themselves for the next five years or 10 years, whether there is a ceiling to the proportion of their issuance that will be green.
Søren Elbech, IADB: But I hope that the overarching goal is to channel funds into new projects, so the ratio itself must be driven by that, right?
Jayakumar, State Street: Correct.
Reichelt, The World Bank: The reason why green bonds are a small percentage of our overall issuance programme is because we finance many other sectors to fulfil our poverty reduction mandate. And a large percentage of our annual issuance is refinancing. The projects that we’re using the proceeds for have varied implementation and disbursement schedules, and we’re issuing shorter term bonds based on investor demand, so the percentage of our overall borrowing isn’t the same as what’s going to projects that year so maybe you should also be looking at that.
Jayakumar, State Street: We look at multiple characteristics but the ratio of green bond issuance is a very easy one for us to explain to investors — because our investors ask about the continuity of issuance. So we talk about what the path is typically for the issuers in our portfolio, but I completely understand there’s an asset liability duration difference in terms of the funding versus the loan and the project.
Our investors want to know that these are not one-time bond issues.
Reichelt, The World Bank: If an issuer has put all the work in before they launch their first green bond, they’re not going to just want to forget about it after one issue.
EUROWEEK: But if you had a corporate borrower, for example, coming or a municipality looking to do their kind of first green bond, are you saying you want them to have some sort of objective for how many they’d issue per year or of what percentage of their funding would be green?
Jayakumar, State Street: It would be good to get that information from them. Some issuers are very open about it, saying that they’re testing the waters and they can’t make firm commitments to investors that they’re going to continue with a green programme.
Padilla, Daiwa Capital Markets: Here is where it may get tricky for corporate borrowers and where transparency of the Use of Proceeds will be the battlefield. Issuers have been issuing freely on the basis of “General Corporate Purposes” for decades. Most corporate issuers will not like a specific commitment unless there is something in there for them. While we all agree that in the nascent stage of this market we should not veer too far off the traditional funding curves, it will be a battle of price versus commitment for those 40% of borrowers on the US aggregate index that are corporates to make an impact on what we are talking about today.
EUROWEEK: Is wanting to see repeat issuance something for Trillium as well?
Smith, Trillium: Yes, we welcome repeat issuers. It shows a level of commitment, but we do recognize that every issuer has to be a first-time green bond issuer at least once! To date, there has not been much corporate green issuance,
but we don’t want to be financing the one single green aspect of a corporate issuer’s business, when nothing else the issuer is doing would qualify. Even if proceeds are ringfenced, money is fungible. Even if we’re funding an identifiably green project, the overall reputation and policies of the issuer are important to us. Having a credible issuer is important to us.
Kinnersley, Nikko: The criticism of green bonds is that many of the supras may have been financing these projects anyway. What I would like — and I have spoken to Heike about this — is seeing evidence that green bonds are becoming a bigger percentage of the overall loan portfolio and that green projects are being prioritised and the less green projects are, not necessarily being displaced, but there’s some focus on mobilising that capital towards low-carbon developments.
Then we get away from that criticism that these bonds from supranationals are purely window-dressing.
Smith, Trillium: For this field as a whole, the objective should be to lower the relative cost of capital for green projects as compared to non-green projects. But we don’t want to do it just by giving a concessionary rate on a particular bond but by growing that field.
Kinnersley, Nikko: Ultimately we would like the gatekeepers for capital, that is, the investors, to be under some pressure to be investing in these projects.
If you get a large and growing pool of capital that’s potentially earmarked for green purposes then you may see a differential in the price going forward.
At this stage I wouldn’t want to emphasise that. I’d see that as something maybe for many years down the line where there is a reversal of the current situation. Where it would effectively be too expensive for issuers that don’t address ESG issues to come to the market.
Smith, Trillium: I’m thinking 10, 15 years down the line.
Kinnersley, Nikko: Yes, I agree.
Reichelt, The World Bank: Do each of you have room in your portfolios which are now geared towards supranational green bonds for non triple-A green bonds or are you really focused simply on that level of credit quality?
Smith, Trillium: We absolutely have interest in non triple-A. We do need investment grade but it doesn’t have to be triple-A.
Kinnersley, Nikko: Obviously our funds have a prospectus and they have very specific guidelines but recently we’ve broadened it beyond the World Bank for segregated accounts. I’ve always said the potential, especially for institutional investors, is looking at going down the credit curve when there’s more availability and liquidity.
EUROWEEK: I’m interested in where you’d draw the line on investing in ring-fenced operations. As a speculative example, if there were a European airline or utility looking at issuing green bonds — a direct, big polluter that’s going to issue a green bond because that money might be used to reduce their emissions or it might be used to construct something that is environmentally sound — where would you draw the line on that?
Smith, Trillium: We would be very interested in financing an airline becoming a rail road!
With corporate issuers, we form an ESG view on the corporate issuer as a whole. There are corporate issues that we don’t buy because the corporate parent does not meet those criteria.
We would require not just that a specific project be green but that the corporate issuer meets green criteria. For example, is the company a participant in the Global Reporting Initiative? Do they have a real and meaningful commitment to sustainability that we can look at and evaluate? We probably wouldn’t bite on an airline indicating that its new business model is to be a railroad until we saw some evidence.
Kinnersley, Nikko: I would have to agree. We obviously don’t have that because the World Bank is a responsible issuer and they have a very clear mission. But it’s stretching it if you basically have a brown investor issuing a green bond.
You have to have a look at the whole package and that’s our responsibility as an investor. We’ve spoken a lot about the costs associated with this from the issuer’s perspective. I do feel that the investor has a role there.
Certainly there has to be more due diligence — maybe like a Trillium — looking at the issue and looking at the whole spectrum rather than looking at the individual bonds. That’s imperative.
Jayakumar, State Street: I agree with that. We have a fiduciary duty to our investors, that’s the most important. I have to be very careful and responsible for what enters the portfolio.
There’s a reason why I talked earlier about the need for greater disclosure on what exactly is being funded, what the projects are, what the underlying nature of the business is and why the borrower is issuing green bonds.
The intersection of green bonds and supras is a good match, given their goals. An airline company — I’m not sure. Having said that though, if you are a corporation and you’re paying for your sins of the past and you want to do some environmental clean-up projects, then is the funding for that project a green bond? I don’t want to discount it.
EUROWEEK: We should ask these guys who have written the paper. Would that pass the paper, as it were?
Michael Eckhart, Citi: That’s a key point. An objective of the whole exercise was to get all the taxonomies in the appendix and to have the framework to only be dealing with integrity and transparency. The framework refers to all the taxonomies: the IFC’s in there, the OECD’s is in there, the CBI’s is in there. These are in all the appendices and let there be many appendices.
All the framework says is — and you don’t have to get a third party to verify it, but that’s another option — that the issuer has to declare what taxonomy they will follow and let the investors determine if that’s OK with them. We position all the taxonomies into the appendices so that the discussion about them goes on while the framework can be put in place.
For example, in the CBI climate bonds, nuclear is allowed in their screen because of climate and CO2 emissions. But in someone else’s environmental taxonomy, nuclear might be excluded, so we wanted the framework not to deal with those kinds of questions but to just deal with disclosure items.
Buchta, BAML: In Europe the ESG application to the entire fixed income portfolio is already well underway in France, beyond just Amundi. Almost every investor I’ve met with in France applies ESG already. It’s fairly well underway in Germany, being worked on in the Netherlands, and is well underway in Switzerland as well. So it’s interesting: there they ask why an issue needs to be a green bond if they have already done an ESG assessment.
There’s a difference in the way the US views things and the way that Europe views things on that front.
I’ve asked the question of a number of European investors — if an issuer is on their approved list from an ESG perspective and the bond is green, do they like it any less or any more? And investors have said, yes, they probably like it more.
But if a company is not in an investor’s ESG index and the bond is green, the answers were very mixed. They question: ‘are you pushing the envelope and helping to get an oil company to shift to wind and solar or are you now supporting a ‘brown’ company that you don’t want to support?’
It’s not clear about how to move forward — Citi and ourselves, when writing this framework, were not trying to be the authority on that by any means. The investors will be the authority on that.
We simply requested that if an issuer is going to come to the green bond market, then they need to make sure they can track their cashflows, make sure that they can describe the specific projects that received the monies and make sure that those projects are generally considered green by some taxonomy in the Framework.
We, Citi and BAML, are not going to say, for example, that one issuer can come with a green bond but another cannot. That’s not our place.
Salvoni, Morgan Stanley: Maybe just to play devil’s advocate a bit — surely if there’s a strong enough use of proceeds there must be some way that a certain amount of investors could get their heads around funding a certain project.
So let’s say that there’s a brown issuer — let’s use the European airline example — maybe trying to raise funds for research and development in a carbon-neutral aeroplane.
If you put aside the company for a second and looked at whether this will create enough of these positive externalities to make sense for you to invest in regardless of the company behind it — is there a hurdle there that you could see yourselves potentially getting over?
Jayakumar, State Street: It goes back to the heart of whether you would buy a company that has polluted but is trying to clear up — so they might fail your ESG screen for the pollution that’s been done and that they may continue to do so on one hand, but you generally know what the bond proceeds are going towards.
I don’t know the right answer, I don’t know what the documentation and the level of proof of payment is needed from that issuer.
Smith, Trillium: It’s a difficult problem. Just on the face of it, we would have to evaluate each issuer to see if this is an issuer that we find acceptable in other areas, because there is a fungibility issue.
We might feel more comfortable in an asset-backed structure if we don’t really trust the issuer for the use of proceeds. Asset-backed feels more secure in terms of use of proceeds.
To go to Suzanne’s point — our portfolios have been ESG all this time and so why is a green bond important? We have diverse investors. For some investors, ‘S’ is important; for some investors ‘G’ is most important and for other investors the ‘E’ is most important.
The number for whom ‘E’ is important is rising. Global climate change is becoming quite difficult to ignore. Our investors are more and more interested. Greening their investments increases their willingness to continue with the environmental organisation work that they’re already doing.
There is a cachet to owning a green bond, it but it doesn’t mean that we can produce any less in terms of return relative to whatever benchmark.
We – and most of our investors – recognize that ‘E’, ‘S’, and ‘G’ are also interconnected. One of the most positive aspects of the World Bank green bonds and IFC green bonds is that economic development is their mission and that the organisations recognise that poverty, environment, and social well-being are very closely tied. That message certainly resonates with us.
Jayakumar, State Street: Now I’ll stir the pot even more by saying green bonds might be a passing phenomenon that end in 20 years because the world is so green that security is green by default and you don’t need that green structure.
That’s certainly not the case today and so 20 years, 30 years from now you might still continue to have high yield, investment grade, mortgage backed securities and asset backed securities — but maybe that will all be green.
Elbech, IADB: Interesting aspects! Maybe, as we discussed before, the need is, rather than a green bond market, to make sure that the gold standard of transparency is continually applied to satisfy investors’ fiduciary requirements to understand that what they are actually buying has been distributed to the right projects.
Kinnersley, Nikko: I’m not sure I agree with that because most people would argue there’s still this massive financing deficit in terms of supporting low-carbon development. Unless more — a lot more — money could be mobilised in that direction, that deficit for global climate warming is going to continue. You do need a much greater percentage of current capital, private sector capital, being directed in this direction.
Elbech, IADB: I’m trying to get my head around the development of this market to actually find out — maybe it’s a passing phenomenon. In our experience, without having issued green bonds, we have succeeded in disbursing billions of dollars a year to green projects, and there continues to be a fantastic — and necessary — development of green projects in the world. So, is it a question of issuance of green bonds, or shall we strengthen our promotion of what we’re already doing? It’s a rhetorical question, of course, but we shall focus more on that going forward. Let me add that, yes, I agree that we’d like more private sector involvement, absolutely.
Padilla, Daiwa Capital Markets: The level of additional information provided to end customers is what has made theme-related issuance so strong in Japan no question.
Eckhart, Citi: Project debt is just not at the scale we need it to be at. Project financing is still a small part of the financing world and a remarkably small part. In a $7tr-$8tr a year bond placement market in 2011, project bonds were $16bn. The category for all intents and purposes hardly exists. Indeed, it is a sophisticated specialty.
EUROWEEK: But regulation will help you get there. Basle III is making it much harder for banks to lend long term to projects — it’s much much more expensive for them to do so — therefore the securities markets are going to have to play a much bigger role.
Eckhart, Citi: Regulation is pushing banks away from it — the regulators are making it more challenging. Then you’ve got the bond buyers coming in with their 15 to 40 year appetite, which is very well suited for these projects.
Jayakumar, State Street: I agree with you, but I’d just like to address the argument that IADB and many other issuers make — that everything they do is green anyway.
I feel at this point in the marketplace and where we are, as we’re trying to bring and attract financing specifically towards green projects, the three-legged stool of disclosure plus ring-fencing plus the additional commitment, distinguishes a green bond from a brown bond.
Elbech, IADB: You’re touching upon a very important topic, which is that we’re trying to attract financing for these projects and that’s my point — these projects already happen, and we have an already existing very active borrowing programme to fund all of the Bank’s projects.
So, is it a question of adding a relatively more expensive funding instrument, i.e. green bonds, or could we achieve an even better result, if we spent the same costs in providing more transparency, reports, and investor dialogue about what we are already doing, and in that process qualify our bond issuances, without necessarily having to label them green, which — by the way — I will tongue-in-cheek continue to argue they all are, already.
Reichelt, The World Bank: Investors are telling us that they want a specific use of proceeds, they want us to earmark — so that’s what we’re doing.
Buchta, BAML: As Stuart said earlier, it’s democracy with bonds. We’ve seen democracy within equity and a lot of what the SRI funds do is to try to mobilise their shareholder rights en masse to dictate, for example, how many people of diversity must be on a board or to dictate what the company needs to do in terms of curbing pollution.
Labelling a bond as a green bond and providing a specified use of proceeds is a way that fixed income investors can start to vote with their fixed income dollars.
I would love to see the green bond market phase out similar to how the Green Bank of New York wants itself to be phased out over time because that means that you’ve already mobilised every investment dollar that you want to mobilise.
But until we get there, 20 years down the road, we need the labels to get the marketing going in terms of awareness. We also need to really engage investors and issuers. Maybe one day the investors will dictate that every single asset that every corporation or bank or supranational invests in will have to be green.
Reichelt, The World Bank: A question on today’s agenda is whether there is a risk that with all the focus on green the other SRI benefits or aspects of supranationals or issuers get neglected. What we’ve realised — and we’ve been doing this for many years by communicating about education and the health projects — is that investors now, because climate change is such a big issue, want to target their funds towards a specific purpose.
They’re not necessarily saying the rest is bad, it’s just for a particular strategy they want green bonds.
They are outsourcing the project selection, monitoring, due diligence, and everything else that we do in our project cycle as a development banks, to us as an issuer of green bonds.
All the little pieces we’ve talked about are helping this market grow and even if it takes longer than we hope — what we’re doing is mobilising private capital for these projects.
As Mike said, the banks are getting out of the project finance side.
Eckhart, Citi: Finding it more and more challenging to do iwithout special treatment.
Reichelt, The World Bank: It is a problem. It’s a problem for our emerging market clients. Many of our member countries have big infrastructure financing needs that aren’t being met. They need infrastructure finance, so why not make that green? This expanding green bond market will help with that goal. But it’s not just an emerging markets problem. There are huge infrastructure needs in most countries.
Elbech, IADB: At IADB, we fully support green. It’s our mission to help facilitate sustainable, climate friendly, green development, while also providing low cost financing to our borrowers. That’s the balance we want to strike.
Suzanne you said the right word — it’s all about marketing/promotion, and this is exactly where the market is right now. It’s a question of raising awareness about all the great green projects, which already happen.
We would like to lend more money to green projects. If that can be done through issuance of cost-efficient green bonds then, absolutely, it would make sense to us, and we would certainly want to look into that.
What I’m going to take away is that the amount of disclosure that needs to be done about what we already are doing in the green project space — there seems to be a massive upside for us in getting a larger understanding or recognition, in the global investor space, that IADB is actually providing an enormous amount, several billions per year, of green financing already.
Eckhart, Citi: Yes, I believe that this is not going away. This is a permanent phenomenon under the guise of branding. You cannot take back a brand — it is in the consumer’s mind. The IFC and the World Bank have branded green bonds and there’s nobody in the debt space who doesn’t know what a green bond is, so we can’t take that back — it has indeed become a brand.
So the question is, how big does it get? That was our objective with the white paper, to make it big, to get it to the 97% instead of the 3%.
The second reason it’s not going to go away is that the climate issue is not going to go away. Climate change is just going to get more intense and coming generations are much more switched on to it than my generation.
The decade of climate change will be the 2020s in my view. That’s when all this really gets traction.
The other reason it’s not going away is the sheer profitability of conventional, non-clean energy.
Oil and natural gas are not going to become unprofitable so they will always draw capital towards them. Coal is questionable here and there but it’s still profitable in most places.
I believe we are shifting from a ‘cost-based’ world to a ‘values-based’ world and we’re right in the transition today. We’re still in cost-based market economies and looking at profit, so we’re tacking on carbon credits and regulations and we’re shifting to a values base but it’s not all done yet, I don’t think it’s going to be done for another couple of decades.
So the need is there and the natural flow of capital to the conventional status quo is so strong that these mechanisms, this branding for green is needed and I don’t think it’s going away.
