As leading developed country borrowers look to innovate in socially responsible financing, those in developing countries say they are unconvinced by the advantages of such instruments.
The European Investment Bank is looking at moving beyond green bonds — an area in which it has been a pioneer — to issue instruments tied to other sustainable development goals. “We are a pioneer in green bonds so why not other SDG bonds?” Werner Hoyer, president of the EIB, told GlobalMarkets. He pointed to notes with proceeds linked to water supply and treatment. “Take blue bonds, and what is happening in big oceanic conferences.
“We are also considering how to print refugee bonds but we are still in the early stages.” The comments came as bankers look to the biggest European sovereign issuers to follow France and Poland to provide more green bond supply.
“With COP23 coming up in Bonn, there is obviously a great opportunity for a sovereign to issue a green bond,” said one senior capital markets banker. “Germany would be a great candidate although such deals can take a long time to structure.”
Yet globally a steady supply of green bonds has failed to materialise, due to a lack of pricing advantages.
Hugo Sarmiento, chief financial officer of Latin American development bank, CAF told GlobalMarkets that spreads on green bonds have not made the securities attractive for the multilateral, which has an annual funding target of $3bn-$4bn. “We haven’t done anything yet because we don’t see a pricing benefit,” he said.
CAF has sold “water” bonds in the Japanese Uridashi market. The funds from the securities are earmarked for supplying, cleaning and treating water in Latin America. The bank has considered more mainstream issues of green bonds to diversify investors, Sarmiento added. But not everyone agrees that even that benefit is evident.
“Everybody is looking at green bonds,” says one senior Latin American bond banker. “But at the moment it doesn’t translate into better prices, or new investors, for issuers.”
Sweden is another borrower that has proceeded cautiously on green finance. “I think it’s important for governments to promote green finance in different ways,” says Magdalena Andersson, the country’s finance minister. “We don’t have green sovereign bonds, but we are in different ways promoting green finance, for instance we are a big donor to the green climate fund in the UN.”
At the same time, the government has nudged — but not mandated — its pension funds to look at environmentally-friendly investments. “Their focus is to invest as effectively as possible for the senior citizens of tomorrow,” says Andersson. “It’s just pointing out that green investments have certain advantages.”
The right signal?
Another concern for Sarmiento was, ironically, sending the wrong message by issuing a green bond. “Anything we do is aimed at promoting development,” he said. “To that extent, should we segment our funding and our bonds — one is green bonds, one is water bonds — or should we say to investors that all of CAF is a socially responsible investment?”
Moody’s data show that Asia Pacific issuers have led the way on issuance of green bonds, accounting for 44% of such deals globally to date. Similarly, financial institutions are the biggest issuer type, having sold around 43% of such deals, according to Moody’s.