But there is a growing debate over the importance of the SRI bond market, compared with the wider approach that favours issuers with strong overall ESG credentials. Many investors are no longer happy to buy green bonds just on the basis of the earmarked assets — they want to know the issuer itself is moving in a sustainable direction, not just issuing to be ‘hip’.
At GlobalCapital’s roundtable with issuers, investors and banks in Amsterdam in early September, other participants pointed to SRI bonds’ ‘transparency’ — providing clarity on the use of proceeds so investors can feel their money has had a specific, and even measured, effect.
Participants in the roundtable were:
Hans Biemans, head of sustainable markets, ING
Olaf Brugman, head of sustainable markets, Rabobank
Joop Hessels, head of green bonds, ABN Amro
Guillaume Hintzy, group treasurer, SNCF Réseau
Ralph Ockert, head of syndicate, DZ Bank
Alexandre Marty, senior investor relations manager, Electricité de France
Maxime Molenaar, responsible investment officer, Actiam
Stephanie Sfakianos, head of sustainable capital markets, BNP Paribas
Bodo Winkler, head of investor relations and sales, Berlin Hyp
Craig McGlashan, moderator, GlobalCapital
: Could the issuers give us a brief outline of their SRI bond activity so far?
Alexandre Marty, Electricité de France: EDF has issued around €4.5bn in four green bond issuances so far. The group issued its first green bond in November 2013, a €1.4bn trade. This was followed in 2015 by a $1.25bn green bond. Both issues were dedicated to financing the construction costs of new renewables and wind projects.
Then in October 2016 we had a €1.75bn issuance and at the beginning of 2017 we sold the first ever green Samurai — ¥26bn ($240m) across two tranches. In addition to financing new renewables projects, the proceeds of these last two issuances are also dedicated to the modernisation of France’s hydropower fleet. That meant no construction of new projects, but new investments in upgrading, modernising and developing existing hydro facilities.
A key feature of EDF’s green bond framework is that all the proceeds are ringfenced in a portfolio of treasury assets and the only way the proceeds can leave those portfolios is to be allocated to an eligible green project. This is to provide assurance to SRI investors that at no point will the proceeds be invested in nuclear activities.
We provide regular reporting on the allocation of the proceeds, summary reporting on a quarterly or semi-annual basis, and then detailed reporting on an annual basis, including the avoided CO2 impact.
Vigeo Eiris issued a second party opinion on the green bond framework. Deloitte provides an attestation on our annual reports.
Bodo Winkler, Berlin Hyp: For us it was very easy because we only do one kind of business. We are a commercial real estate lender and our green bonds are used to refinance existing loans for green buildings. That can mean the acquisition of a green building by one of our clients, the development of a green building or the energy-efficient refurbishment of a building. In any case, it’s always commercial real estate.
For almost 150 years, covered bonds have been our most important refinancing instrument. It was quite obvious, with that history, that our first green bond would be a green Pfandbrief. We sold that in 2015, making us the first issuer of a green covered bond worldwide. One year later we sold a green senior unsecured bond, with the proceeds again used for loans for green buildings. This year came number three, which was a green covered bond again.
We have a green bond programme that defines our criteria for all our green bonds and those we’ll issue in the future. It makes quite clear that it will always be for mortgages for green buildings. We do impact reporting annually on April 27, the birthday of our first green Pfandbrief.
Guillaume Hintzy, SNCF Réseau: SNCF Réseau is the French railway infrastructure owner and manager. We issued our first green bond in October 2016. Our programme is mainly dedicated to the renovation and modernisation of the structuring network — the day-to-day network. That’s major high speed lines, major railways between Paris and the suburbs and so on. The amount of eligible projects under the programme each year is quite significant — €1.5bn-€1.8bn.
As a consequence, we have the ability to be recurrent in the market. We have taken the commitment to issue at least one benchmark each year, to build a complete curve quite rapidly.
We’re also trying to bring what investors call additionality. We don’t refinance any of our existing projects — we only use green bond proceeds to finance new projects such as renovation and modernisation. The assets exist, but the projects are new. Railway track, for instance, is renovated every 30 years.
We try to be in line with the best standards in this market: we have decided to be double certified — the Green Bond Principles accreditations from Oekom Research and the Climate Bonds Initiative [CBI] certification.
In less than 12 months, we’ve issued three green bonds for a total of €2.6bn, making us one of the 15 biggest green bond issuers.
Our first was a 15 year, the second a 17 year and the latest, in July 2017, a 30 year, which is one of the longest green bonds in the market. We are beginning to build a green curve, which should be attractive for investors.
: Do you feel that the SRI bond market will keep growing at the pace it has been over the past few years, or will we reach a saturation point?
Stephanie Sfakianos, BNP Paribas: We’re at a bit of an inflection point. First, where we’ve been very strong is that the Green Bond Principles have aligned transactions in a very clear, thematic market. It’s not about the issuers, it’s about the assets.
Investors can market their green bond funds with explicit language like: “if you spend €1m in this fund, you will reduce carbon emissions by X.” It’s very clear. It’s to the benefit of all of us that issuers are willing to go through the necessary hoops.
There’s a second market we hope will develop, which is the green issuer market. That’s where you have issuers that are genuinely making huge strides to be sustainable and have their business much more aligned with all the UN’s Sustainable Development Goals [SDGs]. The natural investor base for that is those that have ESG incorporation as a strategy. They’re looking holistically at issuers.
My guess is that in 10 years’ time the thematic market will be slightly smaller than the ESG integration market. But I hope we’re getting to a stage where, for issuers and investors, there’ll be no such thing as a transaction that doesn’t take into account whether an issuer is doing the right things across a broad range of activities. That means that, for example, an issuer will struggle if it is the most egregiously polluting coal-fired power company, but has one wind farm that it can link to a green bond.
On the basis of these two markets developing, the growth will be exponential.
Hans Biemans, ING: How would you then define a green issuer? Is it an issuer with the highest sustainability rating? Or a more pure play issuer, such as SNCF Réseau?
Sfakianos, BNP Paribas: There are going to be a number of ways of defining it, and it’s going to depend, a little bit, on investors. As an example, I’ve just done a roadshow with an issuer that has genuinely got sustainability embedded into everything it does. You don’t have to get the corporate social responsibility team in, because the people running the business know the strategy. It’s very holistically approached. A number of the investors were saying: “We don’t need you to do a green bond because we’re looking at how you, as an issuer, are embedding our criteria into the way you operate.”
It’s very much going to be investor-driven. Different investors will have different metrics, pressure points and standards. Just the same, as we all know, defining green is not a straightforward process either.
We’re very much supported in this by the SDGs. There’s a lot of work being done where the SDGs are going to be matched with some clearer, measurable metrics, which investors can apply.
Olaf Brugman, Rabobank: I completely agree and it’s obvious that we’re going this way. Look at other sectors and sustainability standards therein, such as sustainable agriculture. There is always a first wave of aspirational standards that trigger the discussion. That lets the frontrunner companies show what they’re really worth, and also show their first steps. After a while, new things happen. You will see a diversification of standards — and that is already beginning to happen in green bond markets with the CBI and the European Union. Other countries are developing their own frameworks.
There are always new challenges and the first mover standards will never be able to accommodate all the latest developments in the long run. The largest standards will eventually evolve into a mainstream approach for middle-of-the-road ESG performance.
That is one of the challenges for the Green Bond Principles. Will they continue to focus on moving the best or will they also evolve into moving the rest? There is an increased regulatory requirement for companies to show more transparency on their ESG impacts, so the direction is very clear — there’s no way back.
There is already a discussion on the power and the impact of the green bond markets. Some parties see in those standards a limitation, in terms of categories or themes being too narrowly defined. We had a large green bond event with issuers and investors where the investors said: “You need to issue more.” And the issuers said: “We want to issue more, but we cannot always find sufficient assets exactly fitting the categories of the Principles.” We should be more flexible.
That’s the direction, so I can’t imagine issuance would stall.
Biemans, ING: But it’s very important that we move in the right direction. Investors have been able to buy on an SRI basis for the past 30 years. They did that on the basis of a sustainability rating — all issuers around the table will have such a rating. Normally, SRI investors put together an SRI fund by investing in the names with the highest sustainability ratings. In addition, especially in the equity space, there are all kinds of thematic funds — water funds, transport funds, energy funds and so on.
I agree that we will see some other developments alongside the thematic green bond market. But the world is asking for impact and impact measurement. Traditionally, that is much more difficult to measure at the level of the issuer.
SRI ratings are not directly related to impact for most issuers. For pure play issuers such as SNCF Réseau that mainly — or only — do green investments, the relationship is more direct. That is why thematic funds exist.
Sfakianos, BNP Paribas:It comes down to pricing. If investors would agree that in return for the impact — bearing in mind that there is no credit difference — we could put a price on that impact, then there would be a very much stronger appetite for issuers to sell green bonds.
How we get there is by recognising that, at the moment, there’s no pricing differential. It’s going to be a little bit more challenging for investors to ask certain companies, which don’t have these obviously identified projects where they can report impact, not to benefit from the genuine efforts they’re making in sustainability.
So in the near term, let’s park the pricing discussion. Let’s just capitalise on the fact that there are issuers for whom that reporting is much easier and who are also willing to issue at flat pricing for the diversification and presentation benefits green bonds give them.
Biemans, ING:But then what would be the difference between the conventional bonds of a green issuer and the green bonds of a green issuer? That’s not straightforward.
ING has structured green revolving credit facilities for Philips and some other companies. The banks all agreed that they would accept a lower interest rate when the sustainability rating goes up, and vice versa. But I’m not sure how you would translate that model to the bond market — would investors be willing to give up return for a higher sustainability rating, especially when they could buy a ‘grey’ bond from the same issuer? That would not be a consistent story. The SRI community has always argued that sustainability does not cost return and may even improve risk-return.
Sfakianos, BNP Paribas: Investors wouldn’t give up return for a sustainability rating, but for the actual impact. You get all those extra bells and whistles, but it may cost you a little bit because the impact report can be quite onerous for some companies to provide.
Winkler, Berlin Hyp: Coming back to the question of whether the market will grow at the same pace, we have to recognise that not all the major European banks have issued green bonds. Big banks have done one green bond each of €500m or so, and that was one or two years ago — and nothing has happened since.
There is a lot of potential. From our experience, the most difficult aspect was installing processes and responsibilities to identify the assets. Next was how to get hold of new assets fulfilling our criteria.
After having taken all these steps — defining responsibilities and processes, providing IT systems to record all the data — we started with a portfolio of €657m in April 2015. We’re now at €2.5bn — four times the original portfolio. We’ve been able to come to market every year, doing three benchmarks at €500m each. The portfolio size means we could even do a second one this year.
Banks have a big variety of assets and large potential to put them to work. Also, it’s very common when reading final terms to see the use of proceeds listed as “refinancing the business”. From a green bond perspective it’s very nice for investors to have a concrete definition of what’s being done with their money. The same could be done for other projects as well, not only green.
Joop Hessels, ABN Amro: So far, most of the issuer entrepreneurs in the green bond market are willing to accept a similar price. They want to make the effort because they think it fits their ambitions. Of course, they like the investor diversification possibilities.
Now there is a second wave of issuers, which maybe have been subject to a bit of peer group pressure by seeing similar organisations in this market. When I speak with treasurers, it’s very often not their own decision to set up a green bond programme. It should be part of the ambition of the organisation. That’s why it’s important that senior management is involved in these kinds of exercises. We’re seeing some issuers leading by example. That will help to enlarge the market.
But some kind of pricing differential, in the end, will trigger every treasury. Either that will come from price benefit at issue, some kind of advanced capital treatment or maybe even a change in risk calculation on the investor side.
Because it’s a risk-reward system, you could argue that a green bond — as it’s sustainable — should also have a lower premium.
Maxime Molenaar, Actiam: Whether they are willing to accept less return depends on the asset owner. Some have very clear targets in terms of sustainability. But what has helped grow the market so far is that it has also been very accessible to mainstream investors that weren’t necessarily looking for very green projects, but were open to them. What made it accessible was that the bonds did not have a discount in the beginning.
It will help issuers if there is a discount, but at the same time it might scare off investors. It’s very important to find a balance.
I agree with Stephanie’s comments. We also need to think about why we have green bonds. It’s because we foresee that a transition towards a greener economy is necessary and it helps issuers and investors. First, some investments might become available for very green investors that previously weren’t allowed to invest in certain companies. Also, the more mainstream investors have an opportunity to make their portfolios greener.
But as more bonds are issued, investors will probably become more critical about the rest of the company. It’s something that we already look at. Issuers can be ‘grey’, but if they have a clear ambition towards changing to the greener economy — and issuing green bonds is part of helping finance that ambition — that’s a very good thing because that’s the real impact we’re looking for.
If you are issuing green bonds because it’s hip or you want a green reputation, but at the same time are doing things that go directly against that ambition, we’d be very critical about that bond. As the market develops — and it is growing — the investors that were at the forefront of this development are becoming more critical about such issues.
Ideally — and maybe this is controversial — we would not have green bonds, but the issuers themselves would be green. To achieve that, green bonds are a very good tool.
Ralph Ockert, DZ Bank: Not every company can be green. For Germans, nuclear power is not green, for example. But from the syndicate side, I would say that the price differential is coming because, as Bodo just said, SRI bonds will be a new asset class, next to the other asset classes we have — covered bonds and senior.
One day, green bonds will be priced differently. European Investment Bank’s Climate Awareness Bonds are the first example of this, because this issuer has a curve with many bonds out there. It’s hard for a new issuer because it will have only a few points in the curve, but this will change.
It will also change if we have tax or regulatory advantages for buyers. If investment funds need to buy these assets, they will just take the price, then we will see a differential. I’m very positive.
Molenaar, Actiam: It depends on the timeframe you’re looking at. In the coming decades, the actual transition has to start happening.
Biemans, ING: The transition is also about transparency. Bodo has a nice example of a growing portfolio. But not only is the awareness within the issuer growing, it is also growing among investors. It is very hard to believe that at some point, with the exception of some borrowers, issuers will do only green activities or banks will have only green loans on the balance sheet.
Green is also a moving target. The green car of today is not the same as that of five years’ time. There will always be a segment within each issuer focusing on the sustainable transition. That can be financed with green or social bonds, I agree. When the market is large enough, like 15% or 20% of the total bond market, we might see a pricing differentiation for that.
Hintzy, SNCF Réseau: My views are contradictory. I am pushing for transparency, standardisation and so on because this is quite easy for someone such as SNCF Réseau — we want to be best in class. On the other hand, if we want the market to develop then we have to attract issuers, which is probably contradictory with standardisation.
There are a lot of multilateral institutions and a lot of banks in this market. But I have always been impressed by a figure from the CBI in 2016, which said that the “climate-aligned” bond universe was about $600bn. Some 67% of that comes from the infrastructure and transport industries.
But when we issued our green bond in October 2016, we were one of the first infrastructure and transport companies worldwide to issue a green bond. So there’s an issue we need to solve — how can we attract new issuers? It’s really complicated.
Diversification is an argument, for sure. Another argument is maturity: a lot of investors in this world are buy-and-hold and want long maturities. That’s why we were able to issue a 30 year earlier this year. But are these incentives sufficient for other issuers?
Price is probably a solution. If we were to change regulations regarding capital treatment for green bonds, this would have an impact on investors, which could have, indirectly, an impact on pricing. That could be a good motivation for issuers.
Sfakianos, BNP Paribas: It’s probably the thing we discuss the most. The conclusion we’ve come to is that the whole idea of a sustainability-aligned market is very important.
There are a number of ways in which you can measure whether a company is contributing to part of the solution or part of the problem. And there are a lot of companies that would feel they’re part of the solution but don’t have readily identifiable projects they can finance. That’s one solution.
The second solution to grow the green bond market is to revisit the idea of standards. It’s unbelievably challenging and there is no one set of standards that applies to everybody. But it’s too complex and investors are slightly deterred by the lack of clarity. There are 200 different initiatives setting out green standards.
One area we need to turn our minds to with the Green Bond Principles is how to facilitate that discussion, so that we have a little bit more clarity.
Biemans, ING: There is a solution. We need to connect the green financing world to the existing sustainability initiatives in the real economy.
Sfakianos, BNP Paribas: Correct.
Biemans, ING:In every sector there are dozens of sustainability initiative standards with crazily detailed indicators for reporting and so on. But the financial industry doesn’t use it. We need to connect these two worlds. There is a GBP working group I’m part of that has this as a goal. Hopefully, some progress can be made in that group this year.
There is a second, very important aspect. Some issuers have issued green bonds financing small projects very deep in the organisation: individual environmental measures, for example, in production facilities. That’s where it goes wrong, because when you add up the costs of individual measures one cannot find large enough amounts.
SRI investors have always looked at issuers at the corporate level — whether the entire company is sustainable. Green bonds, for the first time, allow us to move down one level to the project level. For many industrial corporates, that would mean the level of the individual plants or production facilities.
We should — and there are measures for this — just look at the sustainability of a certain plant or production facility. Alternatively, of the sustainability of the products produced. Then we look in the budgeting systems of that company and fund that specific green factory, which meets certain standards, with the green bond.
First, you’d end up with very simple accounting metrics, which are auditable and simple. Second, you’d end up with amounts that are feasible. The reason you don’t see too many corporates, apart from the pure play companies, is that people do not look at the level of the production facilities but instead at the level of the underlying individual green measures in the factories. And that does not lead to amounts that are high enough to issue bonds.
For example, I recently had a conversation with a machinery producer. They have ISO certifications on all of their factories and behind the certifications are environmental and energy management plans. Not all these environmental management plans are of the same quality, but at some point when these industries have certain standards that they meet then you could argue that, within a factory, all the measures needed to make that a sustainable factory have been taken.
Then you could just finance that factory with a green bond. It’s a proxy, but it’s a better proxy than trying to go down to the level of the individual measures in that factory. That would not lead to a sufficient amount and then you would not get the transition started in the green bond market.
Marty, EDF: What are we trying to achieve? Is the real goal, in itself, to grow the market? To me, the interest is in growing the amount of capital allocated to green infrastructure. That’s what’s going to get us on the path to keeping warming below two degrees Celsius, as per the Paris Agreement. We don’t want to be talking of business as usual.
Biemans, ING: That will not be the case. For example, we were involved in a green bond for FrieslandCampina, a dairy company. The dairy sector has agreed, among itself, a ‘dairy sustainability standard’ that includes all the steps you need to make milk and other dairy products, from farmer to factory to processing. We should not have the arrogance that we can determine for each sector what should be done.
So as soon as either the product or the dairy factories meet the standards they have set in their own industry-wide, audited set of criteria, then the financial industry should just live with that and finance it as green. It’s an initiative from a sector to become more sustainable and climate-neutral. So it is really an amount of new sustainable investment. These factories are producing sustainably. Compare this with real estate issuers: they also finance the entire building with green bonds, not just the individual investments: triple glazing, the insulation and the heat pumps.
Molenaar, Actiam:It depends on the industry. A coal-fired electricity company would maybe say that a new coal-fired plant that is very efficient is sustainable.
Winkler, Berlin Hyp: I would agree that market size is not a goal itself. If there needs to be financing for goals that are important, it should come from every sector. It makes no difference whether these are financed by ordinary bonds or green bonds.
We need green bonds due to the transparency they offer investors. They create confidence. Therefore, this market that is only 0.1% of the overall debt capital market needs to grow.
Marty, EDF: The market needs to grow if it is a way to allocate more capital to transparently defined assets on which we can provide reporting as to achieving a particular environmental objective. And the most common environmental objective, if we’re talking about green bonds only, is climate change mitigation.
Biemans, ING: That’s been the case in the green bond market. The first were SSAs, which have large portfolios of renewable energy investments and, sometimes, energy efficiency investment.
Then energy companies came in. They have a very clear — maybe the most clear — green asset on the balance sheet that can be financed with green bonds. Within the entire utility energy sector, it is quite clear what the eligible projects are for green bonds. Then we saw deals from similar companies, such as waste companies or real estate firms with green buildings.
After that it became a bit silent in the green bond market, because the industrial companies had to enter. These companies do a lot of investments, but it’s less visible. Look at Apple’s green bond. I’m very happy with it, but the largest part of the use of proceeds is for Apple’s office buildings. With the last bond, only $75m was allocated to the core business. That is a pity.
If a company the size of Apple would just allocate money to factories in which they have taken all the green measures needed to call the factory green, then we would see something different in the green bond market.
I don’t think green bonds will ever exceed 20% of the total bond market. It will always be on the innovative side and be a small part of the amount of bonds that a borrower can issue, unless it is a pure play company.
Hessels, ABN Amro: We need more issuers, to reach the two degree limit goals and the trillions of volume that are always mentioned in all kinds of reports. But we also need more projects.
We have a green bond market that is mainly focusing on investment grade, benchmark transactions. Not every project will end up in this market.
We all speak with many parties that have very good projects. But either the issuer is too small, they don’t have the credit rating or the projects are too small individually.
There are a large number of granular investments that are difficult to isolate from their systems but altogether make up for these amounts. Part of bringing these investments to the market can be done, maybe, with standardisation, but also we need to look more into project finance. Together with investors, we need to see if there are different pockets within their investment portfolios that they can invest in. Maybe that’s a different market from the one we are currently focusing our green efforts on.
Winkler, Berlin Hyp: I’m not sure I agree. If there were not enough projects, we wouldn’t need more green bonds. But I think this is not the case.
Let’s focus on commercial real estate. In Germany we are a well known bank, a medium-sized player, but very active. Why is it that out of all the pure commercial real estate lenders in Europe we are the only one issuing green bonds — for two years now?
It cannot be that only we have the green assets or that there are not enough green assets. It just means that others don’t make the same efforts to get there.
Hessels, ABN Amro: They don’t get the incentives to do it.
Sfakianos, BNP Paribas: German issuers are not hearing from German investors that they care. German investors are the least engaged. You see an investor in France, they say: “We need to think about SRI.” In Germany, they say: “There’s no legal requirement. The projects are just a best efforts basis.”
Winkler, Berlin Hyp: I have the same experience.
Ockert, DZ Bank: Are issuers identifying how many green investors have bought your bonds at issue? Saying “this one was green but this one wasn’t”?
Because that really would push the market, if a typical German green investor — say, the church banks — bought more of your paper because they thought it was green. Especially if they hadn’t bought the issuer’s paper before.
Hintzy, SNCF Réseau: We allocate more to investors we define as SRI than to our conventional investors. Nevertheless, everyone around this table recognises that, to be able to issue green bonds, issuers need to make efforts in comparison to conventional bonds — convince the top management to put in place internal reporting dedicated to these green bonds, define an overall strategy on ESG impact and so on. This is quite heavy. What are the advantages for issuers?
The only answer is the following: let’s modify the capital allocation for green bonds in the same way it has been done for infrastructure investment. In the project finance world there is better capital allocation. There are incentives for infrastructure investment. Let’s do exactly the same with green.
This would probably have an impact on primary pricing. It will then be much easier for CFOs and finance directors to convince their presidents or CEOs that there is not only an image advantage, a communication advantage, but also an economic advantage.
Winkler, Berlin Hyp: By capital allocation you mean risk weighting of the assets, don’t you? From my point of view a separate risk weighting requirement can only be justified by different risk. But not only because something is green.
We have this discussion in the mortgage industry that a lower risk weighting should be justifiable if we can prove that these assets are less risky. Otherwise, you are driving investors in the wrong direction. We don’t want to do the same as those who provided a 0% risk weighting for every EU government bond.
Biemans, ING: Banking regulation triggers short term investments. It is becoming increasingly difficult for banks to invest in projects with a 30 year maturity because it will cost too much capital. That is not what we want. That methodology is more designed to protect banks and less to promote sustainability. But there should be a solution in between.
Sfakianos, BNP Paribas: I agree. There’s a huge risk involved, particularly at the current stage where there is a big doubt about how to define green. One thing that’s going to come up in the EU High Level Expert Group is that there is going to be a lot more of an initiative to decide how you do that.
The irony is that the way the green bond market currently operates is that a green issuer is less risky than a green bond, because a green bond can be about the assets — but of a company that perhaps has some inherently high risk.
You could be a tobacco company with a wind farm. We’ve explicitly omitted the idea of a pure play company’s conventional bonds being considered green bonds. We’re saying that you can be doing anything else, but have a green bond if you can highlight the assets.
Look at the World Bank. It has decided that it’s not going to issue labelled green bonds because everything it does is driven towards sustainable development ends. They are refocusing their issuance on transactions that highlight the SDGs, which is very helpful for us as intermediaries. Are we getting ourselves hooked on something, the future of which is a little bit challenging?
So what is the point of growing the green bond market? The answer is that we’re talking about it in a way that we weren’t even five years ago.
When we first started in this business, there were six banks that had been a lead manager on a green bond issue. There are now about 67. It is something that everybody feels they have to be involved with — people are watching you and people need to behave better. That’s really the goal.
I can’t be sure if in 10 years’ time we’ll look at the green bond market as it’s configured now and say this was what drove us in a good direction. But we need to at least keep asking ourselves the questions — what exactly are we doing here, why are we trying to support the growth of the market, is it fit for purpose and are there other ways in which we can achieve the same end, which, after all, is making sure that our children and our children’s children have got a planet that’s worth inhabiting in 50 years’ time.
Hessels, ABN Amro: The trend is already happening. More and more discussions with investors are not only about a framework about green assets. They’re also about the concrete issue of the issuer’s strategy, what it is focusing on, is this part of a bigger plan or is it just a one-off because everybody else is doing it. That discussion is key and the green part is providing the opportunity to calculate the impact.
France now has this investor climate reporting legislation. I can’t imagine that we won’t see that in more countries in the foreseeable future, so this discussion will only be more intense. It can’t be within green bonds, it should be coming from the issuer. Hopefully it will also include those that need to make the transition, because otherwise we’ll end up in a niche market.
Brugman, Rabobank: Look at the report by the Business & Sustainable Development Commission. They are captains of industry and have said we need $100tr or so extra investment for climate mitigation, otherwise our businesses will go broke.
That’s where the opportunity is. We should measure whether the investments we make are realising that goal and if we have put enough money in the basket. Besides looking at green bond categories to facilitate green investment in certain areas, investors and markets will also be increasingly looking at investing in green issuers, next to investing in green assets and projects.
We should not only look at green bonds as a highway where we make the left lane green, focus on that and forget about the other three grey lanes. We should do everything we can.
So issuers should be transparent on their assets and their impacts, just as investors and underwriters need to be. We need to do all these things in parallel and this will drive the next discussion.
Biemans, ING: The green bond market was originally designed to direct more money to green purposes and that’s still the goal.
An issuer does not spend all proceeds from their normal bonds on green projects or on things that help the transition.
That is the key difference between the old world, where we just said: “OK, you have the right ambitions and policies, and for the rest we don’t care,” to the new world, where we want to know: “What is the contribution you make to a better world and what is the impact that you generate?”
Call them green or social bonds — there is no difference. They are the part of the bond issuance programme that helps to catalyse the transition. Because it’s still the same risk for the investor — it is also about transparency in the end.
A green bond is, in a way, a transparency or ‘awareness’ bond. Some issuers have a lot of such assets; some, such as Berlin Hyp, have a growing awareness of the sustainable loans on their balance sheet; and some, such as EDF, have a renewable branch that is growing and can make clear how much money they are spending on it. That is the contribution of the green bond market.
It’s not so important that we call it a green bond, but I would rather not lose the distinction of bonds that contribute to the transition and sacrifice it to, let’s say, bonds that are just for overall green issuers. There are almost no overall green issuers, just some SSAs and some pure play environmental companies.
Transparency and environmental accounting are key. Take an industrial company — not all its products and not all its production facilities are equally sustainable, so you could never call that issuer sustainable or impactful. But there is some value in determining which part of its activities contribute, preferably via accounting rules. Call that part green bonds or whatever you like.
Ockert, DZ Bank: In the beginning we got a lot of questions when executing SRI bonds. On the day of execution, in the weeks before and when you were on the road. But on the last one I executed, a 30 year social housing bond for Nederlandse Waterschapsbank a few weeks ago, I was asked no questions related to social housing, disbursement or impact reporting.
I was really surprised. Either there’s a constant dialogue between investors and issuers in which the lead managers are not involved, or the market is so established that the investors looking for SRI bonds don’t care too much. For them, it’s just an opportunity to buy 30 year paper.
Biemans, ING: Let’s say there is an incentive for issuers to designate an amount of money to green projects, so the only thing we need to do then is to say which part of the balance sheet or of the investments is green. That is still a challenge, but most issuers will not be able to call all their investments or their entire budgeting programme green.
If they only had to be transparent based on certain accounting rules — which part of your budget contributes to certain sustainable development goals or whatever — that part might even be funded at an attractive rate or end up in specialised mandates at some point. Then we are there.
: EDF earlier this year sold the first ever green Samurai bonds. What was your experience there?
Marty, EDF: We have included green bonds as a key component of our financing toolbox to achieve a number of objectives — investor diversification being one of them. Issuing in different currencies also contributes to that objective. In that regard, our green Samurai issue was very successful.
Another directive of our financing policy is to extend the average maturity of our gross debt, to match, as much as possible, the duration of our liabilities and the long lifetime of our assets. In terms of maturity, the Samurai market is very comfortable until 10 years — beyond that it becomes trickier. Issuing green Samurai tranches helped us push investors a little bit out of their maturity comfort zone and we printed two tranches of 12 and 15 years.
That is another tangible benefit of green bonds.
: Are SRI investors generally looking further out along the curve?
Hintzy, SNCF Réseau: There is more traction for green bond issues. We issued our second green bond in March 2017, a few weeks before the first round of the French presidential election and a time when the market did not like French risk.
We were able to raise €1bn at 17 years — which was very long — one month before the election. Clearly, a lot of investors are searching for green paper.
There are also a lot of buy-and-hold, quality investors searching for maturity, such as investors from Germany and the Netherlands. Of the €2.6bn of green bonds we’ve issued, about 40% have been bought by French investors and 20% from Germany, which is in line with our conventional issuance. But 20% of our green bonds have gone to the Netherlands, which is new. Dutch investors love green paper, as do Scandinavian and Japanese investors. These investors are also able, depending on the type of bond and issuer, to buy at a long maturity.
Marty, EDF: The geographical diversification shift is interesting as it is very straightforward to monitor. The share of specific SRI investors in the book is another indicator of diversification, but much more difficult to measure. We also see more than just anecdotal evidence that there are truly new investors coming into our green bonds compared with a standard issue, sometimes with very large tickets.
Winkler, Berlin Hyp: Berlin Hyp is almost 150 years old. With our three green bonds we attracted 60 new investors — 60 investors that had had 150 years to invest in our name, but waited until we issued green bonds.
Green bonds made our investor base more international. Half of our green senior unsecured bond’s book was made up of foreign investors — quite a lot for a bank with only €26bn of balance sheet. We heard from investors that they had considered us too small to engage in all the necessary credit work. But they did these assessments in order to be able to buy our green bonds. And now they have limits for us, not only for the green bonds, but for our credit — which is another benefit.
Hintzy, SNCF Réseau: We were also able to extend the limits we had with some French investors that were already full of SNCF Réseau paper, because on a case by case basis they could buy a little more if they wanted green.
: Maxime, are there any SRI regulations for investors in the Netherlands?
Molenaar, Actiam: There’s basically one law that determines what we can invest in — we can’t invest in cluster munitions production. In terms of green, everything else is voluntary and so behaviour is from the bottom up. But it is still a very developed market in terms of responsible and green investment.
There are of course still investors in the Netherlands that don’t do responsible investments, so legislation could be beneficial for the market. But most of the large institutional entities are responsible investors. They have big teams and everyone bought the French government’s green bonds. Most Dutch investors are quite interested in green bonds.
Sfakianos, BNP Paribas:I’ve also noticed when talking to issuers that we can all envisage a time when we’re not in a raging bull market for bonds — but as we’ve discussed, you can do green bonds in circumstances when you can’t do normal bonds.
You can push the boundaries on tenor, on size, on issuer type a little bit, and on market conditions, simply because there is what the syndicates would call a technical bid for green bonds, as investors are just not getting the supply they need. Regulation is something that’s going to help.
Molenaar, Actiam: But don’t we already have enough demand from investors? Is implementing regulations that would force investors to buy more green bonds necessary?
Sfakianos, BNP Paribas: It’s not just that. It’s about how investors measure what’s green and what’s not green. Let’s have a bit more disclosure and let’s agree what that disclosure might look like. Let’s have comparable metrics — it’s much more complicated than just saying investors need to buy more green.
Ockert, DZ Bank: I started in syndication 10 years ago, right after the crisis started. There has been a bull market for the past five years, when green bonds became really attractive.
I fear that if the market changes and we fall on bad times again — when some triple-A issuers were paying 100bp spreads — then it will hurt this market niche. I’m happy to have this market, but I fear that when times change, green will not be the first topic we speak about.
Hessels, ABN Amro: When we showed our first green bond, a default by Greece was still an issue on the table. Had we been doing a regular senior bond, we would not have gone ahead.
But in the case of the green bond, having done the roadshow and talked with all these individual investors, knowing why they wanted to buy it, we were comfortable to go to market. The deal was very successful and even in the aftermarket we had investors saying they feel the performance is much more stable, even in volatile times.
Now we have a very tight and flat market, but from what we have seen in the past, green bonds are pretty stable. Because of the huge number of green bond investors and the lack of supply, investors will probably sell regular bonds earlier than green bonds during troubled times.
: Could we start to see more differentiation in secondary spreads between conventional and green bonds, once the European Central Bank ends its asset purchasing programmes?
Sfakianos, BNP Paribas:It could.
Winkler, Berlin Hyp: That should be the case.