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SSAs lead SRI bond market through transition phase

Public sector borrowers were the pioneers of the green and socially responsible themed bond market. Now that the sector is burgeoning, they are still leading the way. From sovereign issuers bringing green bonds of hitherto unseen size, to supranationals structuring catastrophe bonds to protect poor countries, the supranational, sovereign and agency market has had a busy 12 months. Borrowers have also brought a range of new social and sustainability bonds to market. Others are searching for more assets to add to their SRI funding mix, as well as branching out into new currencies for the first time and exploring the possible issuance of tailor-made, privately placed notes and when they are not bringing deals to market, issuers are driving forward new advances in impact reporting. Meanwhile, the question of where SRI bonds should price relative to conventional curves remains a central question for the future of the sector. GlobalCapital brought together several funding officials at the biggest SRI issuers in the public sector to discuss these issues with investment banks and socially responsible investors.

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Participants in the roundtable were:

Michael Bennett, head of derivatives and structured finance, World Bank

Björn Bergstrand, head of sustainability and senior investor relations manager, Kommuninvest 

Jens Hellerup, head of funding and investor relations, Nordic Investment Bank 

Crispijn Kooijmans, head of public sector origination, Rabobank 

Kai Poerschke, head of SSA origination, DZ Bank 

Aldo Romani, deputy head of funding, euro, European Investment Bank

Chris Wigley, senior portfolio manager, Mirova 

Craig McGlashan, GlobalCapital (moderator)


GlobalCapital: What has been the main thrust of your SRI bond issuance this year?

Jens Hellerup, Nordic Investment Bank: We’ve done one transaction this year, a €500m seven year environmental bond that had a nice book of €850m with some good investors. Nordic and Benelux investors took up 65% of the bonds. We were very happy with the transaction. We still plan to do a bit more this year. We hope we can get up to €1bn of issuance, which is a little more than last year.

Michael Bennett, World Bank: We’ve been active in the classic green bond space for investors that have a specific mandate to buy labelled green bonds. Increasingly, however, we are asking investors to look beyond just ‘green’ and focus on our whole balance sheet, since all of our projects support the achievement of the UN Sustainable Development Goals. 

We have also issued a number of bonds where we focus the communication for the issuance on our work in a specific sector within the SDGs. For example, we launched a very successful Canadian dollar bond earlier in the year that focused on our work in the area of gender equality. 

Finally, we also have issued a number of structured notes linked to sustainable or ethical equity indices. These transactions appeal to investors that are interested in sustainability and love the World Bank credit, but want to earn higher returns than they can get with a plain vanilla bond.

Aldo Romani, European Investment Bank: Demand has been strong. We’ve already issued €4bn of Climate Awareness Bonds this year, which is more or less the total issued on average in the past five years. The largest was a seven year $1.5bn benchmark. We’ve issued €1bn in euros via a new line and two taps. The rest were in Australian and Canadian dollars, Norwegian kroner and Swedish kronor.

Björn Bergstrand, Kommuninvest: We issued our fourth green bond this year, a Swedish krona deal that was quite small, at Skr3bn [€290m]. We priced that below our curve, but still got a 50% oversubscription. We expect to return to the market after this summer. We continue to see a build-up of green assets, so we’re now at four bonds and approximately $2bn-equivalent in total green bond issuance.

GlobalCapital: Are issuers finding more green assets?

Bergstrand, Kommuninvest: There are certainly a lot of assets that are likely eligible for green financing. We fund Swedish local government investment projects and they are focusing on green. Essentially, half their investments are real estate-related, and most of those have green objectives at the local level. 

Our view is that a large share of these assets are eligible for green financing, although we don’t have specific project insights like the multilateral development banks, which have complete control of the projects they finance. We’re reliant on clients applying for green lending, and we certainly see increased interest, but the share of green as a proportion of our total lending is still in single-digit levels, though we’re aiming to bring it up to 15%-20%. 

Sometimes clients might believe that the green application process is, for some reason, cumbersome, so they might abstain or postpone it to the next quarter, say. But fundamentally, the underlying demand is substantial.

Hellerup, NIB: We hope we can do a little bit more than last year. We have had steady growth every year since we established our environmental bond framework in 2011. The difficult part for us, even though we’ve had the environmental mandate, is to find the projects. There is a lot around to finance in the Nordic countries, but to a large extent the municipalities and corporates have gone to the green bond market themselves. But we aim to find projects with which to grow the programme.

Bennett, World Bank: We still have a significant level of green assets that could support more green bond issuance. But, as I mentioned before, we’ve actually started to push back a bit on some requests for green bonds and asked, “do you really need it to be green?” We have a sustainable development mandate across the board, and we think there’s no reason investors that similarly have broad sustainability mandates need to limit their investment in World Bank bonds just to green issues. After all, the flip side of a green bond issue is the proceeds will just go to green projects, not to health or education or empowering girls or any other of the wonderful projects we do.

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Romani, EIB: For historic reasons, our green bonds have so far focused on renewable energy and energy efficiency, because of the relevance for GHG emissions reduction that the EU Energy Action Plan affixed to these two areas in 2007, when we launched the first transaction.

There is demand that exceeds these sectors. The market in the past 15 months has come to realise that green and environmental objectives go beyond climate. The latest initiatives in the field of sustainability taxonomy have shown that there is strong demand for a higher degree of clarity on, for example, social dimensions.

The market has realised that the instruments required to measure the contributions of existing economic activities are not yet fully available, which has triggered a lot of discussions on developing these instruments. The best example is the European Commission Action Plan on Financing Sustainable Growth. 

At the EIB, we are in a phase of transition that is a litmus test of this trend. We’ve already this year exhausted the €4bn of Climate Awareness Bond funding we’ve issued on average in the last five years, highlighting that an extension of CAB eligibility criteria could be welcomed. 

And we now intend to issue Sustainability Awareness Bonds (SABs), which will shed light on activities that serve objectives beyond climate change mitigation.

This development shows the beauty of green bonds, because you can draw the line wherever you want, as long as you can allocate and report properly on the impact of underlying activities.

The degree of transparency and accountability provided by green and sustainable bonds can expand organically over time. This requires new classification and measurement instruments that are shared in the market.

Kai Poerschke, DZ Bank: I agree we are in a phase of transition, because on one hand, a number of existing SRI bond issuers are coming to their limits on green lending suitable for green bonds. A lot of issuers have established a product, so the demand is there, but the limit is the amount of projects, as Jens mentioned. 

On the other hand, there have been new entrants into the market adding to the offer side. This is mainly true for the financial and corporate worlds, rather than SSAs. 

The market is also growing because of new products, but at the same time there is the EU level discussion to find ways to grow this market and to extend the product range, but on a basis that it will be accepted by the market in line with a taxonomy being developed by Aldo and the High Level Expert Group on Sustainable Finance (HLEG). That shows again we’re in transition.

Chris Wigley, Mirova: We’re very happy to see the development of social and sustainability bonds. But one of the biggest trends this year is an interest in investors having their funds aligned with a world limited to 2°C of warming or lower, and that means green bonds. 

We’re receiving a lot of enquiries about this, particularly from the US. They’re looking for 2°C or lower thermometers. 

We base our analysis on the Green Bond Principles, and Pillar 1 of those says it’s very important to disclose that the use of proceeds is for green projects. We can only invest — for our green bond strategies — in bonds that do that.

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Bergstrand, Kommuninvest: Are 2°C-aligned investments and green bonds the same thing, or do you see a need for the green bond market to differentiate itself by pinpointing those assets and portfolios that are truly, to the extent that that is possible to measure, aligned with the 2°C scenario? Do you feel that the green bond market fulfils the needs of those investors or is there still work to be done?

Wigley, Mirova: This is ongoing. Investors have plenty of choice in terms of green bonds. The Bloomberg Barclays MSCI Green Bond Index has about 240 or so bonds. One new development is that some of these green bonds are going to be coming up for maturity, certainly in 2018, and we’re seeing shorter maturities. So we do need a constant supply of green bonds.

Romani, EIB: This increasing demand for Paris Agreement-compatible bonds is also part of our extending the spectrum of objectives and activities covered by our sustainable bonds. The objectives of the Agreement are very ambitious and, increasingly, a holistic approach is required to balance different objectives that are only partially congruent with each other. 

The market is maturing and there is strong demand for more clarity on what every activity in the economy contributes to the Paris Agreement and to other objectives. Measuring that clarifies what needs to be done.

This is also the reason why green bonds or, more generally, sustainable bonds contribute to the goal of additionality. If you are able to measure the contributions of different activities to certain objectives you can see how those activities can be improved and at the same time monitor how the activity mix is improved over time.

Crispijn Kooijmans, Rabobank: I fully agree. It’s about measurability and being transparent. The International Capital Market Association has just published a report that found that 70% of investors are looking for more than just green. 

A good example is social housing. In the Netherlands they make social housing more energy-efficient and put solar panels on the rooftop. It’s not just for the environment — it also brings down the costs for the people who live there and don’t have much money to spend. There are many examples where green and social go hand-in-hand.

Wigley, Mirova: I totally agree with what Aldo said about the SDGs. In our analysis, it’s very important that a green bond is not in conflict with any of the objectives of the SDGs. To take a classic example, a green project could be a hydro project in a developing country, but if it displaces indigenous people it has a very negative social impact and would not be eligible for our investment.

We’ve seen very few funds based on just sustainability and social bonds. One reason is the lack of bond issues — there are 30 or 40 or so, so not the number for a diversified fund. 

It’s wonderful that the multilateral development banks [MDBs] are leading. But they will dominate any sustainability or social bond fund because there are so few corporates printing these bonds. We want to see that area expand.

Bennett, World Bank: In terms of corporate SDG bonds, could you pick companies that score highly as sustainable — through your own or external analysis — and buy any bonds they issue for a sustainable bond fund? In the equity world, we already have companies scored based on sustainability and indexes built up around that.

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Wigley, Mirova: We lean against scoring. Our analysis tends to be qualitative, but green, social and sustainability bonds need to be consistent with the Green or Social Bond Principles or Sustainability Bond Guidelines. Their two key pillars — the disclosure of the use of proceeds and the undertaking to report on a regular basis — are critical.

Hellerup, NIB: We’ve discussed for years whether an issuer can call all its bonds green or describe itself as pure play, which I understand investors are not happy about because that might not live up to the GBPs.

Bennett, World Bank: I wouldn’t say all our bonds are green. We make loans for government budget support purposes, for example, and although even those loans are subject to our environmental safeguards, we would not put a green label on them. But all our bonds are sustainable. So for investors that are looking beyond green to sustainability, every product we issue should work for them.

Wigley, Mirova: Jens is right, and in the GBPs there is a note that says pure plays are encouraged to issue bonds aligned with the Green or Social Bond Principles. That’s because you could have a company that’s 100% focused on the green industry, but if they issue a bond and don’t disclose how the money’s going to be used there is a risk it might be used to, say, repay an existing bond that’s not a green bond. That’s not what our clients want — they want to know their money is being used to fund green projects.

Romani, EIB: There’s an improvement in the quality of the discussion, as people are generally becoming less Manichean with regard to what is good and what is bad. The distinction between green and brown has become more considerate and realistic. It’s about taking things as a process and realising you can’t change things from one day to the next. What’s important is your commitment to extending transparency, while you also extend the degree of what you believe is properly sustainable. 

In this sense it’s very important to reduce uncertainty around measurement, because a very big source of insecurity derives from the different ways to judge what is green and not green. In the absence of reference parameters this kind of development is very difficult.

It is very important that one finds a common language.

Bennett, World Bank: There are some parallels with the sukuk market. That’s asset-based — you can only issue the same volume as the Islamic assets you have — and likewise with green bonds, issuance is limited by the volume of eligible assets.

That creates significant liquidity issues in the sukuk market because investors are never sure what volumes will be like the next year, and sometimes issuers are tapped out in terms of eligible assets — they have to wait for one sukuk to mature before they can issue again. In the sukuk market, that leads to a heavily buy and hold market because investors are never sure what flows are going to look like.

Is the liquidity of your green bond fund something that keeps you up at night?

Wigley, Mirova: Requests for proposals from potential clients will often ask: ‘If you had to liquidate your fund, how many days would it take?’ Liquidity is important and there are certain rules with regards to that. 

We’ve launched three global green bond strategies — one in euros, one in Canadian dollars and one in US dollars. They’re all global but currency-hedged. When we launched those strategies, we were able to source the bonds in the secondary market. We have money coming in on a daily basis, normally. We need to invest in the secondary market and haven’t encountered any liquidity concerns. The liquidity issues are really the same as for the credit markets generally. 

Poerschke, DZ Bank: On liquidity, there’s a large group of investors that is buy and hold, simply, and they say so. Like church banks in Germany or ethical banks, they keep the bonds. For them ESG bonds are extremely sticky investments.

The fund industry is playing in a different field. Their volumes can be really large — or are at least growing to large volumes — and many of them, like Mirova, are recognised as specialised ESG investors. Funds need a higher degree of liquidity. But there are investors that have been applying ethical standards to their investments for decades, even though they are not known as specified green investors or ethical investors outside their home turf.

GlobalCapital: Have social bond volumes lagged green because measuring their effects is harder and more subjective? 

Kooijmans, Rabobank: Impact reporting is still more difficult to make really specific for social bonds. But that shouldn’t stop us from focusing on it and coming up with more specific and generally accepted measurements. That will be the next phase for social bonds. The market is working on that. We should also understand the green bond has been around a bit longer. Maybe we need a bit of extra time for social, but we’ll get there.

Wigley, Mirova: Impact reporting for social bonds was always considered to be more difficult. But this year the Social Bond Principles released a paper on impact reporting, so this is a developing science. We’re seeing now the focus on target populations, and they’re also outlining the types of social projects that could be funded. Advances are being made.

GlobalCapital: Last year we broke the $100bn annual green bond issuance level. Can we expect even more growth in overall SRI bond volume this year and if so, from where?

Kooijmans, Rabobank: There are limitations to what issuers can do with regards to green, so we do see some issuers, SSAs particularly, expanding to sustainability or social. Last year’s numbers were really about the sovereigns and Fannie Mae stepping up. That’s how you get the size. But while we need to grow the market, so need a target to work towards, I’d rather have a lot of smaller €300m or €500m issuers than just a handful of big ones. The market will grow this year, and as often happens there’ll be more SRI issuance in the second half compared to the first.

Hellerup, NIB: That ties in to what I said earlier about the Nordics — we’ve seen even smaller than those sizes, as low as Skr1bn, around €100m. The corporates and municipalities are happy to issue at those sizes and the Swedish investors are very keen to buy. There you see a lot of new entrants and if you add them together it’s a large size. The number of new entrants from Sweden last year was significant and it’ll spread to the other Nordic countries.

When our lending guys speak to corporate treasurers, they know about green bonds, so you will see an increase in supply.

Bennett, World Bank: We are seeing interest in issuing green bonds from several of our member countries. We’re doing a good amount of advisory work, and the IFC is as well, on getting them up to speed on what it means to issue a green bond or sukuk. Based on that anecdotal evidence, there’s still a lot of potential for sovereigns to issue.

The question in my mind is how many of those that issue will make it a regular part of their funding programme? If they see tremendous benefits from their first issue you’d expect them to come again, but I don’t think there’s enough evidence yet of whether sovereigns are going to become regular suppliers or whether they’re more one-off green issuers.

GlobalCapital: Are there only upsides to having more sovereigns issue?

Poerschke, DZ Bank: They are a good reference for other issuers in their countries. The French agencies are measured against the Green OAT, for instance. More issuers and more liquidity on the government side will only help.

Kooijmans, Rabobank: A great example is KBC, which referred to the Belgian sovereign issue on its mandate. That was a direct and positive link.

Bergstrand, Kommuninvest: It’s a natural step on from the Paris Agreement, which mentions the need for increased green finance in society in support of its overriding objective. If governments want to put money where their values seem to be, it’s obvious they should enter this market. It can only be supportive of the market and there is probably sufficient demand.

But I’m surprised that in connection with the Swedish government inquiry into green bonds, there was such reluctance from the National Debt Office and the Swedish FSA to green bond issuance. There remain hurdles to be overcome.

Romani, EIB: There are also sovereign leaders in this market, for example China. We were all at the GBPs AGM hosted by the Hong Kong Monetary Authority last week, and it was apparent the authorities are showing the way there in a very systematic way. Everything is implemented in such a way that more and more volumes of issuance will materialise. This is an example for emerging markets and, in a way, European authorities, which are starting to recognise the value of this market.

Wigley, Mirova: Sovereign issuance has been positive as it demonstrates their commitment to the Paris Agreement, but also in other ways. There were questions before about green liquidity. Well, governments such as France and Belgium have greatly assisted that.

France in particular set a very good example of a green bond, particularly on impact reporting. They split regular reporting in terms of, first of all, the disbursements, but also set up a special committee for their impact reporting — developing that whole process.

But there are implications for investors. A sovereign issuing long dated green bonds, like France and Belgium, has an impact on the green bond indices, particularly if those issuance programmes are part of a much larger programme. Those issues could be tapped and become very much larger.

The duration of a green bond index has increased by at least a year or so as a result, which has implications for investors who may feel interest rates are on an upward path. Down the road, we might want to consider a reference index capped at 10% for an issuer. 

This is a nice problem to have, if we’re seeing more green issuance.

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Hellerup, NIB: We were discussing earlier about finding other environmental projects. A lot of these are within the government and it can maybe be difficult to make them bankable. If they are within the government and you can identify them, it may be better for the government to issue the green bonds, because it’s difficult to put the project in an SPV. Then you can make them bankable. 

There is also an important signalling factor, for sovereigns to issue green bonds and show the way for other green bond issuers.

Kooijmans, Rabobank: The spill-over effect from the treasury departments to other departments and stakeholders has been quite key, especially with first time issuers, many of which we’ve helped to the market. It’s where the treasury team starts talking with the real business and policymakers, which in the case of sovereigns even means politicians. 

That’s essential to create the awareness and to create real impact.

GlobalCapital: Have there been any other major developments in impact reporting?

Hellerup, NIB: The Green Bond Principles working group for impact reporting is working down the different categories of green projects and recommending issuers to follow some matrix in their impact reporting. Just before the AGM in Hong Kong, GBP published a green transportation impact reporting matrix. So that’s a new area.

Bergstrand, Kommuninvest: A group of 10 Nordic public sector issuers launched impact reporting guidelines last year, in complement to the ones already existing by the MDBs.

We’ve since had the first impact reports published by this group, which are aligned to these guidelines. That’s been a good development for the market. We’ll seek to further align and improve our impact reporting. We also know an increasing number of investors are reading the reports, as we get requests to discuss specific points that we didn’t get a year ago.

Wigley, Mirova: We spoke earlier about clients being very interested in their funds being consistent with a plus 2°C world, and as an asset manager we certainly would like more data, so we can calculate Scope 1, 2, and 3 emissions for our carbon methodology. 

But green bonds are more than just carbon. They also include water and land sustainability. That area of impact reporting needs to be developed more, but appropriate progress is being made, and again, the GBPs have issued guidance in that respect. 

The development of impact reporting for social bonds has also been important. That’s a first stage and has further to go.

Kooijmans, Rabobank: There’s a strong link to the SDGs in basically all the impact reports now. The GBP team has published a tool that allows you to link all the different GBPs, social guidance and so on to the SDGs. That’s quite useful.

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Bennett, World Bank: A lot of the projects underlying green bonds have been in the mitigation area as opposed to adaptation, and I think the reporting standards have largely been shaped by that emphasis. Reporting on the impact of adaptation projects can be more difficult, and certainly impact reporting on all types of social projects is even another step up beyond that in terms of complexity. 

One benefit we have in the MDB world is our shareholders and donors also require a certain level of impact reporting to know the effectiveness of how we’re using their money. So, in some ways reporting to investors is an expansion of what we need to do in any case for our shareholder countries.

Romani, EIB: Impact reporting for our upcoming SABs will be a trial and error process. You start thinking about the way you want to reclassify your activities by reference to multiple objectives, and specify the primary indicators to measure those activities’ contributions to your objectives.

The major difficulty is to find a platform shared by different market participants, to foster comparability of data. At a technical level there is no agreement on several aspects.

In 2015 a group of MDBs and other international financial institutions pushed forward the Framework for Green Bond Impact Reporting Harmonisation. There is a GBP working group making proposals in areas that go beyond renewable energy and energy efficiency, which were the focus of the framework in 2015. 

This organised approach comes from markets. Some MDBs are involved in mediating between project and market specialists.

The MDB expert group is particularly important. This group is debating all relevant issues in the context of the Common Principles on Climate Finance Tracking that the MDB-IDFC community uses to assemble joint statistics on global climate action. These principles are being reviewed to align them with the Paris Agreement. 

The discussions are dialectic — you go from markets to technical experts to policymakers and back. This is the basis for a broader platform of agreement that will facilitate impact reporting in an increasing number of areas. Agreement by convention leads to practical solutions that work.

The biggest challenge for SAB issuance is to define what to measure, according to what objective. The SDGs are very good in principle, still they are a very long list that partially overlaps. You may have to find a way to mediate between the GBP objectives and the SDGs, which highlights the value of this mapping table published at the GBP AGM.

Hellerup, NIB: You also see many more requirements from investors. Before, you could provide your CO² number on a portfolio basis. Now, you need to go into each project. Some investors even want the background materials because they calculate the CO² number themselves.

Wigley, Mirova: That’s driven by clients. A year or two ago, our clients were happy to be advised that maybe 30% of the fund was invested in renewable energy, 20% in energy efficiency and 15% in green transport.

Now, they’re asking for more information — not just the sectors, but what are the projects? What’s the size of the project? Where is it located? How old is it? Is there a photograph of it? In our reporting to clients, we’re having to include that sort of information, so we’re having to ask issuers for more information.

But this shows increasing interest in this sector and it’s something that green, social and sustainability bonds can do that bonds for general corporate purposes cannot.

GlobalCapital: Is the gap between green and conventional bond spreads becoming more pronounced as central banks go on their normalising path?

Romani, EIB: Green bond volume growth is mainly from use of proceeds bonds, where from a credit perspective a green bond is just like any other conventional bond. Only the supply and demand balance can lead to outperformance.

We have been able and will continue to be able to price our green bonds in line with the secondary level of our green bond curve, which has generally outperformed our conventional bond curve. This is why it is important that sovereigns issue green bonds, to create liquid references for the rest of the market.

When general market conditions change, the relationship between the green and conventional curves also changes. We were able to issue at remarkably better levels than our conventional curve last year. This year, with more uncertainty and phases of sudden spread widening, everything has been more aligned.

In general, however, there is a growing pool of green investors that are happy to price bonds in line with secondary green bond levels. If the structural changes taking place lead to a general excess in demand for these bonds, you will see outperformance and, increasingly, pricing advantages — especially if spreads widen as central banks tighten.

Bennett, World Bank: The principal benefits we get from issuing sustainable and green bonds are investor diversification, communication — the ability to tell the great story of what we do — and volume. For example, we’re often able to achieve a larger size on sustainable equity index-linked issues than on just a general, say, S&P-linked bond.

Price could be another benefit, but it’s not something we have required so far, since we see it as part of our mandate to develop this market. 

For a corporate or other kind of issuer, however, it might be harder to justify the extra work involved unless there’s a pricing benefit or, at least, an expectation over time of a pricing benefit.

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Poerschke, DZ Bank: Many established SSA issuers have developed a green curve with regular issuance. It’s not established with the first issue, but comes with more points on the curve. This is a primary market effect that is helped by secondary illiquidity. It is very likely that this will become more pronounced with tapering.

Execution can also be much safer. We have had several cases in recent weeks when volatility was high. We observed that ESG bonds had a better execution than conventional bonds because there is a certain investor base that comes into these bonds regardless of what’s going on elsewhere in the market because of political uncertainty or whatever.

Kooijmans, Rabobank: Lower execution risk is a big plus. But it’s very hard for investors to digest that an SRI bond is priced through a curve. If markets change and spreads widen, new issue concessions could go up, and they are less factual than fair value. Getting a little less premium for an SRI compared to a regular bond would be less painful, I would expect, for investors than pricing through fair value — because everybody could see you paid up. That could be a difference.

Bergstrand, Kommuninvest: It’s also important for investors that use of proceeds bonds offer something conventional bonds do not, by adding transparency about the project and its impacts. This is a better bond, regardless of the credit risk being exactly the same. It provides investors with an opportunity to be engaged, both with the issuer and the end client.

I’m convinced that if you asked the end retail investor whether they would be willing to pay for that better bond, the majority — particularly in the younger generations — would say yes. Market forces will determine where pricing should be, but in our view we are delivering a superior product.

Wigley, Mirova: In terms of pricing, we believe that if the credit risk is the same as for a conventional bond from the same issuer, then the yield should be the same. I would add that a large investor such as a pension fund focuses on every basis point. Just 1bp means an incredible amount of money to them.

But there are other interesting things going on. We hear a lot of information from the government in Washington, but that’s not the whole story for the US. For example, New York and California are strongly committed to green bonds as issuers in the muni market.

But across the US, we’re seeing, increasingly, incentives — particularly for utilities — to become more sustainable and to issue green bonds. We saw that recently with DTE Electric issuing a dollar green bond. Those incentives will bring more deals. It doesn’t necessarily have to be pricing — there can be incentives helping issuers.

One piece of research I noted over the last year focused on the ‘halo effect’. This is essentially when organisations issue green bonds it demonstrates a commitment to the environment and that they’re becoming more sustainable and therefore, possibly, more resilient. That might not just have an impact on the green bonds, but on the whole curve for that issuer. As sustainable investors, that’s what we’d like to see — organisations becoming more sustainable.

Hellerup, NIB: There are different price dynamics in different markets. We don’t have a euro curve or a Swedish krona curve in non-green, so it’s difficult to compare completely. But on the euro transactions we did at the beginning of this year, the results were probably 1bp-2bp better than we could have achieved in euros.

In the dollar market, where we’ve been active for some time, green bonds are smaller than normal bonds. It’s more the liquidity issue and it seems this green effect doesn’t outweigh the perceived lower liquidity. We priced fine in the primary market, but the performance on the dollar deal was not as good we could have hoped for, compared with the normal bonds.

We would like to issue a lot more in Swedish krona bonds, green and conventional. But it’s difficult because we need to compare it to what we can achieve in other markets. However, if the krona bond has a green component, there is very good demand from the Swedish investor base. 

GlobalCapital: One or two issuers have sold private placements linked to specific renewable energy projects. Have any of you looked into this, or seen much of it?

Kooijmans, Rabobank: I’ve seen some, but not a lot. It opens up new markets and makes it more tangible, also for investors and stakeholders. From that perspective, it’s great. And also, as with the World Bank, you can incorporate different themes. Even if you don’t have enough assets to bring a big benchmark for a specific theme, you can still get the attention if you’ve got those assets.

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Poerschke, DZ Bank: We’ve seen only a few, maybe one or two issues. They’ve gone to Asia mainly and they have been covering different tailor-made themes for the investors that have really looked for exactly these themes. It’s very much investor-driven.

Hellerup, NIB: To a large extent, one reason investors buy SSAs is because they’re buying into environmental analysis on the projects. Otherwise, they would need a lot of resources to do it themselves. We have the expertise and can do that on the environmental side. However, some investors might carry some of this expertise also.

Bergstrand, Kommuninvest: Some green bond issuers are thinking of going into social and sustainability and they’re figuring out how to do that, which assets to use and so on. 

Plus, investors are coming to us with ideas for specific themed products.

So there may be an increasing amount of private placement issuance, as they try to figure out how to extend their use-of-proceeds product portfolio until they’ve built a sufficient asset base to go into public issuance.

Wigley, Mirova: We see private placements from time to time. They can be resource-intensive, as Jens indicated, on credit analysis. We need non-disclosure agreements signed and we also have, as we touched on before, liquidity constraints. You can do some, but there’s a limit. The work is so much greater than for public issues.

But we have to give consideration to smaller companies that want to be green. They need funding, but maybe only €30m-€50m.

GlobalCapital: Do the panellists welcome the European Commission’s draft laws on sustainable finance?

Bergstrand, Kommuninvest: At a hearing hosted by the Ministry of Finance in Sweden the general impression was that they were very favourably received by, at least, the Swedish financial industry. But they also pointed to the fact that if this proposal is to be truly effective, there need to be fairly specific requirements on the information corporates provide.

For banks as intermediaries and fund managers to disclose sustainability metrics on their holdings and engagements requires qualitative data sets. That was one of the takeaways.

Hellerup, NIB: We need a standard, clear taxonomy that is not so narrow that it kills demand. The problem is, how do we find that? If there is an EU taxonomy, how does that look compared to the Chinese one and so on? 

Bergstrand, Kommuninvest: The first step, getting the regulation in place, is the easy one. The next step is defining the eligibility criteria, as I understand it, in the delegated acts. 

I believe it is going to be quite a challenge to arrive at criteria suitable to different geographies within the EU. What’s green in Sweden may not be green elsewhere and vice versa.

Romani, EIB: It is a very good initiative that will have a very important impact on the development of the whole market. 

One big challenge for the development of green finance is the lack of clarity. This was clearly stated by the G20 Green Finance Synthesis Report. To overcome that, you do not need a one-size-fits-all approach. The report says clearly that you need “internationally comparable indicators” that can express differences in the form of target thresholds for the contributions of activities to objectives.

Most market actors, which do not have the expertise to decide every single nuance in defining green, need reference standards. It is very good that the EU tries to define what it considers green and, in the future, social.

We then also need a way to compare what the EU defines as green with what others do. Markets and the GBPs have an incredible role to play there, as long as they manage to create a framework that enhances that comparability. In this way, markets can also make clear that investment and issuance decisions are individual and free and must stay like that.

So, if the Commission decides that something can be labelled green, the market may still continue to invest in products that go beyond that definition, in order to motivate and monitor how issuers improve their activity mix and its impact over time. Some external reviewers have introduced this notion of ‘different shades of green’, for example, which is good in terms of that transformational approach to the whole set of activities in the economy.

It is good to have a clear political initiative that underlines the relevance of a classification system. The EU Action Plan is very relevant because for the first time, member states realise this initiative is going to be binding on them, when they, for example, regulate market actors — so they are taking this much more seriously. 

They’ll have technical expert groups of their own that can start a dialogue with the expert group of the Commission, so that all different approaches can be compared and brought together.

There are two further roles for the GBPs. The first is a catalyst for collecting information from the market. Issuers can provide information on the indicators they use to measure the contribution of their activities, and aggregate information can be channelled into the public discussion. 

The other element is simplification. If the technical discussion becomes too detailed — and the Commission has indicated it will go into a detailed description of activities and screening criteria — then the GBP can have a filtering function. They can build market consensus on which, among the various indicators adopted by the official authorities, should be considered the most relevant for the market.

Wigley, Mirova: I started my career in ethical investment about 15 years ago when in London there were maybe six or eight boutiques specialising in SRI. Everything else was mainstream.

We were talking about integrating ESG at credit rating agencies and into fiduciary duty, but no one was listening. Now, to have an organisation with the weight and authority of the EU pick up these issues and carry them — it’s momentous. 

The Action Plan is also trying to direct more capital to sustainability and I applaud that. We need a lot of money to fight climate change, but the important point is the money is already there in bond markets — it just needs to be allocated more efficiently to sustainability.

On taxonomy, as soon as sovereigns started to issue green bonds we were in a different ball game. Central banks were then buying green bonds, so we need a taxonomy.

Poerschke, DZ Bank: I find the disclosures initiative as part of the action plan very helpful. I don’t know if you share that, Chris, because it’s probably another regulation you need to follow and probably involves additional reporting. 

I guess you’re used to it, but for mainstream investment funds especially there’ll be a lot more work to do. But it can be very helpful for getting more momentum on the investors’ side.

Wigley, Mirova: A year or so ago, we highlighted the importance of having flexibility within a taxonomy and for it to evolve over time. The granularity within the taxonomy tries to accommodate that. There are risks, you’re right, but hopefully, they’re striking the right balance.

GlobalCapital: Are catastrophe bonds a growing part of the SRI world?

Bennett, World Bank: This has been a big focus of ours, particularly of late. We started in the catastrophe space in 2007, and it’s really accelerated over the last 12 months. 

On the transactional side we are increasingly able to provide insurance against natural disasters, hurricanes, earthquakes, droughts and even pandemics by going out into the market and hedging ourselves by issuing insurance-linked bonds.

This financial year was particularly busy. We did a $360m transaction for the government of Mexico that insured it against hurricanes and earthquakes. We did a $425m pandemic transaction that provided insurance against pandemics in our poorest member countries. And we did the second biggest catastrophe bond ever a few months ago — a $1.36bn issue covering earthquakes in four member states: Chile, Colombia, Mexico and Peru.

We see it as very much linked to the climate change agenda — particularly when you’re talking about weather events like hurricanes, droughts and flooding — and we are seeing a lot of interest from our members.

The catastrophe bond market is mostly made up of specialist investors. 

Many other types of investors, like pension funds and conventional asset managers, also have allocated money to this sector, but usually through the specialists because it’s a highly complex area. 

These specialist cat bond investors tell us they’re getting more interest from their underlying capital providers, like pension funds, in the sector because of the sustainable and climate change element — they see that side of it.

Bergstrand, Kommuninvest: There could be interest from cities and local governments outside the traditional arena of cat bonds — even in developed countries — as extreme weather events become more frequent and they are faced with substantial costs.

Swedish cities are undertaking major adaptation investments following extreme downpours, for instance. There seems to be a reluctance by local governments to find the money to invest in adaptation measures. These are typically infrastructure investment projects that are costly and don’t show real short term benefits. That’s a challenging investment to propose to voters.

We fund adaptation projects through our green loans; it’s one of eight eligible categories. We have one adaptation project out of 175 or so approved, so it’s still quite small. There is also legal ambiguity as to where the financial responsibility lies for costs associated with climate change and rising sea levels — is it the city, local government, central government or private property owner?

Bennett, World Bank: We expect that increasingly issuers that engage in ex-ante risk management, for example, by purchasing insurance protection through the cat bond market or otherwise, will be rewarded by the broader market as well. For example, the Metropolitan Transport Authority of New York sponsored a cat bond after Hurricane Sandy flooded its tunnels, causing massive damage and costs. 

I would expect that rating agencies and investors would over time reward entities like the MTA — which have insulated their finances from the impact of significant loss events — with higher ratings and lower spreads on their general issuance.

Wigley, Mirova: Cat bonds are maybe a little bit like social impact bonds. They’re a little bit different in that when buying a bond, we know what we’re going to get — we lock in the yield. It’s not uncertain like an equity, which has a variable return.

Having said that, I met an insurance company in California that had been impacted by the recent forest fires there, and they were very interested in any bond that might increase the resilience of the land or reduce the risk of forest fire. So there may be an opportunity there.

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