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Sustainability begins to permeate corporate finance

The touch points between the corporate finance world and environmental and social consciousness are proliferating. First came responsible equity investing, later green bonds — now this is an evolving, complex interaction.

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CFOs and treasurers need to know what their company’s sustainability story is, what its metrics and ESG ratings are. They may be asked about it when raising money, since mainstream investors now run ESG analysis on any stock or bond they buy. And there is a feedback loop: demands from investors flow back to company plans on sustainability. Green loans have created a new way to weave green and social targets into the structure of financing, making lenders part of the company’s improvement.

GlobalCapital gathered experts in corporate borrowing, green financing and ESG investing in London to explore how these issues are changing finance.

As they explained, the Sustainable Development Goals and forthcoming EU laws will steer companies to make more detailed disclosures, and further sharpen the dialogue between borrowers and investors.

Participants in the roundtable were:

Mariano Benito Zamarriego, financing director, Repsol

Hans Biemans, head of sustainable markets, ING

Olaf Brugman, head of sustainable markets, Rabobank

Inês Faden da Silva, treasurer, Thames Tideway Tunnel

Joop Hessels, head of green, social and sustainability bonds, ABN Amro 

Adam Richford, group treasurer, Renewi

Richard Sherry, manager, M&G Impact Financing Fund, M&G Investments

Jon Hay, GlobalCapital (moderator)


GlobalCapital: When companies interact with their debt investors, is sustainability now part of the conversation?

Mariano Benito, Repsol: Yes, institutional investors nowadays are increasingly paying attention to sustainability. The total assets under management, which incorporate environmental, social and governance considerations, have reached $22tr globally.

We have completely focused on the ESG investor base, and ESG investors now hold circa 16% of our shares. 

When we issued our first green bond last year, the first public green bond from an oil and gas company, without taking into account the central bank orders, more than 50% of the investor base was green bond investors. 

So, we’re quite comfortable. It was a challenging deal, but we are so focused with our strategy regarding sustainability that we’ll continue in that path.

GlobalCapital: And when you go on roadshow for a non-green bond, do you get questions from investors about sustainability?

Benito, Repsol: For sure. Not only roadshows, but we have continuous contact with ESG investors and our investor relations team are aligned with the sustainability department and the fixed income department.

We have had contact with more than 80 investors, and we visit them not only in Europe, but also in the US, in Asia and Australia. In a regular roadshow we have questions of sustainability, but in addition we have specific roadshow and one-on-one meetings based on ESG issues and investors.

Adam Richford, Renewi: We’re a recycling business, based principally in Benelux.

We issued a green bond in 2015 which was listed on the London Stock Exchange, but was a Belgian retail bond. But we’re more focused on the banking market for most of our financing. 

Sustainability has definitely been a dialogue with each of our banks, particularly over the last six to 12 months when we’ve been doing a transaction to make our main €550m banking facility into a green financing. We’ve got a target to make all our financing green at some point in the near future.

It is an area of interest for fixed income investors as well as banks, albeit the spectrum is quite broad between those that think it’s really important and those that think it’s a nice feature. 

GlobalCapital: Inês, when Thames Tideway Tunnel started, were people thinking of you as a sustainability story, or is it more infrastructure?

Inês Faden, Tideway: That’s interesting. I’d say both. Tideway is a regulated water utility in the UK, created to address pollution in the River Thames.

Right now, it’s a construction project for the next five years, so we’ve been raising all our financing in the past couple of years. 

But eventually, what we’re doing is to address a sustainability issue, and interestingly, outside climate change — we’re addressing pollution and biodiversity. London is one of the last capital cities in the world that still has sewage discharge into its river.

As to investors, it’s an interesting debate because we’re pure play, and so before they come and talk to us they’ve already made up their minds about investing in Tideway. 

But we’ve been thinking about aligning our financing. We started issuing green bonds last year, and we’ve raised £775m with six green bonds, one public bond and the rest private placements. 

We’ve done fixed rate, CPI-linked, RPI-linked, and green bonds that won’t be drawn until five years from now. This makes us the largest sterling issuer of corporate green bonds, which just shows how small the market is.

Some of the investors, like M&G, have very developed ESG analysis. They are not too bothered about our green bonds – they’ve already done their own analysis. And then there are a few at the other end, miles behind.

With all the investors in the middle, it’s changing quickly. They are not raising the issue so much, but once we raise it they engage in the conversation, and I think they are happy that we issue green bonds.

Each time we’ve started a conversation we’ve told the investors we’ve done a lot of private placements, that we would like to do it as a green bond, and no one has said no. They all say yes, of course.

GlobalCapital: Richard, is sustainability part of the conversation on ordinary bond investing at M&G?

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Richard Sherry, M&G: Yes, we run an integrated ESG strategy across all asset classes — that’s now common across most major managers. 

The focus is on the environmental, social and governance issues that are material to risk and return. It’s part of the credit analysis, rather than wanting to invest in something just because it’s green.

So there’s a lot of discussion with companies before we invest about ESG issues, but it’s focused on the issues that our analysts deem material to the risk and return of that investment. That’s the main way most mainstream managers incorporate ESG into investment. 

It’s not a screening. Just because you find maybe a negative environmental concern on a company, if they’re dealing with it in an appropriate way, or if it’s priced properly, you might decide that its impact on the risk or return of investment is minimal. It’s just incorporating all that information into your investment decisions.

Now, my team also runs an impact strategy, which ties much more into green and social bonds. Our new environmental and social Impact Financing Fund, which I manage, invests in private and illiquid debts.

We still have the same credit analysis where material ES&G factors are factored into that decision about investment risk.

On top of that, there’s an additional overlay looking at impact: does this investment provide sufficient environmental or social impact to invest in? They are two separate, although somewhat related, types of analysis.

GlobalCapital: Now, let’s hear from the bankers. A couple of years ago, sustainability never came up when issuers were doing ordinary bond deals. Is that changing?

Hans Biemans, ING: Definitely. Recently we’ve seen examples of developed market, investment grade issuers that could not sell even their normal bonds any more, just because their sustainability ratings were too low. That would happen five years ago but in very rare cases, and now it happens regularly.

In equities, it’s already very old, but bond investors are catching up.

Joop Hessels, ABN Amro: Yes, I agree. It’s become like a hygiene factor: if investors analyse a certain credit, they not only check the credit rating, but also make their own sustainability check. That’s what all investors are doing now.

Obviously, with a green bond the analysis will be much more focused on the assets, but also there, investors expect to see a very strong link between the sustainability of the company and what issuers will finance with the proceeds.

Olaf Brugman, Rabobank: It is definitely changing. There is still 50% year-on-year growth in the green bond market. You see a wider range of issuers, countries, sectors involved, and the green bond offering has extended, due to green loan products, over the last year or so.

In the beginning, this was looked at with some suspicion, maybe, on the market side. We had to explain sometimes why a green bond or loan would be a good idea. That’s not an issue anymore. We virtually always have the green, sustainable discussion in our conversations with clients.

We’ve talked a bit about ESG as a risk factor for issuers. But these days, especially banks would look at sustainability as an opportunity — what can we do with it? So a lot is changing and we have favourable winds.


GlobalCapital: What is the place of a themed financing in a company’s sustainability strategy? Should it be the first thing you do, the last, or what?

Richford, Renewi: We’re a pure play, sustainability-focused company in recycling, or more broadly, pollution prevention and control. But the green financing we’ve worked on recently with the banks has really helped energise the conversation internally.

We have, as a result of that, developed additional CSR [corporate social responsibility] metrics which we’re going to be releasing into the market. We’ve developed more actionable key performance indicators [KPIs]. There’s been a lot of engagement internally in terms of executive committee and board on those limits. It has helped us focus from our key purpose, which is recycling, and evolve that to targeting the footprint of our activities as well. 

We’re also seeing a lot of interest from our equity investors on what we’ve done on the debt side and its definition of us as a sustainability-focused company. It’s given us an extra thing to talk about with our equity investors, which has been really helpful and supportive of our corporate story. It helps you talk to SRI investors.

Faden, Tideway: We have a similar experience. All we do is sustainable, but financing was an afterthought, and the big challenge is that financing has to be aligned and as sustainable as the rest of the business. 

I still have, from some of our bankers, and even internally, the question of additionality: why do green financing? All you do is green already. What are you adding?

GlobalCapital: So, what’s your answer?

Faden, Tideway: That’s an interesting one. There are two, actually. 

I have my personal answer — we do need to change the financing system. 

There’s no way we’re going to meet all the Sustainable Development Goals, the Paris Agreement, without changing the system, and we have to start somewhere. Green bonds are just a stepping stone, it’s the low-hanging fruit. I’m not saying we’re doing anything very difficult or revolutionary because we are green already, but you need to start somewhere.

From the company perspective, it wasn’t pricing that caught our board on to it. It was the alignment of the financing with everything else we do and expanding the investor base. 

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And then we had those secondary benefits as well that Adam mentioned — it really galvanised the company around financing. No one was very interested in financing up to then. We’ve become very close to our delivery and environmental sustainability teams. We do a lot of things together. They’re giving presentations about green bonds on the construction site without us. We just give them the materials and off they go. So, that has been very positive.

What has been positive as well, although we’re owned only by four investors, they’ve been very interested by our success in the green bond market. Now they’re looking a lot more closely at their portfolios and finding other good things they’re already doing.

Finally, because we have support from the government — it is taking the catastrophic risk of our project — they were delighted because the UK has a very ambitious programme for green financing and a limited track record.

Benito, Repsol: We are supportive of the fight against climate change. From the very beginning, Repsol was one of the main oil and gas companies which signed the Kyoto Protocol. We are also supportive of, and follow, the Paris Agreement and we are quite interactive with the international organisations fighting against climate change. And Repsol, with another nine companies, is in the Oil and Gas Climate Initiative, to share analysis to review greenhouse gas emissions. 

So we thought it was a good opportunity to use the green bond to engage the sustainability team with finance and with the capital markets. 

It was a public success. We are completely aligned with the Green Bond Principles. It was more than five times oversubscribed and more than 50% went to green bond investors, so it has diversified our investor base.

We should increase our portfolio of investments that are in compliance with the Green Bond Principles. If there are enough projects under the umbrella of those Principles, we would follow with future financing.


GlobalCapital: So we have three issuers all planning to do more green financing. This is a growing market, but it’s not growing exponentially. Is the market fulfilling what issuers want — and what is constraining it from growing faster?

Brugman, Rabobank: Why would it need to grow exponentially to be relevant? We’ve just seen three examples of companies that take leadership, that show accountability, that show a lot of transparency, and that is one of the great values of the green bond market. 

The more this becomes mainstream, it will point more and more to companies who are fairly silent about their sustainability performance and impact and how they’re accountable and how they contribute to climate change mitigation.

If you ask the question ‘why should we do green bonds and is there a benefit in it?’ it is more or less like asking ‘why should we see any benefit in climate change mitigation?’ We are past this discussion now.

GlobalCapital: Well, let’s take the UK. An awful lot of large companies are here, but not many green bond issuers, apart from Renewi and Tideway. Is something holding people back?

Hessels, ABN Amro: Most of the green bonds currently are benchmark-sized transactions, investment grade-rated, and those two elements limit the scope. Larger companies will absolutely look at green bonds.

But the majority lean pretty heavily on bank finance. So that’s why it’s interesting to see the development of the green loan market. 

Another element is the ability to find green assets. So far, many companies that have issued green bonds are utilities with large pools of solar panels or offshore wind — the lumpy projects. In many cases, green financing within corporates is smaller and not as easy to identify as these larger projects, so there is extra work required.

Biemans, ING: Yes, you need a lot more sustainability knowledge to define the green uses of proceeds for ordinary industrial companies.

It is now coming, but we are not there yet. There are some examples, like Apple, Starbucks and Unilever. 

Also, investors are used to very clear environmental green bonds, but not to ones issued by industrials who do a lot, but in a less obvious way.

Sherry, M&G: This is a step the market really has to make. The amount of investment we need just to tackle climate change, without other environmental and social issues, is several trillion a year, and the green bond market is a couple of hundred billion. So, for this market to really have an impact it needs to scale, significantly. 

Most of the impact needs to be made by non-obvious companies, outside the easy sectors. But it’s very difficult to make that happen in reality.

So the constraint on the growth of the green bond market is definitely supply side; it’s getting more issuers into the market, and less obvious issuers. If the bonds are priced fairly the demand will be there.

GlobalCapital: It’s interesting you mentioned Unilever. Their green bond had six different uses of proceeds, and they were quite complicated; one of them involved installing better freezers in Turkey. For deals like that the investors have got to make a bit more effort. Do you think they will?

Biemans, ING: They have to, but they are not there yet in the green bond market. Maybe the Unilever bond was too early. It was not understood by everyone, which was a pity because it was a very well structured green bond.

Also, investors are not used to bonds that focus on the products companies sell. For example, a chemical company that makes insulation for buildings will easily offset its entire energy use just by the effect of that product. 

Investors are looking for obvious, simple, footprint reduction green bonds, and they do not yet look to what companies produce.

Hessels, ABN Amro: It’s also partly how the market is structured. It’s very much focused around green bonds, which are asset-based — you need to look at individual investments. If you can do that, you can collect them and pool them together and hopefully they are sizeable enough. 

How you can enlarge the market is also to create a sub-benchmark and non-investment grade market. We’ve done a couple of smaller private placements. You see unrated private placements once in a while, sold to dedicated green investors who can do their own credit analysis.

It’s also about system changes. A company needs to find a way to earmark all the small sustainable investments they make, especially related to energy efficiency improvements.

Should we always have the green bond market being asset-based or could we also think about more outcome-based?

Biemans, ING: Yes, a nice example is Renewi’s Green Finance Framework, which refers to its budget system. That’s important for companies, when they structure green bonds, that the use of proceeds has a clear link to the budget.

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Faden, Tideway: Companies that are not pure play are very understandably concerned that it will be a lot more difficult to find and identify the uses of proceeds, and whether they would have to produce a lot of new information. 

Even in our company, we didn’t want to make people do a lot of extra work. You have to go and find what’s already been done.

That’s what other companies are starting to do. They’re going out there talking to the environmental sustainable people, with all the other areas in the business, and finding what’s been done already, to use for the reporting. 

Richford, Renewi: The other feature that’s coming in in the loan market is the concept of green, not just in the definition of the Green Bond Principles, meaning specific assets, but based on ESG improvement or KPIs. This might be more easily accessible by a broader audience of companies.

Sherry, M&G: Most of our impact investments aren’t labelled green bonds or loans. We do the analysis on the companies ourselves to come up with that assessment. 

That’s how I would look at these more complicated green bonds. If the information is disclosed in a form so that investors can make that assessment, they will. 

If it’s smoke and mirrors, or it’s partially disclosed but there are lots of gaps, I don’t think a lot of investors will dig deep.

So, to get growth in that sector of the green bond market you really need to focus on disclosure. It’s more work for issuers, but it’s a necessary step to get more investors into that space.

Benito, Repsol: For sure you can have extra work when you issue a green bond, because first of all you have to prepare the green bond framework and a second party opinion, and afterwards provide transparency every year to the investors so they can be sure the proceeds were allocated to the appointed green projects. And we have also an external auditor to certify that we comply with the green bond framework.

But we already release every year a sustainability report that contains the information we also disclose under the green bond framework. 

The important thing is to give more transparency to the investors, so they can analyse that all the proceeds comply with the purpose of the green bond. It’s not much extra effort or cost.


GlobalCapital: Now GlobalCapital has pushed very hard for a long time the idea that it is natural and observable and probably right that green bonds should be priced more tightly than ordinary bonds. Do you think the issuer gets a pricing advantage?

Hessels, ABN AMRO: Is a green bond priced below your regular curve? I don’t think you can always say that. Most issuers will shave a couple of basis points off their new issue premium compared to a regular bond, and that typically makes up for all the external costs — the second opinion, the auditor and all the technical advisers. So, from that perspective, it’s definitely not more expensive.

The big benefit is that with these competitive pricing levels, issuers can attract as wide an investor base as possible. There are, of course, very dedicated green bond funds which might be more flexible on price. Not if you asked them, but in practice, they might be.

But is that the main purpose of doing a green bond? Most of the companies I speak to like to see different and new investors in their portfolios, have a dialogue with investors and try to widen the net as much as possible. If you interest new investors and then squeeze out the last basis point and drive them away, that’s not beneficial.

Would it be good for the market to see a better pricing? Absolutely. It would be good to have some kind of pricing differential, not least because then issuers could urge their internal departments to make more green investments.

Sherry, M&G: I think offering discounted pricing on green bonds is a short term fix. 

We have a supply/demand imbalance in this market because there are dedicated green investors. And if we offered a discount to issuers, I’m sure for a time those green investors would buy those bonds and we would get increased issuance.

But then what happens? You’d probably end up with a green bond market of $500bn and a lot of the green money would be used up. To really scale this market to the size we need to seriously address climate change and other issues, we need trillions, we need all of mainstream finance involved, and to do that, the price needs to be fair for the risk.

I’m a middle man. It’s not my money I’m investing, it’s my clients’, and a lot of my clients are very happy to have green and social investments, but they’re not happy if they’re made at the wrong price.

Biemans, ING: I agree with that. One or two nice examples of this temporary imbalance — first of all, the Prologis European Logistics Fund. We were involved in that bond in January. In the weeks before and after, a number of similar companies in the same sector issued. And this green transaction had the highest oversubscription of all the deals. The pricing was 2bp inside the secondary curve and others paid new issue premiums from 5bp to 20bp. That was a clear example.

Then, the Danone social bond had, let’s say, a 2bp new issue premium, compared to 10bp-30bp paid on similar deals. So there is clearly more demand than there are deals on offer. 

That might lead to temporary price changes but maybe that cannot go on forever, because then you would limit the size of the market.

Interestingly, in the allocation processes, typically 30%-40% of the investors have no green angle at all. And that part will keep the spread high because they are less interested in giving in because it’s green.

GlobalCapital: But the very tight pricing on green bonds has not been enough even to put off the non-green bond investors, has it?

Biemans, ING: No.

GlobalCapital: You’re saying on one hand, yes, there is a pricing advantage, but, on the other hand, you agree with Richard that there shouldn’t be.

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Biemans, ING: I don’t believe that in the long term, mainstream sustainable investors will accept a lower return.

Brugman, Rabobank: I think the pricing discussion may be clouding our view on the benefits of the green bond market.

Environmental benefits, which is the rationale for the green bond market, are not priced into the price of the bond. The prices of non-green bonds also do not account for the adverse impacts. So there are a lot of benefits and adverse impacts that are not visible in the pricing at all.

Biemans, ING: Mariano, do you think your entire curve is tighter because you have a high sustainability rating among oil companies, so that investors see you as a lower risk?

Benito, Repsol: It is clear it could help, because we have one of the top notch sustainability ratings. But I think that if our curve is quite tight it’s because of the positive perception of investors as a whole, not only because of a high sustainability rating.

Our pricing was the same for our regular bonds and green bond.

But the main advantage right now is diversification of the investor base. And also, in times of volatility, the secondary market will be more stable because green bond investors are more focused on buy and hold instead of other regular investors that, in case of turbulence and volatility, could sell their bonds. 

GlobalCapital: Adam and Inês, do you feel you’ve had, or deserve, any price benefit from doing green financing?

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Richford, Renewi: There’s a very tangible and demonstrable link in the loan market. Our pricing is now linked to our ESG performance and KPI delivery. It will be lower if we deliver those targets.

With the bond, it’s less clear, but there was certainly a benefit in terms of investor support.

Faden, Tideway: We only have one public bond and our private placements are inflation-linked; they’re deferred; so it’s very difficult to infer. 

What we’ve seen is that support in secondary. In the past five months, utility credit spreads in the UK have gone up substantially and ours has gone up substantially less.

Is it because of buy and hold green investors, or just buy and hold infrastructure investors?

In the short term, we see tighter new issue premiums for green being tied to better secondary support. But in the long term, I agree with Richard. Until there is segregation of cashflows, I really can’t make the case for tighter pricing.

But all the same, investors are getting more for the same money, because they’re getting additional reporting and more information. 

Biemans, ING: But sustainable issuers could see their whole curves come down, because when you do not just manage your financial risks, but also your non-financial risks, you are a lower risk company overall.

Sherry, M&G: Following the integrated analysis I described before, this is just a factor that goes into the credit quality.

The rating agencies are also doing more in this space. As it factors more into their models, these companies should get upgraded and then, of course, the pricing gets better. But it’s just another investment characteristic leading to better credit quality and tighter pricing. It’s not a magic bullet that sustainability leads to tighter pricing. It’s appropriate pricing for that risk, once the market decides that risk is less.


GlobalCapital: Shall we move on to green loans? It’s a very new product. There have been green loans for a couple of years but in the last 12 months they’ve really accelerated.

There are green loans based on use of proceeds, like green bonds. But the real innovation is deals, like Renewi’s, where companies sign up to certain KPIs and get a pre-agreed price benefit. What advantages and disadvantages does this have?

Richford, Renewi: We’ve done two things in our green loan. We’ve done a Green Loan Principles-based framework for the use of proceeds. 

And then we’ve got a green scorecard. We have certain ESG and CSR targets, and as we deliver against them our pricing changes.

That linkage of pricing and performance is very valuable to a treasurer in communicating internally and getting the support to do a green loan, because there’s a clear economic benefit.

But with it, of course, comes a whole load of complexity — which KPIs, which targets? What happens reputationally if you don’t deliver the targets, as well as in the banking documentation?

So, it’s not a straightforward transaction to do. You have to be confident that there is a benefit for all that investment of time and effort. We genuinely feel there is.

GlobalCapital: There are at least three stakeholders: you, your board and the banks. Where did it start and how were the others convinced?

Richford, Renewi: Some of the banks we work with, which had been active in the green loan market, suggested we look at it. It came through me, and then into discussions with our CSR team and then the ExCom and the board.

We took a lot of help from a number of banks to put the framework in place. We concluded to focus on our own KPIs, rather than on an ESG rating, where we didn’t feel we had as much control over the output.

GlobalCapital: It’s very interesting because in normal financing there’s a clear push and pull — one side wants the pricing higher, the other lower. But with this, was there any of that? Were any of these stakeholders pushing for the targets to be more stringent or less?

Richford, Renewi: I think the support from the banking market comes because by focusing on a broader set of metrics beyond the financial ones, the company is doing its utmost to make itself a better creditor. It’s generally supportive to the credit quality and that supports a little bit of benefit in the pricing.

But this is not transformative. It’s still, fundamentally, the same company and the pricing hasn’t moved dramatically, it’s moved marginally. But the banks have all got round the table and supported Renewi to do more to make it even better in its CSR performance.

GlobalCapital: And this is going to be drawn debt?

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Richford, Renewi: Yes. It is both our term loan, which is fully drawn, and our revolving credit facility, which is partly drawn. 

That’s one of the unique features about the framework. We have been able to define all our assets as green. Those are much less than our liabilities. But the loan enables us to use a revolving credit facility for general corporate purposes.

Biemans, ING: It’s very interesting that banks now agree with their borrowers that there are KPIs which are non-financial. 

Two things are important. First of all, to define the KPIs precisely, so that you don’t have disagreement afterwards, about what was agreed and how you measure it. 

Secondly this is similar to what has been happening in the equity space for a long time, where it’s called engagement. The big difference is that engagement is mostly focused on negative issues, and here it is more focused on positive issues.

GlobalCapital: You three banks have all been very involved in green loans, but when you do syndicated deals, are other banks happy to join in?

Brugman, Rabobank: Surprisingly, yes. We have quite a few syndicated loans, with a couple of dozen banks involved altogether. The proposals are usually readily accepted without too much discussion, if the goals are formulated in a concise and smart way.

That is one of the positive surprises of this market. Of course, the pricing benefits are marginal. This is something banks can do to improve the quality of their portfolios in terms of non-financial risks. 

At the same time, this is a very young product. So at this point, regulators do not accept that more substantial differentiation should be applied, because it would not be justified by the credit risk models that they supervise.

With a relatively short history, you cannot show that more sustainable companies perform, credit risk-wise, better than non-sustainable companies. So we still have to play within the current rules of the game. I agree it’s not transformational. Perhaps we could do that, but, at this moment we’re not allowed to.

Hessels, ABN Amro: What I like in this new product is the innovation. It is more like an issuing platform, where issuers have one framework and can choose in what format they want to issue, depending on the appetite from investors or their banks. They don’t have to go back to the drawing board again and again.

Like Renewi — it can issue bonds, syndicated or bilateral loans, US private placements. And the definition is very clear, it’s aligned around the Green Bond Principles, but also you can attach KPIs. It gives issuers a lot of flexibility and variety to attract the investors or counterparties they are aiming for. That’s what I expect to see much more of in the future.

Biemans, ING: Richard, you could be an investor that benefits from this, if the loan was distributed to investors instead of just banks?

Sherry, M&G: Yes. What we need to do is achieve enormous scale and you’re not going to without having all players in the market involved. Banks can participate in green loans up to a point, but banks, by themselves, cannot finance the green transition. You need some mechanism to get that risk from banks to the rest of the financial system.

Green loans is one part of the picture, but we’re quite supportive of trying to grow securitization, so that banks can do what they’re best at, which is source more green loans. But long term capital, like investment managers and pension funds, can then take those loans off the banks.

The green securitization market is quite new and more developed in the US than in Europe. We’ve participated, in public and private deals. 

One of the issues in growing green securitization in Europe is a lot of the pools aren’t big enough to do a big public issue now. But there are investors like M&G who are quite happy to look at private deals, to be that stepping stone to help this market grow.

It tends to be either very small loans, financing residential solar, energy efficiency programmes, green mortgages, or very large loans to wind farms and so on.

GlobalCapital: Inês, would you like to be able to do a deal which was KPI-linked, with a pricing benefit?

Faden, Tideway: I was thinking that on the way here because in a similar project to ours, there has been a deal. DC Water in Washington DC have done a five year bond with the outcome structured like an advanced loan — although it’s the opposite of Renewi’s, and more like a social impact bond. If they underperform, they pay the investors less, and if they outperform, they pay investors more.

During construction we’re doing a lot of things that have a big social impact and we’re measuring it, with 50 very ambitious targets. 

But we couldn’t issue a social bond because construction will be done in six years and we’re issuing debt for 20, 30, 40 years, so it didn’t match. But with our loan, we could do that.

Once the project is built, it either works or doesn’t, it is very binary. The Tideway tunnel will be more or less used, depending if it rains more or less in London, or if people keep paving their gardens or if the population keeps growing. There’s not a lot about what we do that will influence the outcome. But otherwise, we would love to, yes. During construction we could, but we’re not doing short term debt.

GlobalCapital: Mariano, do you talk about green loans with banks?

Benito, Repsol: We’re not active in syndicated loans. Most of the outstanding debt we have is in the capital markets. We have bilateral undrawn revolving credit lines, required for liquidity reasons.


GlobalCapital: Let’s move on to official policy. That is massively different from a year ago. We’ve got a European Sustainable Finance policy and even in the UK, there’s a report which hopefully will become policy.

There are going to be great changes in how investors’ duties are defined, including talking to their clients about their sustainability wishes and implementing those. And there is going to be more disclosure for companies. Is this going to change the market?

SRI Report
Hessels, ABN Amro: Yes, I think it will be a gamechanger. Investors will pass on to their counterparties and banks what their ambitions and criteria are for sustainable investments.

If you sell a product, you need to make sure it fits the purpose of the investor. That means, for the entire portfolio of products, you will need to not only look at suitability from a credit point of view but also from an ESG point of view. That will have a massive impact on financial organisations. They will need to start questioning their clients.

Corporates will get involved in this kind of dialogue, not only on the risk side, but about scoring them on the ESG side. Investors should work towards a minimum ESG standard but also an ESG scoring system for all their investments.

Biemans, ING: I also think it will be a gamechanger, but more gradually. Sustainability is, in the end, always about transparency. A lot of these changes will be about more transparency from investors and issuers. No one can exactly define what sustainable is, so it will be a gradual process with more disclosures.

Sherry, M&G: I agree. The biggest effect of a lot of the policies is going to be increased disclosure, and that will take some time. As better information is available, people can start changing their investment decisions, but that takes a while to flow through. 

GlobalCapital: Will there be more favourable bank capital charges for green assets?

Biemans, ING: Potentially. In the Netherlands, we have a fiscal green scheme launched in 1999. Green projects can get funding at a lower rate and retail investors provide that because they get a tax break.

The system has extremely strict guidelines for what green means, much stricter than the green bond market. The banks have always tried to convince the Ministry of Finance to make the scheme bigger to facilitate the entire transition. That didn’t work, because it was too expensive.

So I can imagine we will see a supporting factor in the EU for innovative, cutting edge projects, but it’s too expensive to subsidise the whole transition.

Brugman, Rabobank: And regulators have not been particularly keen on supporting that, or have said no. On the other hand, new policies are part of several tendencies. You have to make more disclosure if you want to list your green or social bond. There is more labelling.

And the market reacts by anticipating these requirements by also developing further voluntary standards like the Green Bond Principles. So, more concrete and specific disclosure will be required and it will be a self-driven process.

GlobalCapital: The EU is planning to create a taxonomy to define what’s green. Is that helpful?

Biemans, ING: There is a lot of talking about classification. We should use existing definitions. There is a System of Environmental-Economic Accounting, which is used by all the national statistics offices in Europe and the rest of the world to calculate various environmental accounts: environmental goods and services, water, forestry. This system has quite a nice classification.

GlobalCapital: So, why are they trying to reinvent it?

Biemans, ING: It makes no sense when governments want to promote green finance and then use different classifications from those they already use for the output of the environmental goods and services sector. We need to use what we have and not reinvent the wheel.

Hessels, ABN Amro: One very clear target of the EU Action Plan is to grow the sustainable finance market. If you come up with a new definition, it’s important that you aim perfectly in the middle. If you draw it too tightly — or have many specific criteria, with information which is typically not available for issuers — then you might even reduce the market and make it marginal. But if you aim too wide, anything goes and you may get a market which is not interesting for investors anymore.

Brugman, Rabobank: Let’s hope the EU’s taxonomy will at least endorse the good standards and principles we have, and also leave freedom for the market to declare and make explicit environmental benefits that companies see.

Frankly, it’s not doable to anticipate all the possible ways to frame and describe and measure environmental benefit.

So, were the EU to do that, it would kill a lot of variety and opportunities in the market. It would just be a box-ticking exercise and a large part of the market would be excluded. Is that what you would want? I don’t think so.

Faden, Tideway: The market has been self-regulating. I don’t think the reason it doesn’t grow is a lack of standardisation. A little bit may be helpful but, I agree, the market has to self-regulate.

Benito, Repsol: There is a risk that huge information could mislead not only investors but also issuers. Clarity regarding regulation and taxonomy would help give more transparency, or a clearer path for issuers and investors who would participate in a green, social or sustainable bond.

Sherry, M&G: The initial discussion was whether the EU would issue green standards, which go a lot further than a taxonomy, they lay down the specifics of what you need to do to count as green. That proposal worried us quite a lot, because that’s the easiest way to stifle innovation, especially if the resources aren’t put into keeping those standards up to date all the time.

We see the taxonomy as reasonable middle ground. From what has been announced so far, they haven’t gone to the far extreme of very precise standards. It provides some clarity to the market, hopefully, without stifling innovation.


GlobalCapital: The Sustainable Development Goals are getting an increasing focus in capital markets. Are they going to play an important role?

Benito, Repsol: Yes, they are. We should focus not only on environmental, but on all the ESG — environmental, sustainable and governance. The important thing is that a company should have a long term strategy that is supportive of sustainability overall.

Richford, Renewi: The Sustainable Development Goals are quite difficult to work with. We have them as part of our framework, so we have mapped it as best we can. You can fit into parts of it but you don’t fit squarely into any of them. Whereas with the taxonomy of activities, sometimes you do fit squarely into a box.

However, I think the SDGs are a much broader conversation that is well understood, so there has to be an effort to map yourself into that space. 

Our activity and how it contributes to society is clear. How it links through to the SDGs is less obvious.

Faden, Tideway: We’ve done the same. We’ve mapped the SDGs in our green bond framework, but we’ve picked just seven or eight we’re touching.

It’s very easy for companies, within 17 Goals, to find somewhere they’re doing well. The challenge is, if you’re really going to report against it, you need to look at all 17.

Some may say ‘my company doesn’t act in that area’, and that’s fine, but there will be some areas that come up, where you actually should be doing something you’re not. 

There’s a risk of greenwashing. You could have a negative impact in some areas and choose not to report. The reporting has to be consistent.

Hessels, ABN Amro: Most companies are active in some SDGs, but probably not all. There needs to be a balance. When does a company say ‘this SDG is really for us’ and focus on it? That’s the good thing about the SDGs — the discussion will be much more in the open.

But it’s also very important that you look behind the goals and make it specific what are the exact figures, focus points, to achieve.

It’s a perfect way to enlarge sustainability bonds. There is now a document attached to the Social Bond Principles, focusing specifically on the SDGs, to give more guidance.

Biemans, ING: Also, a template was published last week to do impact reporting for social bonds, which refers to the SDGs.

The world is investing massively in basic needs, job creation, SMEs, microfinance. So potentially the social bond universe will be very large, even larger than the green bond universe.

Faden, Tideway: Some issuers say they do a lot with their supply chains, but you can’t issue bonds against it.

GlobalCapital: You’d need a KPI-linked structure, perhaps.

Brugman, Rabobank: I’m sure we can solve that. It shouldn’t be an impediment.

We find SDGs coming up in our conversations more and more.

It’s becoming a standards approach, as more and more companies have made commitments towards the SDGs. And in positioning a green bond or loan, it is usually important to determine how they relate to the sustainability strategy and efforts of the issuer.

The company knows its SDGs, it knows its KPIs, it has a strategy, while the categories of the green loans and bonds are sometimes not as known. We need to establish the correspondence, so that it is completely clear how the financial instruments link to the sustainability programme the company already has.

Biemans, ING: And the investors, nowadays, commit explicitly to investing more in the Sustainable Development Goals. One of the reasons is that the reporting is a bit more flexible. Especially in social bonds, but also in green bonds, impact reporting is quite difficult for issuers and it’s quite difficult to process that information for investors.

In a number of years, we might want to move from level zero of impact reporting to level two and the SDGs are a very nice level in between.

Sherry, M&G: For impact investors, who we’re now talking to a lot concerning managing funds for them, SDGs are now the norm. So all the impact reporting for our fund is linked to SDGs.

We see it as a useful common framework. To achieve the SDGs, the financial sector needs to work with the corporate sector, governments, NGOs.

So even though, for one of those sectors in isolation, the SDGs might not be a perfect fit, if you’re trying to create a dialogue across all those different players, it’s a useful common language.

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