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Investors debate the E, S and G that go into SRI

One of the big obstacles in developing the SRI bond market has been tackling the complexities and sheer diversity of the investor base engaged in making ethical investments. Yet it is their preferences and their investment that will drive the market forward. Investment strategies and ethical checklists vary wildly between investors in the SRI market — and those are just the SRI-focused ones. The market stands on the cusp of exponential growth and that will mean bringing in mainstream institutions into the mix. EuroWeek gathered together a spectrum of key investors and bankers and a smattering of issuers involved in SRI capital markets to discuss their future and the best way to maximise their potential.

Participants in this roundtable were:


Suzanne Buchta, managing director, green DCM Americas, Bank of America Merrill Lynch

Philip Brown, head of public sector DCM, Citi

Olga Dyakova, senior manager, treasury funding department, EBRD

Christopher Flensborg, head of sustainable products and product development, SEB

Martin Foden, head of credit research, Royal London Asset Management

Jane Goodland, senior investment consultant, Towers Watson

Solveig-Pape Hamich, head of investment strategies and sustainability, KfW Bankengruppe

Angela Homsi, director, Generation Investment Management

Bryn Jones, head of fixed income research and manager of Rathbone Ethical Bond Fund, Rathbones 

Navindu Katugampola, vice president, SSA origination, Morgan Stanley

Stuart Kinnersley, chief investment officer, Nikko Asset Management Europe

Samantha Lamb, investment director and portfolio manager, European Corporate Bond SRI Fund, Standard Life

Anders Nordborg, portfolio manager, SEB Asset Management

Carlos Perezgrovas, executive director, SSA coverage, Daiwa Capital Markets

Rebecca Seabrook, credit fund manager, F&C

Moderator: Ralph Sinclair, EuroWeek

EUROWEEK: Just how important are environmental, social and governance issues to bond investors? What is driving the interest in socially responsible investment?

Stuart Kinnersley, Nikko Asset Management: Our motivation when we set up the World Bank Green Bond fund around 3-1/2 years ago was to redress the dearth of fixed income product within the ESG space. 

When the World Bank started issuing its green bonds, we saw an opportunity to address this in terms of creating scalable, liquid, and transparent funds which generated a positive externality — in this case combatting climate change. 

The timing was appropriate. We launched it in 2010 — a couple of years after the global financial crisis, and it resonated at that time to have bonds and bond funds that provided greater transparency so investors knew exactly where their money was going.

But our main emphasis was always to achieve this and generate a mainstream return at the same time. There wasn’t to be a sacrifice in terms of investment performance.

Bryn Jones, Rathbones: We launched our fund in 2002 to unitise some of the smaller accounts. Some of those accounts required an ethical mandate. That ethical mandate was set up with a negative and positive screening process so selection was not based just upon sustainability, but on excluding certain negative criteria too.

Demand for ethical and sustainable investment has increased so that now the fund has grown from its original £12m of seed capital to £125m.

Rathbone Greenbank, which manages the sustainable discretionary funds under management, is now managing over £500m in this space, and as a group we manage over £1bn of charity funds.

So across the group, around £2bn is looking for an ESG home. That’s at least 10% of Rathbones’ total assets so it is clearly an important part of what we do.

Jane Goodland, Towers Watson: There is some demand for products which explicitly integrate ESG characteristics, but equally there is a large portion of the market that is not seeking this out.

Towers Watson has over $2tr assets under advice globally, much of which is corporate pension funds. In our experience these funds have traditionally not been that interested in products with explicit ESG criteria. More often the view is that if incorporating ESG helps mitigate risk and enhance long term returns then it’s something that should be built into the investment process but it’s not something that they’re willing to pay extra for or that they seek out explicitly. It’s all part and parcel of what they believe is good quality investment management.

Angela Homsi, Generation Investment Management: We do only sustainable investment and only long term investing, across asset classes. We are fully dedicated to these principles and integrate sustainability research into traditional financial analysis, we analyse risks and opportunities linked to environmental, social and governance issues and how they affect businesses. We believe this helps us to be better investors and is the key driver enabling us to generate performance.

Samantha Lamb, Standard Life: We’ve had an ESG team for over 10 years and it’s very much their analysis that is core to our investment criteria and product analysis. 

There’s more emphasis on downside risk so we consider the materiality of the ESG factors which in certain sectors are going to be more material and also where the issuer’s balance sheet strength is as well.

European investors have driven the increase in monies that we manage that focus on ESG factors.

Anders Nordborg, SEB Asset Management: We were more focused on negative screening before but the launch of the green bond has started more of a process where we can act on positive screening by choosing what we want to invest in.

But in all honesty, the green bond market has mostly funded projects in the Third World, which is not the problem. The problem is the G20, so what green bonds accomplish is the start of an effort within financing and asset management to focus on these issues.

Rebecca Seabrook, F&C: SRI or ESG-driven investing has always been seen as a minority interest. But some of the biggest corporate failures were caused by phasing out strong governance.

For us to be confident in what we’re investing in, we have to be confident in an organisation’s governance, sustainability, and full ESG criteria, so trying to separate those SRI or ESG issues has almost become a thing of the past.

This is an issue that will become increasingly important in terms of the way we run all our investments, not just those that are deemed green.

Martin Foden, Royal London Asset Management: When you introduce an ESG policy the first point is to be realistic about what’s achievable. 

You have to step back and understand some of the specifics about bond investing. Although as bondholders, we are in a senior position in the capital structure, we are subordinate in terms of control so ultimately we go in the direction the equity market wants to go, so the first stage of building a credible risk approach is to recognise that limitation and think what kind of pre-emptive controls can be built into a portfolio. 

Olga Dyakova, EBRD: The EBRD was set up as an institution with an environmental mandate so everything that we do on the lending side has to be screened by our environment and sustainability team.

And another thing that we do is attract other investors into projects we support. The EBRD typically invests up to 35% of the funds required by the project but we also attract other private sponsors so from an environmental and social perspective, they also benefit from the screening we do.

Solveig-Pape Hamich, KfW Investments: Back in 2006, we started thinking about what we could do, as a capital market investor, to support our colleagues on the lending side of KfW’s business. They finance mainly projects that come up against the megatrends like demographic change or climate change. This finance has to follow high environmental and social principles.

It doesn’t make sense to have environmental and social principles on one side of the organisation but not the other. We are convinced that we see better performance, and make better risk assessments if we take ESG criteria into our investment decisions. Back in 2006 we signed the UN’s Principles for Responsible Investment and our responsible investment approach has been in place since 2008. 

Foden, Royal London Asset Management: I wonder how much conviction you have within the overall credit management assessment within so many environmental liabilities. 

It does feel very subjective and it feels like a very long term liability as well. We’re all interested in greater sustainability and liquidity in the market — we have to think about being longer term investors in the companies that we lend to. But I just wonder about the conviction you can actually have in assessing some of these environmental liabilities?

Homsi, Generation Investment Management: It’s not about trying to analyse every single ESG indicator possible. What is relevant to credit assessment is going through the fundamental analysis of a business and really understand the maybe four or five key performance indicators that are material to a company’s way of doing business. 

At the end of the day, these issues are actually part of normal financial analysis to better assess credit risk, they are highly material to a companies’ licence to operate and ability to deliver on its cashflow projections and business plan. So we should not even be calling it ethical or SRI investing, as in our opinion this is just good normal credit investing, and this is taking a more holistic approach to risk and opportunities than most people have done in the past. 

That’s also why we push for integrated reporting from companies, rather than having them publish sustainability reports on the side — which do not always emphasise the materiality of the issues stated.

Foden, Royal London Asset Management: So that’s the key point. It’s not distinct from any normal credit analysis, it’s just an understanding of the sustainability of cashflows. 

Christopher Flensborg, SEB: There’s more climate stress going around there, which is changing the way we value raw materials and assets.

Water is going to be a huge issue, food will be an issue in some places and unless you build that into your analysis when you’re going into lending and investing you are not measuring all of the risks.

Foden, Royal London Asset Management: The credit market tends to be very focused on liquidity and investors see it as an asset to trade in and out off. Actually we need to think of ourselves more as being a lender to a company for the long term, especially as banks pull liquidity out of secondary trading. You do naturally have to take a longer term view.

Homsi, Generation Investment Management: There are a few drivers and trends that are making ESG today more relevant than ever before for assessing creditworthiness.

The whole regulatory framework is evolving and becoming more stringent around many sustainable challenges like climate change, pollution, water or sustainable healthcare systems. This is accompanied by a much better ability to identify, measure, record and attribute responsibility and negative externalities — with the big data and tech progress. As these externalities can be internalised more accurately, they will impact specific companies and their credit profile, with losers facing fines and sanctions and winners seizing opportunities in this new landscape.

Kinnersley, Nikko Asset Management: It’s slightly different for us. We don’t claim that we’re going to generate a superior performance because we’re buying World Bank green bonds. We generate the alpha from our skillset in terms of our analysis. 

What we are presenting to the end investor is that we’re going to generate mainstream returns vis-à-vis a benchmark, but the end investor, through investing in our product, has much greater knowledge of where that money is actually going, so they have a much greater transparency and there are positive externalities over and above the financial return that they’re going to generate from our alpha.

Therefore in a broader sense the total return is greater than a standard bond fund. We will outperform, dependent on the skillset of our fund managers.

The ESG industry tends to claim that it is going to generate superior performance because of ESG factors, however the empirical evidence is at best mixed on that. 

At the end of the day it depends on how good the investment process is. It’s not necessarily because we’re focusing on ESG. What we’re trying to do is create a mainstream product by investing only in a very few select bonds that have certain characteristics and that’s how we’re presenting ourselves.

EUROWEEK: What are the major hindrances to SRI investors looking for bonds?

Lamb, Standard Life: We’re not looking for themed bonds or specific monies that have been ring-fenced for projects. We’re looking at the credit risk of the company as a whole and in order to be able to do that, the more transparent the issuer is, the easier it is for us.

But in addition we look to see that an issuer has identified the ESG issues that are material to them, that they are measuring their performance on these issues and that they’re feeling in certain areas that they’re willing to act. 

The governance becomes important in their future strategy so that they can implement the changes, but if we don’t have the transparency we cannot assess that.

Homsi, Generation Investment Management: We believe being a sustainable investor is a hard job and allows for no shortcut. Similar to assessing the quality of the management of a company, you cannot pin it down to a simple ratio or box-ticking exercise. It’s based upon fundamental bottom-up, holistic analysis. 

What would help? We need more transparency of data, of issuing companies’ structure and risk sensitivity to allow us to understand better how the firm is positioned in the face of sustainability challenges and how good the quality of its business and its management are. 

Also more awareness and products from intermediaries such as brokers, research providers and rating agencies would be welcome. So far, unfortunately, there’s too much focus on quarterly earning guidance and things that are not relevant to long term investors.

Finally, if we could have more systematic integrated reporting that would make things more easily comparable across industries and across issuers. That has to come from a regulatory and investors’ push. 

EUROWEEK: Does that make themed bonds, for example, something of a gimmick for you?

Homsi, Generation Investment Management: Themed bonds are a very important and interesting development for investors with a particular focus on the environment.

They are a great development, but they are not the same as being a long term sustainable investor, or an SRI investor, which is for me a method of analysing risk and opportunities of issuers across different key performance indicators, not a theme.

Suzanne Buchta, Bank of America Merrill Lynch: One important process of ESG on the equity side, is using your voting rights to be able to effect change in the company. Themed bonds are a new way to be able to do that with debt.

The new generation of investors are looking for ways to be able to speak with their money about the change they want to see. It’s possible you could have a themed bond come from a poor ESG issuer but you could also have a themed bond come from a positive ESG issuer. 

If we can engage, based on the SSA model, the industrials to start thinking about issuing a green bond, that then gets the discussion going internally where it may not have existed before. It may start to shift the company just from focusing around that one green bond, to engaging in ESG factors as an entire institution.

Flensborg, SEB: The differences between an SRI approach and a themed bond is that there’s an educational phase and there’s an enabling phase.

By enabling mainstream investors to engage you allow them to move towards more dedicated investors. If you raise the awareness, you raise the innovation and raise the commitment.

Philip Brown, Citi: We have spoken about the market being at an inflection point where issuance and demand for green bond product could grow exponentially. Away from the SSA space we’ve led a stream of climate-friendly project bonds in the US market, to finance large scale wind and solar projects. In the corporate credit space it’s still a relatively rare thing to see a specific green bond. Last year we launched Air Liquide, the first euro denominated corporate green bond. As the debut corporate green bond in Europe the deal attracted considerable attention. As with many corporate deals, the transaction was heavily oversubscribed and it would have been equally successful as a regular bond. 

The company has benefited over time by the increased investor awareness of its strong governance with regard to its environmental policies. We are seeing a growing range of interest in the green bond space from a number of corporates from different geographies and industries. I expect we’ll see a substantial increase in corporate issuers looking carefully at this market in the years to come. You can see from the annual reports and websites of most major corporations an increasing focus on ESG principles. It’s interesting to note that in the distribution of some of the SSA green bond issuance that we have seen, cash-rich corporate treasuries are a significant investor base. Investors are also proud to participate in the green bond market and many of them are happy for their participation to be disclosed in the press release for these deals. There is franchise value for them beyond the investment itself in being seen to have a climate-friendly investment policy.

Dyakova, EBRD: We publish a sustainability report, and we also report regularly on the types of investments that we are making on our website. Many international financial institutions have to produce lots of information that is publicly available and hopefully that makes it easier for investors to analyse. 

It may be more of a question for other types of bond issuers — how do they confirm that the funds are going where they are supposed to go?

Kinnersley, Nikko Asset Management: When meeting with prospective clients, invariably two questions always crop up. 

One is about scalability — how much can we manage under the strategy? Three years ago we were very much helped by our collaboration with the World Bank and their commitment to support this initiative. This helped greatly given the nascent state of the market.

The second most often asked question is related to liquidity. There are two areas that are gradually changing. Since the World Bank lead the way with the initial issuance, so the other supranationals followed.

There is now a basic template that some in the private sector are beginning to replicate.

Jones, Rathbones: The other point to make is that investors have thought ethical or sustainable investments have performed worse historically than mainstream investments. 

But you only have to look at Royal London, which won awards for performance a few years ago and numerous others.

More investors are starting to realise that in actual fact performance is not necessarily worse in an ethical fund and a lot of them can outperform their peers.

Lamb, Standard Life: In terms of the money that we’re investing, particularly with institutional, the pension trustees have a fiduciary duty to deliver a return for the people who’ve got their pensions invested, and doing that in a responsible manner is important, but they cannot have an agenda which supersedes the return objective. The two have got to work in parallel.

Goodland, Towers Watson: The Law Commission Review of Fiduciary Duty will be interesting later on in the year. It will address this exact issue, which will help the discussion move forward, and move beyond this perennial question around responsible investment forfeiting returns.

In my opinion the more important issue is skill of the investment manager and whether or not they are applying a superior strategy in the correct way at the right time and ESG might form part and parcel of that strategy.

Seabrook, F & C: We are blessed in the UK in the sense that the make-up of the sterling market alone lends itself more happily to any kind of screened investing. It doesn’t have big exposure to the oil companies, doesn’t have big exposure to armaments, or heavy industrials exposure.

It’s very different, however, when you start looking at a European equivalent, or something of that nature where you’re going to be able to make more difference. Your starting position isn’t the whole universe like it is in the sterling market. It’s a very different place, so whether we’ll see more differentials come out over time, I don’t know.

Foden, Royal London Asset Management: That’s where clients may have to make a really difficult decision because when a client buys into Royal London, they find a 15 year philosophy of running very diversified funds and being overweight secured and covenanted assets — in a way, trying to mimic some of the characteristics of bank lending. 

We would have a very difficult decision in terms of the sequencing of the investment decision and whether we’d be prepared to forgo some of those characteristics to get a different make-up of fund. Philosophically we would not be prepared to compromise some of the key cornerstones of how we invest.

EUROWEEK: Some investors have said they’re happy to receive lower yield on an SRI bond. Would the investors around this table pay up for an SRI product?

Jones, Rathbones: It’s a slightly erroneous question on the basis of risk. If you’re looking at something without thinking about risk then the answer to that question will be no, you are not willing to forgo any kind of yield. 

But, having said that, clearly if the volatility of returns are much lower then the risk-adjusted return from that asset might be stronger. 

It’s a balance of your mandate and how you position your green portfolio. So my direct answer would be no, but keeping risk in mind perhaps yes, but then that depends how much you value the volatility.

Kinnersley, Nikko Asset Management: Certainly the way we positioned ourselves is that the World Bank issues these green bonds at exactly the same yield levels as they would their conventional bonds and, therefore the end investor’s not forgoing any financial returns. 

So to grow the market, that type of characteristic has to continue and that’s why maybe there is quite a lot of sensitivity in terms of the extra cost to the issuers of bringing themed bonds to the market, and who bears that cost, which will especially matter if the market expands to the corporate sector.

At present issuers are absorbing these costs, with investors not ready to accept lower returns as a result.

Goodland, Towers Watson: Many of the pension funds we speak to don’t have a specific sustainable mission or mandate, and so working from that premise, it would be difficult for them to consider lower yielding investments with less liquidity, particularly when they can fish in a much bigger pond with lots of opportunities available. If they don’t have a clear sustainable mandate then typically they’ll just look for the optimal opportunities, consistent with their fiduciary duty.

Buchta, Bank of America Merrill Lynch: In the US we’ve seen that some of the major participants in the World Bank’s and other green bonds have been the pension funds, such as CalSTRS.

Goodland, Towers Watson: Yes, the very large public plans with the mandate and scale to get involved.

Buchta, Bank of America Merrill Lynch: So why is it different in the UK?

Goodland, Towersd Watson: Some of the large public UK plans have a clear mandate to invest sustainably but the vast majority of corporate schemes don’t. The appetite for these bonds varies between different segments of the market.

Jones, Rathbones:  Are they looking at risk at all or is it just about return?

Goodland, Towers Watson: Ultimately if you’ve got a group of trustees in a room who have no clear compulsion or interest in looking at anything beyond financial returns, then the conversation’s not even going to get on the table.

Navindu Katugampola, Morgan Stanley: When we did the IFC $1bn green bond we wanted to make sure that it was in line with the rest of the IFC curve. To go back to Bryn’s earlier point about risk and reward, when you’re buying an IFC green bond you’re buying exactly the same risk as a normal IFC bond. Over time, there will be an increase in the funds that are seeking positive social results as well as economic returns, and if that demand leads to green bonds trading tighter in the secondary markets say than some ordinary bonds, then market forces will lead us in that direction.

It would be a mistake at this nascent stage of the market to force pricing down investors’ throats and demand an extra concession from them for the green badge.  That was foremost in the IFC’s mind and indeed the World Bank’s mind when they brought their deals. 

Jones, Rathbones: I’m surprised that the pension funds wouldn’t be looking at the efficient portfolio theory and lower correlations. If over time ethical or sustainable investments prove that they have a lower volatility or that they have a lower or even a negative correlation to other beta risk assets, surely pension funds will start to realise that in actual fact it’s not just about the return. An emerging market fund may earn up to 8% in yield but it can have huge amounts of volatility as well. So I will continue to bang the drum about the volatility.

Homsi, Generation Investment Management: The majority of our investors are institutional investors and most do not have a specific mandate on being green or sustainable. They just invest in our funds because they think that our methodology of integrating sustainability analysis into financial analysis and our investment process will generate better risk-adjusted returns for them.  

It’s not about doing good, it’s not about being ethical, it’s not about being green or environmentally friendly. It’s about better complying with fiduciary duty and managing your capital to maximise risk-adjusted returns.

Flensborg, SEB: We have seen roughly a little over 170 investors going into green bonds over the last couple of years. The further down you get towards the end user — the person with the money — the more you see segregation in the market. Eventually you might see somebody looking at the volatility as well and taking a risk-adjusted spread rather than an absolute return. But that takes education and time.

Lamb, Standard Life: So are you suggesting that two bonds from the same issuer will price at different levels and they will have different volatilities because the proceeds of one deal have been ring-fenced?

Flensborg, SEB: The credit risk of the green bond and the regular bond is the same. If they’re issued at the same level, the return to maturity would be the same. However, together with Bank of America Merrill Lynch, we brought Export-Import Bank of Korea  (Kexim) to the market in February. And not too long after that the political debate between North and South Korea brought enormous volatility to Korean debt.  

And what we saw was that the Kexim green bond outperformed all other Korean debt. The stickiness of the money that goes into green bonds is higher and in volatile markets you will see a tendency for outperformance in those assets.  

Some issuers may get greedy and ask for a basis point or two because of that but at this stage that is like telling investors to go away. It’s extremely important to bring themed and regular bonds at the same level for the foreseeable future.

Buchta, Bank of America Merrill Lynch: And if the two bonds come at the same level and you are an ESG-focused firm, would you not participate in the themed bond? I see no reason why you would not participate if you were given the choice between the same issuer, same pricing, one green and one not.

Hamich, KfW Investments: We conduct a credit analysis for all issuers and then a sustainability analysis for all issuers. A green bond from an issuer would have to pass the same analysis as all other bonds do. If it fits into our portfolio guidelines, yes, we could buy it, but we need liquidity at the same time. Each investment has to make economic sense.

Buchta, Bank of America Merrill Lynch: But if it does and you were given two bonds with the same pricing, same size, would you choose the green over the non-green bond in that situation, with all else being equal?

Lamb, Standard Life: I’d be indifferent.

Hamich, KfW Bankengruppe: Is the green bond really as liquid as the other one?

Buchta, Bank of America Merrill Lynch: Yes.

Kinnersley, Nikko Asset Management: We’ve always positioned this as a mainstream product. So that if you had a global fixed income allocation you could allocate it knowing that you’re going to get returns in line with global fixed income markets. 

In the UK this is very pertinent because — and I’m not an expert on this — under trustee legislation if pension funds are offered two products that have generally the same risk-adjusted returns but one of the products has the added broader social positive benefits there is an obligation for them to choose this investment. So all other things being equal, there’s no reason why the trustees should not be looking at green bonds more closely.

If you had two global fixed income strategies with similar returns on a risk-adjusted basis, but one of the strategies clearly has positive externalities over and above the other one then trustees have an obligation to choose that one.

Carlos Perezgrovas, Daiwa: One phenomenon that we have seen in the Japanese market is not only the issuance of green bonds but that of other themed bonds too. These bonds which fund water, agricultural, micro-finance, education and other projects, are at the moment mainly, although not exclusively, issued by supranational borrowers. A key point is that the demographics in these transactions are slightly different depending on the type of projects, some favoured by retail investors of a certain gender, age bracket or background. 

If one extrapolates that experience into the wider investor base, the international institutional market, one may expect that demand for a certain social theme may have a different value for some investors than maybe a green bond does for others. So we may reach a point where although the credit is the same the interest from the investors to participate in bonds that fund specific projects or a specific type of project in a clear geographical region add enough value to make a price distinction between one security versus another.

EUROWEEK: Do any of the investors here feel that SRI funds in particular deserve priority in allocations? When it comes to bigger deals are you happy to compete with central banks and every other investor and risk being allocated less than you want?

Homsi, Generation Investment Management: The syndicate and bookbuilding team should behave how they usually behave, which is to consider as a priority long term investors, without any preferential treatment.  

We want this market to become mainstream. We don’t want it to stay a niche market.

Lamb, Standard Life: It’s about bringing ESG factors into credit analysis versus your portfolio construction. ESG comes into all of our credit analysis. 

We have £35bn of credit funds under management at Standard Life. But from a portfolio perspective, only £1bn of those are dedicated ESG funds. 

So if we’re putting in an order across our portfolios, it would be challenging for syndicate to work out which portion is going to the SRI-dedicated funds. It would be very complicated and I’m not convinced of the rationale of why we should be given preference.

Kinnersley, Nikko Asset Management: It would be market distortion wouldn’t it? If you’re an asset manager and you have some SRI clients and non-SRI clients and you’re putting in an order across the board, you’re not really supposed to show preference to your own clients.

Brown, Citi: When we’re lead managing transactions, we ask our sales force to very clearly reflect the nature of the order. We ask the sales person to speak to the trader or the portfolio manager to clarify the nature of the investment. When making allocations, it’s our fiduciary duty to do what is in the best interests of the issuer and all bondholders. 

In the case of the IFC $1bn green bond, which was brought to market in February this year, we deliberately launched the syndication on a Chinese public holiday to reduce the expected participation from IFC’s traditionally largest investor base. We wanted the large Asian central banks to play a lesser role this time, leaving room for SRI and other asset managers. The whole objective of the exercise was to diversify IFC’s traditional investor base to a broader group of fund managers. 

We also feel it doesn’t serve the future interests of the market well to target only SRI money.  If we were targeting purely dedicated SRI funds — and there were a number which did come into the IFC bond — but only those with a 100% focus, then it would not have been possible to bring a well performing $1bn-sized bond which brought a new liquidity into the green bond sector. 

Our objective was to crowd-in new investors to IFC’s funding. If climate projects are going to attract the kind of money on the scale that is needed, we need to bring new investors into this space. It’s also in the long term interest of every holder of IFC bonds that the universe of investors interested in the IFC credit is as big as possible.

Katugampola, Morgan Stanley: One of the things we did on the IFC deal was go through the order book, examining each investor for their SRI credentials.  

Investors can be very secretive about which deals they have bought. But we were pleasantly surprised that the full range of investors, from asset managers to corporates, to dedicated SRI funds were queuing up to be named as having bought the deal and wanted to be quoted on the press release.  

That gave us a high degree of confidence that these were strategic supporters of the transaction.

Even though the corporates involved had no SRI fund within their institutions, each has a corporate social responsibility department. That they could buy this bond and publicly state that they’re supporting it, gave us a degree of confidence they were the sorts of investors we wanted to have in the transaction.  

What we’re really looking to do is to get as many people on board with this as a strategic offering to the market to support it.

Hamich, KfW Investments: Green bonds might be one small part of socially responsible investment, but socially responsible investment should be something that goes in the direction of better risk return analysis. It should become part of mainstream investing.

Perezgrovas, Daiwa: We had a similar allocation issue when we did the IFFIm dollar benchmark floater. The vehicle, different to other types of SRI bond, was used to raise funds to support GAVI’s efforts to immunise children against mortal diseases in developing countries; a noble cause different from the more common climate-related projects. 

Daiwa, as one of the joint leads, did a lot of investor work to try to market the name and cause among specific ethical investors that could have been interested in this transaction. And although we also targeted traditional SSA investors during the marketing, it was only until the bookbuilding process advanced that it became clear that we could face an allocation problem and could potentially have to choose between pure ethical and traditional investors. — a situation that could bring other problems for issuers as they may have relationships with these investors who may not be necessarily ethically-focussed investors, but those relationships incentivise them to try to fill them in full. 

Fortunately for everybody, IFFIm had room to increase the issue size from $500m to $700m, which made the allocation process a lot easier. The main lesson, however, is that although a balance between the ethical and traditional investor is needed at the moment, syndicates and borrowers need to follow a very cautious approach to allocation. At least until the ethical investor base is large enough to justify a pure SRI-targeted issue.

Dyakova, EBRD: It’s not that straightforward as we found out. The way we started issuing green bonds was on a reverse enquiry basis in Japan. They were very much targeted at investors who wanted to apply exclusion criteria, for example, no alcohol investments or they wanted to exclude certain types of projects that might use fossil fuels. So we excluded all those and we did specific targeted bond issuance just to those investors. But that leads to relatively small deals.

With benchmark-sized deals, what Carlos was pointing out is that we might already have some participation in our other bond issuance from central banks and if they start coming to our green bonds they might then decide that they only want green bonds but we will still have the rest of the universe of projects that we need to finance. We’d want to ensure that we still have the ability to finance them.

EUROWEEK: Is one of the key problems with scaling up the SRI bond market the accreditation and standardisation of the products?  Given the diversity of funds being invested or looking for socially responsible homes, would it be helpful for this market to have more standardised accreditation or should it still be down to individual investor decisions?

Kinnersley, Nikko Asset Management: If it’s part of the investment process in terms of identifying the issues of transparency and what positive externalities will come out of it, then that is part of the investment thesis. 

I’m not sure I particularly would pay too much attention to a general market standard that some aspects of it I might agree on and some not. It would be fairly subjective.  

EUROWEEK: So an issuer rating would be a deferral of your responsibility as an investor?

Kinnersley, Nikko Asset Management: Yes I would be uncomfortable relying upon that exclusively.

Lamb, Standard Life: But to an extent you’re reflecting credit ratings as they stand. You wouldn’t make an investment decision based on a credit rating given by either Moody’s or Standard & Poor’s, but it’s still useful to have that framework and that objective analysis for comparison to facilitate a discussion about how these things should be looked at and considered.  

Having that similar framework with more focus on ESG would be good. Whether that’s through a separate SRI rating agency or the existing credit rating agencies building out the ESG part of their analysis, it will become more of a factor.  

I agree with this caution over setting frameworks which then turn out not to have been thought through well enough and are just too restrictive. 

There has to be some caution, but at the same time we have to get that industry discussion going.

Seabrook, F&C: There are several agencies that provide quite in-depth ESG research.

Lamb, Standard Life: Sure, but they’re not sought by the issuer at the moment in the same way that the credit ratings are.

Seabrook, F&C: They’re not sought by issuers, which is a good comment. I would suggest that sitting on our side of the fence, we want to protect areas in which we can add value, and if that’s one of them then maybe we could hold on to that and I wouldn’t standardise something which we could lose a fee for.

Goodland, Towers Watson: I don’t think we should have a standard approach because it’s up to every investor to work out what they think they can add, what’s their edge. When we’re assessing investment managers we look at the extent to which they identify and assess ESG factors as they relate to their particular investment strategy. Obviously it’s not applicable to all strategies, but we’ve taken the lead on equity and now we’re looking at the bond managers we’re placing money with to explore the extent to which ESG is relevant and how they think about this in practice.  

Hamich, KfW Investments: There are so many different investors in the SRI market. Ethical investors have a totally different view on things than others so you need some freedom for everyone to put down their own thoughts into the investment.

At the same time, it makes it harder for the market to develop. When an investor decides to look at socially responsible investment for the first time, it’s a really complicated thing to assess.  

On the credit rating side you have ratings between agencies which are more or less comparable. On the SRI rating side, the ratings are not comparable. Every rating agency has its own approach. 

It’s still a bit complex.

Goodland, Towers Watson: Often there’s not sufficient information available about SRI funds to understand what the environmental or social dimension is so more transparency would be good.

Katugapola, Morgan Stanley: I’m curious to know from the investors around the table, have you found third party opinions on the SRI credentials of a green bond necessary, useful or completely redundant?  

Hamich, KfW Bankengruppe: Well, it is helpful because it’s independent.

Kinnersley, Nikko Asset Management: It’s certainly something we’ve used as a reinforcement. Whether it’s essential, I don’t know, but it certainly helps that it’s not just us and the World Bank who think the bond is great and that there is some independent verification.

Perezgrovas, Daiwa: Some degree of standardisation is needed. As a complement to public issues, one development I would like to see in the international market, that we have seen in Japan, is an increase in the number of private placements in the SRI space for investors that have specific requirements. This would represent a more direct involvement from the investor community in specific projects funded by one particular issuer. 

The more we see these private placements — and I understand the potential disadvantages of participating in such trades — the more familiar investors would become with the projects funded and the less concerns they may have about liquidity issues.

Brown, Citi: Whereas small private deals have their place, we’re also focusing on bringing liquidity into the sector with large benchmark-style issuance. Transparency is the key word here. And if some form of external certification helps new investors to feel comfortable, it can only be a good thing. But what this market does not need is a gatekeeper or some kind of bottleneck, which limits the flow of supply into the market. We want a democracy and as many people participating in this as possible.

Jones, Rathbones: It is not a necessity for everyone around the table who manages SRI and ethical bond funds. We are doing our own due diligence at the moment anyway. If it provides an extra level of comfort for some investors, that’s fine, but I don’t see it as a necessity. 

Homsi, Generation Investment Management: I do not mind about liquidity because the capital we’ve been entrusted with by our investors is long term patient capital. The market has to scale-up to provide both liquid benchmarks for mainstream bond investors as much as higher yielding products that are less liquid for other investors. It’s just a matter of providing different strategies for different mandates and investors. 

EUROWEEK: What would be the one thing that the SRI market needs to aid its development on its way to maturity?

Perezgrovas, Daiwa: Greater transparency. Our investors are asking not only for information on the projects themselves but on the progress and the development of these projects. They want to be updated on a regular basis about what’s going on at a particular wind farm or thermoelectrical power plant or water treatment plant.  

Jones, Rathbones: A time machine, so we can take investors forward 15, 20, 25 years and they can look back at these kinds of conversations and see that that these investments will probably make good investments in 25 years’ time. 

Foden, Royal London Asset Management: Yes, a time machine, to steal Bryn’s point. You need a track record until just the empirical evidence improves that actually embedding sustainability, and ESG in particular, governance within a bond fund framework actually does deliver better risk-adjusted returns. 

Homsi, Generation Investment Management: Transparency of data and structure is key. And the endgame will be to remove the word sustainable or the letters SRI as it should just be recognised as smart, good investing.

We need to see people adopt these ideas more widely, this is when the market will really be at scale. 

Lamb, Standard Life: Given that we take a holistic approach, there’s nothing about a segregated SRI bond market that’s going to assist us in investing at the moment, but we would like to see greater issuer transparency. 

Buchta, Bank of America Merrill Lynch: Speaking very specifically about the green theme bonds, we’ve made major progress in making them more liquid and benchmark-sized. The next step is to then bring additional yield by bringing in different credits, different issuers to really broaden that theme bond market out across the entire spectrum. 

Katugampola, Morgan Stanley: The key driver will be the investor community. The fact is that there’s a growing focus on SRI as a key component of the analysis for investments. 

The more pressure investors put on the issuers to deliver that to you, the more you’ll see a growth not only in terms of greater disclosure, and greater transparency of key ESG criteria, but also to Suzanne’s point — you’ll also start to get more thematic bonds, if there is that demand, and a broader range of issuers coming to the market with thematic bonds as well. 

Dyakova, EBRD: We need to think about what the goal is and whether we call it green or sustainable or SRI investments. It all started with the notion that we want to improve standards of living, and we want to invest in something that is sustainable, be that improving water efficiency, or making energy more affordable for the population or for businesses. 

It’s all those factors and how they fit into the overall goal, whether that’s in 25 years or 50 years. Then we need to recognise what kinds of products are needed to meet these requirements and also recognition from investors to support this market. 

Seabrook, F&C: It’s probably the one thing I’ve wished for since being a bond investor and that is that issuers realise that shareholders aren’t their only long term providers of capital and engage more thoroughly, more regularly and more transparently with bondholders too. 

Hamich, KfW Investments: I would like to have investors not take the short term view. Not to take a 12 month view, but take a look beyond that one year horizon. You should integrate ESG criteria into your investment decisions — take a medium term, long term view to compile a better risk profile of a company. 

Goodland, Towers Watson: While I don’t wish for negative market events, they can serve as a reminder to investors of the relevance of ESG factors. 

In recent years there have been several examples of companies getting into difficulty due to poor governance or mismanagement of environmental and social aspects of their business and investors have felt the financial impacts. 

These events remind investors why incorporating ESG factors is prudent from both a risk and a return perspective. 


Brown, Citi: We wish for more issuance, but it is already happening. The money following this sector has grown exponentially and it’s going to continue. 

We’ll see more supply and more of what everybody here is asking for. 

Kinnersley, Nikko Asset Management: I want to see much more of the $100tr global bond market being designated to bonds that are characterised by transparency and additional positive externalities. 

I believe bond markets can be a big driver for change and that’s an opportunity that all of us in capital markets are foregoing at present. I would like to see 10% of bond markets made up of these types of bonds in the future so that a meaningful positive impact can be achieved to help address the many serious issues facing the world. 

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