While the green bond craze has taken supranational and agency borrowers by storm, it has been slower to catch on among bank issuers. One of the only issuers to have marketed a bond specifically mentioning any sort of social responsibility credentials is Rabobank, which priced its third series of ‘Agri Bonds’ in August this year.
Rabobank has its roots in agricultural lending anyway, so how is the Agri Bond any different? According to the marketing material, the proceeds from the bonds will support the bank in the work it does for various projects, lending and other financial support to enhance sustainable business practices in agribusiness in developing countries
“One of the biggest issues the world faces is how it will be able to feed nine billion people by 2050, and agribusiness in developing counties is the key to social responsibility and sustainability,” says the marketing material.
It’s heavy on the classic SRI buzzwords, but light on detail of how exactly investors’ money will be used. And some might say it is too easy for an agricultural bank to dress up a Uridashi bond as an SRI investment.
The first move
Still, it’s a start. And as Julia Hoggett, responsible for EMEA green DCM at Bank of America Merrill Lynch points out, it takes someone to make the first move for others to sit up and take notice.
“Some institutions see themselves as naturally a better fit to SRI,” says Hoggett. “They are further down the curve in terms of working out what they might do to externalise what they’re doing on the lending side within their funding operations.”
“These theme bonds have a value, because one of the ways of integrating environmental, social and governance values into the way fixed income investors evaluate credit is to use the mediation of a themed bond to focus issuer attention and provide people with a dedicated product. Then over time banks and corporations should come to know that their ESG credentials are a core part of their credit.”
It’s about image
Theme bonds are only one side of the market, however. There are plenty of dedicated SRI funds that, rather than waiting for supply to come to them in a nice green package, base all of their investment decisions on firms’ environmental, social and governance credentials.
Plenty of banks are vocal about this side of their corporate image. Société Générale, for example, stands out for its commitment to reducing carbon emissions, and Santander has trumpeted its commitment to higher education. But it is yet to make an impact on the way most of them raise funds.
“Banks do care about ESG,” says Suzanne Buchta, responsible for Americas green DCM at BAML in New York. “They publish substantial corporate social responsibility reports, participate in the carbon disclosure project. They care about their perception in the market.
“The extent to which ESG screening is going on among fixed income investors is something everyone is learning about. It’s a newer phenomenon for fixed income. Syndicate desks all around the world are learning about it — but I would be surprised if it has made its way into very many treasurers’ minds yet.”
Bigger issues
Part of the problem is that treasurers have bigger fish to fry, such as how bail-in regulation might affect their senior unsecured spreads, or when to pay back the money they borrowed in the European Central Bank’s long term refinancing operation.
“Banks are worrying about how to be profitable again after the crisis,” says one FIG syndicate banker. “Their concerns are elsewhere. If you mention SRI in a meeting with bank issuers, people start to smirk.”
But at a time when regulators are pushing for more stable funding structures, there could be a very concrete benefit to looking at SRI, quite apart from its impact on the corporate image. SRI-conscious investors are, by their nature, a desirable account base for issuers, says BAML’s Hogget.
“SRI investors are naturally biased towards a longer term buy-and-hold view. They care about the credit in the long term. It is an account base that issuers should naturally want to gravitate towards. They should understand the need to address their concerns.”
