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SSAs: pioneers of SRI bonds still leading the way

Supranational and agency issuers were the early adopters of the SRI bond format, creating a market and developing standards for others to follow. While other sectors are enjoying the fruits of those labours, the SSA pioneers are still focused on bringing further innovations — from the development of social bonds to higher reporting standards, to the introduction of the last ‘S’ in the acronym: sovereign issuers. GlobalCapital brought together many of those market leaders, together with bank experts and SRI investors, to discuss the latest innovations and the growth of the market.


Participants in the roundtable were:

Kris Devos, global head of debt syndicate, ING

Nathalie de Weert, senior capital markets officer, euro division, European Investment Bank 

Justin Eeles, senior partner, head of portfolio management, Affirmative Investment Management

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

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

Christian Hardt, investor relations/ESG specialist, NRW.Bank

Crispijn Kooijmans, head of public sector origination, Rabobank

Chris Wigley, senior portfolio manager, Mirova

Isabelle Laurent, deputy treasurer and head of funding, European Bank for Reconstruction and Development

Tom Meuwissen, general manager, treasury, Nederlandse Waterschapsbank

Ralph Ockert, head of syndicate, DZ Bank

Rodrigo Robledo, head of capital markets, Instituto de Crédito Oficial

Ulrik Ross, global head of public sector and sustainable financing, HSBC

Marius Ruud, senior vice-president, international funding, Kommunalbanken

Otto Weyhausen-Brinkmann, head of new issues, capital markets, KfW 

Graham Bippart, moderator, GlobalCapital

: Green bond issuance in 2016 reached $41.8bn at the end of August, according to the Climate Bonds Initiative (CBI). That’s still some way off the $100bn annual target. Where do you expect issuance to reach by the end of the year? 

Kris Devos, ING: If you try to increase the numbers every year, it’s going to be very difficult. We have to look at the quality of the issuers and number of participants as well. If you look at the issuance over the last year, we have seen an increasing number of new green issuers, including smaller SSA issuers coming into the market. That’s much more important. If you also see that there are a large number of new investors entering the market, that’s important as well. 

We will see an increase compared to last year, but maybe not in the same way as we have seen over the last couple of years. If we see an increase of 15%-20% at the end of the year compared to last year, that’s fine. That means $100bn will not be reached this year or next year. But in a couple of years, we might be there. 

To me, it’s much more important to see the right identification of issuers. That’s also what investors like. Investors want to see more issuers entering these markets — they want to see more green but also social issues coming into the market as well. 

Ralph Ockert, DZ Bank: I don’t know when they made up the number, but it would require more than $8bn per month. Remember, the start of the year was really tricky and there are a lot of issuers here at the table. To get your funding needs done, you’ll probably think in the beginning to do your conventional funding. If you want to add a green bond, you would add it at the back of your funding. We will not get the $100bn this year. 

Justin Eeles, Affirmative Investment Management: We will get there perhaps fairly quickly because of markets like China, where we’ve seen very large issuance and there is a very large need for funds over time. 

Chris Wigley, Mirova: We are seeing increased issuance every year, we want to see growth of the market — but not at any price. We don’t want to see any erosion of standards at all. We have to maintain the integrity of the market too. Forecasts are just forecasts. They’re not that material.

Crispijn Kooijmans, Rabobank: I agree. I would rather see four credible inaugural issuers each doing a $500m bond than one issuer doing a $3bn deal. 


Christopher Flensborg, SEB: The numbers are one thing. The other is what’s happening behind the scenes. A lot of institutions are building their infrastructure. It’s going from dipping the toe in to taking an institutional approach. It takes time to identify who you want to be and how you want to do that. That’s been happening over the last couple of years and it’s going to happen for a lot of other institutions this year and next year. That’s going to be progress. 

But that is also creating a better system. Consequently, it’s going to expand quite heavily. Due to that, it’s going to reach $100bn quite soon. We had an estimate of $80bn early in the year. We’re not going to be far away from that. 

Jens Hellerup, NIB: But isn’t it also a decision for a lot of issuers? These bonds that are labelled green are the tip of the iceberg.

There’s a lot of bonds which, in fact, could have been in green format if they just wanted to call them green bonds, like some of the transportation train companies. They just need to take the decision and issue the green bonds.


Devos, ING: One easy way to get to $100bn far quicker is, of course, the sovereign green issuance. We will see France entering the market next year and if a few other sovereigns enter, you will quickly get to the $100bn. 

Currently, the market is about one third corporates, a quarter SSAs and a quarter financials. The SSAs have the biggest numbers in terms of issuance per transaction. If a few of them issue more and you have new entrants like sovereigns, that’s going to give a big boost to the overall volume. 


: Being as green bonds are a fairly nascent bond market, to what extent is it likely that other emerging markets that are developing capital markets would be incentivised to also have green bond frameworks in place as they develop? 

Ulrik Ross, HSBC: We have a working group under the ICMA Green Bond Principles team. It is called the new market working group where we try to compare and support the development of each emerging market. It’s clear that some markets are moving quicker than others. In some countries the climate agenda is higher than in other countries, which clearly helps accelerate green bond issuance. 

That is the case, for example, in China, where they, through a centralised efficient decision making system, have the ability to mobilise a lot of supply very quickly. They’ve been pioneering a lot of regulatory features that we expect to be implemented in the other capital markets around the world. This will be a progression over time. Emerging markets are likely to be an extremely important component. 

In India, they have a slightly different approach. It’s very much supported by their stock exchange on the listing side and they’re trying to ascertain which mechanisms people should think about, but there isn’t a regulation in place, in the same way as you have in China, which is a positive standalone case. 

Also Latin America is picking up and we can potentially expect to see a lot of issuance coming out of that side of the emerging markets.

When we travel around the world we have been experiencing a broader willingness to engage and improve by many stakeholders such as the regulators, accounting providers, stock exchanges etc. And at the political level, there is really a willingness to want to transform. 

Some stakeholders are still scrambling with what it should look like. In Europe we don’t have one standard that has been cemented by any sovereign yet. It is impressive that in many cases that emerging markets are a frontrunner on setting a standard for the capital markets. The western world has to catch up quickly if they do not want to be left behind.

Flensborg, SEB: We are working very closely together with KfW’s sister organisation Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), providing technical assistance in trying to establish a forum for transferring experience about what investors want in Europe and the US. We look at how the green bond market has been built up, what kind of moments and what kind of processes, what kind of quality assurance needs to be in place. 

Together with the officials of central banks, ministries of finance and interested organisations, we have been establishing a platform where we are educating bankers. Our competitors, our colleagues, the investors, regulators, academics for verifications and borrowers in Mexico, India, Brazil and China. We work together to establish a communication platform. 

This is not only about telling the borrowers and bankers in those countries about what is required by investors in Europe and North America — it’s also for our banks and our service providers to understand the requirements and the needs for capital in those markets. Creating communication between those markets is essential. 

We all have different definitions of green, we will have that for a while and we will have to accept that. What we are trying to do with this communication platform is to standardise the methodologies. If we have the same checklist and go through the same processes, it means investors in Europe or in North America can understand how a green bond is structured when it comes out of China or Brazil. 

It also means that a borrower or a bank in India, Mexico or China understands how to structure a note in case it wants to have investors from Europe and North America to come into the deals. 

Wigley, Mirova: This is very important. When we compare, for example, an emerging market green bond issuer with a developed market issuer, we’re checking at least three essential elements. 

One is the credit risk, one is the environmental, social and governance (ESG) profile of the issuer and the third is the green bond framework. When comparing an emerging market issuer with, for example, a supranational like the World Bank, there are going to be big differences. There were issues of transparency and impact in the early days of the emerging markets. But over time, we’re seeing standards increase. And as more countries like China and India base their standards on the Principles we’ll see a strengthening of those standards over time. 


: How much volume of SRI bonds are the issuers around the table planning to print this year? Do you have any forecasts for how much annual SRI issuance you’ll reach in five years’ time? 


Nathalie de Weert, EIB: EIB printed a bit more than €4bn equivalent in 2015 and so far this year we’ve done €3bn. We do not expect to do more than last year. Even though we lend 25% of all our activity into climate action, energy efficiency and renewable energy, the two sectors we have set as eligible for the proceeds of our green bonds represent only a part of that. And even though we are the biggest lender in this area, we are limited by the amount of disbursements we have per year. The level of lending to these sectors remains stable, but if we were to enlarge the scope of sectors eligible for our green bonds we would also be able to increase the amount of issuance. 

In 2015 we lent in total around €7bn to renewable energy and energy efficiency projects. However, we do not see flow from our green bonds immediately because there is a delay between the time when the loans are signed and the project disbursements. 

Otto Weyhausen-Brinkmann, KfW: It’s similar for KfW. More than one third of our annual lending is for environment and climate protection, so this amount is exceeding our green bond issuance by far. However, we have decided only to use a part of that as the underlying for green bonds, i.e. a particular loan programme. The criteria to apply for loans under our renewable energy programme are very strict and clear, and the impact is being assessed by a third party. This allows us to provide investors a very high degree of quality and transparency.

So our renewable energy loan programme is the maximum size we can issue in green bonds. That’s expected to be around €3bn a year, which also reflects the size of our green bond issuance. 

Isabelle Laurent, EBRD: We have issued €850m equivalent in the first eight months of this year and do not have full year forecasts — or, indeed, five year forecasts.

Tom Meuwissen, NWB: We’ve sold three water bonds so far. Last year, we did a €1bn 10 year, this year a €1.25bn 10 year. We expect to do €500m-€1bn of water bonds each year and that’s based on our lending to the water authorities. They are very green indeed so this is a very strong format. For the rest, we’ll explore the possibility for issuance of social bonds.

Christian Hardt, NRW.Bank: We started in 2013 with our first green bond transaction and since then we’ve issued green bonds annually. The upcoming green bond 2016 is already the fourth one. Our target is to issue a green bond with a size of at least €500m per year. 

Our green bond programme is based on the concept of implementing state climate and sustainability policies in order to reach the 2C target. Important is our reliable use of proceeds and clear wording on the use of proceeds. The bond refinances green NRW.Bank loans out of the current calendar year. Since the shortest loan maturity determines the longest maturity of the bond, a green default is impossible. 

Usually our green bond is issued end of third quarter, or at the latest the beginning of the fourth quarter. A second opinion is part of our concept since 2014, and since 2015 we provide a detailed impact report aligned to the MDBs’ framework for impact reporting. The impact is evaluated by the Wuppertal Institute, an environmental think tank of North Rhine-Westphalia. 

The upcoming green bond will again focus on climate mitigation projects, primarily renewables. In addition, the restortation of the Emscher River is a constant part of the asset pool and is a perfect example for climate adaptation projects.


Marius Ruud, KBN: It’s the same situation with KBN. We do $500m per year. That’s the size we have the possibility to do. We can’t compare ourselves with EIB or KfW when it comes to volume. We did our first public green bond back in 2013 and we’re going to do another one in the fourth quarter.

Rodrigo Robledo, Ico: We did our inaugural social bond for an amount of €1bn two years ago. We chose ‘social’ instead of ‘green’ bonds in order to guarantee that we are able to print ESG bonds on a regular basis. Social bonds for lending to SMEs, with special emphasis on employment creation and retention, fit perfectly with our business model.

We are committed to print one transaction per year and the size will depend on the funding programme for that year. This year, with a €4bn programme, we have done our second social bond for a size of €500m. 

Hellerup, NIB: We’ll do about €800m, which we have done this year and last year. I figure it will stay about the same or a small increase. We could probably do more because we have the environmental mandate and 40% of our disbursement is to environmental loans, but we only take the best ones. 

An important factor also is that if we look at implementation risk, what is the risk if we don’t achieve the expected impact? That is important and it is in our framework, so we are limited up to about a €1bn. 


: Are we ever likely to see green bonds priced significantly through conventional curves? If so, what will drive that? Would legally binding language on the use of proceeds lead to tighter pricing?


Eeles, AIM: Ultimately what you’re buying is the credit risk of the entity, but it has these other features as well that aren’t actually legally binding in that it’s not going to stop you getting your return if they don’t quite meet all those features. It may have an impact on secondary pricing if it’s seen that the entity hasn’t fulfilled the mandate that it had said it would. 

That would knock on to the rest of the borrower’s issuance because it would clearly be an impact on its reputation that it structured the green bond but didn’t follow through. There is a strong reputational element once an issuer issues a green bond. 

We have seen some evidence of differential secondary pricing. TenneT gave the example of its green bonds. Because demand for green bonds is very high and it’s a broader investor base — there’s additional investors beyond the normal buyers of that credit — it lowered their green bond yield curve relative to their other issues. 

In primary issuance, I’m not sure they’d be different in terms of a green and a non-green bond when it’s the same credit exposure. But the example of TenneT shows that there is great demand for green paper. Maybe the buyers are a bit stickier so the green bonds maintain those lower yields. That has a knock-on benefit to the issuer anyway, because investors then may look at the other issues and decide that they do fulfil their mandate, then they’re more willing to buy that credit. Because the green paper is trading at a lower yield on a secondary basis, the average yield for TenneT falls, so it gets a benefit for having issued green bonds which could be reflected in subsequent issuance.

Wigley, Mirova: We get this question a lot. The most common type of green bond is a use of proceeds bond that has a link to projects. If the credit risk is the same as for a conventional bond from the same issuer, then the return should be the same as well. 

However, there’s huge potential in green bonds for green infrastructure. There’s huge potential for securitised deals. So taking use of proceeds deals aside, if we were to look at a secured deal where the quality of the projects is the collateral, then there’s no limit to how much spreads can tighten because the spreads will reflect the quality of the collateral of the projects themselves. 

Laurent, EBRD: I think it is highly probable for corporate bonds, but is rather more uncertain for SSA issuers, given that our normal bonds are classified as green by a number of SRI investors.

I think it would be problematic to subject green bonds to more stringent legal requirements, especially if the return is not linked to any pre-specified named project. With the usual SSA green bonds, the investor takes the credit risk of the issuer, who commits to make certain payments, and therefore while they do so, it is not clear to me that the investor could or should have legal remedy.

While green bond issuers all commit to utilising the proceeds for green projects, especially where there is a commitment that the proceeds will be directed at “new” green projects (rather than refinancing existing ones), there is inevitably a risk of delays or cancellations, and thus that the proceeds may not be used as intended. The documentation would therefore almost certainly have to make clear what would be done with the proceeds under such circumstances. 

I therefore doubt that more stringent legal requirements would be desirable, and would offer pricing advantages.

Flensborg, SEB: Another issue is the time slots. We have been bringing a lot of issues into the market. Even extremely well-known and recognised names, like KfW, have been able to get new clients. These buyers said they didn’t invest in these kinds of names because it was not their core, but have taken time to understand them. 

For issuers that have been serving society all through their lifetime it has not really been the job for banks and investors to go into that. But due to green bonds, issuers suddenly have a chance to talk about not only their mission, but also their management of it. That is not only broadening the investor base but also giving much more loyalty and much more trust to the organisations. And trust is reflected in cash. 

What we see already is that issuers willing to do this effort get much more time and credibility with investors — and bigger lines. That creates cheaper funding not only for the green bonds, but all of them. If you try to diversify between the green and the normal bonds, you’ll go back to the old times. You will have a niche that is called green but you wouldn’t change the behaviour of the financial society. That element is important to the pricing discussion. 

Eeles, AIM: In the medium term you may find those issuers that issue green bonds, because of the additional transparency involved with the green structures, give investors more information, putting them in a better position as the credit has more dialogue with the investors. It’s that openness and transparency that investors will prefer and you’ll eventually perhaps find that green issuers will be the ones who benefit in terms of their funding costs. 

Meuwissen, NWB: There are definitely benefits during the execution process. You don’t see different prices in secondary curves but, during the book building, let’s say 50%-70% are green investors that would otherwise not be in the books. That has an impact. It can make a difference of one or two basis points during the execution process.


Kooijmans, Rabobank: There is also market access. If investors know you’re only going to issue a green bond once a year, investors will buy when you issue. In secondary markets it’s difficult to get green bonds, in size especially. If you have that one opportunity in the year to buy the bonds, you will more likely do it as a dark green investor. So even during more volatile times, it would still be possible to issue. 

Devos, ING: I disagree. We’ve seen a growing number of investors in the green books. However, if you really talk to green investors, are they accepting lower yields for green investments compared to the conventional bonds in the current low interest rate environment? Because if you look at SSA issuers and the yields that they can get, it’s difficult to convince them about accepting lower yields when we’re talking about zero yields on certain of these assets. That’s the difficult part for investors buying green SSA issues in today’s market. 

If you look at financials and corporates, you see a small advantage coming into the green bond market. There’s less issuance there per corporate or per financial. But there is a bigger book when you issue a green corporate or a green financial. That creates a dynamic for a syndication to be priced a few basis points tighter. 

As long as we have this very low interest rate environment, maybe there’s a few examples of SSA deals that can squeeze one basis point with a bigger book, but it’s difficult to accept for certain of these investors. 

de Weert, EIB: When we came back to the market with a new issue in euros in 2013, we didn’t want to price our green bonds differently than other issues. As Christopher said, trying to price through one’s curve would send us back to the niche market of 2007-2013, and would prevent issuers from reaching the broader investor base they want to reach. 

Robledo, Ico: When we did our inaugural social bond we were looking more for investor diversification rather than tighter pricing. At that time, some investors had some concerns on buying Spanish public risk. Furthermore, for some of them, the only way they could buy Spain was by buying ESG bonds. 

It was also a matter of labelling the bonds and marketing ourselves in a world where public sector issuers need to say that we are doing something that really has an impact on the environment and on society. In the latest social bond we have also seen some price benefit, as we were able to price it flat to secondaries. 

Meuwissen, NWB: With green bonds, your proceeds are limited. Normally, when you aim for a €1bn bond and you have a book of €3bn, then you can raise the size to €1.5bn or €2bn, also to accommodate the investors. But with green bonds, that’s not possible because your proceeds are limited. This can lead to a tightening of the price. 


Hardt, NRW.Bank: As a euro house we have the ambition to just issue euro green bonds to build a green bond curve. With one green bond a year this takes time, but we want to display a possible funding advantage and forward that advantage to the green loans to drive the green infrastructure that is needed. 

Thus, showing a green bond curve yielding below the regular curve is part of our green bond concept and the latest transaction increased our confidence that green bonds price through the curve.

Ockert, DZ Bank: But could we flip it around? We’ve just talked about it being cheap for the issuers. Couldn’t we say, because we are all serving society and the country, that we could have tax reductions on green bond issuance from the owners of your institution so that investors could participate with a higher return? 

Flensborg, SEB: It’s a short term issue. Tax incentives come and go. That means it’s very difficult for institutional investors to make long term strategies for them. You will see a lot of private clients but not institutional investors. Capital encouragement, like lower capital ratios, would be a good way of encouraging institutional investors, but it depends on what kind of investors you want to attract. 


Ross, HSBC: I would disagree with Christopher. Both risk weighted assets and tax incentives like we’ve seen in the US municipality bond market have worked extremely efficiently and I can see no reason why the retail market would not benefit significantly from that. We have several markets locally also in, for example, Denmark where you have different tax status between different bonds.

The RWA would definitely allow a dialogue with regulators to support that in the same way as they had small and medium enterprise (SME) paragraphs included in Basel III. So why not for the environment as well? 

We have a lot more disclosure and a lot more information at hand than we have ever had before. We’re likely to see a lot more requests for disclosure and information from rating agencies, which are coming up with new methodologies, the Financial Stability Board’s (FSB) task force is starting to ask questions and coming up with voluntary guidelines for what disclosure might look like, for corporate and FIG and potentially also for investors. New scoring methodologies have been introduced for the investor side from Morningstar and MSCI. The stock exchanges are coming up with new listing requirements. I would not be surprised if we saw accounting rules changing over time as well. 

There is significant momentum around this. Investors are realising this and they’re asking us, “How do we set ourselves up to meet those changes?” We’d seen a centralisation around green portfolios being established by the first movers. But I definitely see a lot more investors spending a lot more time developing holistic ESG strategies for their entire portfolio, and their entire business. This is because they will potentially need to report on that and of course because they want to make a difference. 

There are a lot of very obvious drivers behind the dynamic we’re seeing today. Will that spill into a different mechanism and a different reflection of pricing? I am not so sure because first and foremost you’ll always buy a credit. If there is additional demand that exceeds supply for a certain product type, yes, we will get some price dynamics that are positive, which we from time to time have seen, because there is a lot of focus on moving the dial from one spectrum to another on the investor side. 

But when that move has all taken place and it’s a reflection of everything you do, we’ll find a natural plateau for pricing that probably will be more in line and reflective of credit pricing, rather than the purpose of the bonds. 

It’s a very interesting time and a lot of investors are changing and engaging in the topic. We have investors that have been experts from day one, like Chris from Mirova. Then there are other investors trying to emulate policies and strategies with regard to negative screening, positive selection criteria, thematic investment or even impact investment and so forth. 


: Is that something that investors are getting ahead of and starting to mirror? Impact reporting, negative screening and so on? Or do you wait for the regulation to come? 

Eeles, AIM: Impact reporting is very important. There are changes in regulation led by the French. Maybe over time that will spread to other jurisdictions. 

Different countries are in different stages. The UK has an awful lot of other things to deal with in the short term and so maybe there won’t be so much of a focus on that element of regulation. But France is taking a lead in requirements from asset managers and the likelihood of the state issuing green bonds next year. 

It’s going to be led from two sides. There’s regulation but there’s also, hopefully, the asset owner demand for more information as well. That will help drive reporting requirements from the asset managers. 


Wigley, Mirova: The French government has set a good example. It’s not just that requirement of institutional investors, it’s also the labelling of funds which is all part of the process of trying to attract money into green assets. We hit a very important watershed at the end of last year with the Paris agreement, when nations signed up to keep global warming well below 2C. The question is, how is that going to happen? We think green bonds are part of the solution. 

The Institute for Climate Economics (I4CE) released a good research paper a few weeks ago that said it would welcome more intervention from governments in terms of encouragement, setting direction and perhaps even setting a framework for the green bond market, so there would be more joined up thinking as to how the green bond market and governments can work together to keep global warming down. 

Ross, HSBC: Maybe we should also touch upon the threats for the green bond market.

As the market is still governed by a voluntary set of guidelines for the majority of markets around the world and there are no ramifications for issuers not delivering on the obligation besides reputational risk, we have been able to find a middle ground between investors and issuers. If we are to take it a step further and add a strong regulatory framework to the green bond market, we might have some players finding it less attractive to go into this market. 

It’s very important that we have the right balance between obligations and the product. All of this will be reflected in the pricing of green bonds. 

de Weert, EIB: We shouldn’t forget that we have NGOs watching and closely following market developments. Reputational risk is very important. So there is a strong incentive for issuers to do what they say they will do. The Principles are widely acknowledged and have supported the market development so far. For example, the French labelling initiative has recognised the Principles in its framework.

Ross, HSBC: To clarify, self-regulation means reputational risk between investors and issuers and other stakeholders. 


: How important is adherence to the Green Bond Principles when investing in green bond? Or do you come up with your own criteria? And is it more of a holistic ESG approach?

Wigley, Mirova: The Principles are incredibly important. They give guidance to the market, to issuers, investors and intermediary banks. We use them as a foundation, but we also try to go a stage further. That’s because we’re trying to differentiate ourselves as an asset manager. 

A lot of thought goes into them. There are a number of people here who are members of the Green Bond Principle’s executive committee. We speak regularly on the phone and we’re regularly enhancing the Principles. That’s a positive for the market and I’m pleased that various countries such as China and India are basing their standards on them. 

Eeles, AIM: They’re a very useful framework but it doesn’t excuse an asset manager from doing due diligence. If something is seen to adhere to the Principles, that isn’t enough. The Principles arose in response to issuance — they didn’t lead issuance. They have developed as well, which is good. As issuance has developed and we’ve moved on to social bonds as well, there have been additional Principles added. That shows that it’s a useful framework but it’s also in some ways reactive to the growth in what is still a developing area of the bond market. 

Devos, ING: For bigger investors or those with more experience in the matter, the Principles are complementary to the investor’s own due diligence. But smaller investors definitely need these Principles as a guideline. They cannot investigate all the green aspects themselves. That’s very important for the growth of this market and the enlargement of the investor base away from, let’s say, the real green investors. 

For smaller pension funds and insurance companies that haven’t bought green bonds yet, it can be a guideline. It’s very important for them to guide themselves in how can they responsibly invest in the future, not only for green but also social bonds. 

de Weert, EIB: They’re also important for issuers. For years we were approached by borrowers asking us how to issue green bonds. The Principles represent a set of guidelines that helps issuers design their framework for issuing green bonds. 

Kooijmans, Rabobank: It’s also about transparency. With the Principles and the checklist, it’s a very clear way for everybody to see what they have to do. If you miss something or decide not to provide certain information of follow the guidelines, you need to at least explain why.


Ockert, DZ Bank: It’s good for the intermediaries as well. Because of the Principles, we can execute bond sales — even if the issuer has not been on the road beforehand — by appearing on screen then giving investors two hours for their decisions We don’t have it like in the former times, where we would open books on Monday and give investors a week to do due diligence, before they decide on Friday whether they will buy. Nowadays it is a fully execution on one day, or even within hours.


: To what extent are investment strategies determined by, or limited by, second opinion providers? How important are third party opinions? 

Eeles, AIM: They’re an influence on the decision making process. We have our own verification process. Sometimes the second opinion providers have helped define the framework, so the impartiality of the opinion could be questioned. 

It’s an input into the process. Sometimes it gives you extra information above purely reading the framework — it may give more colour about to what extent the issuer has followed the suggestions for their framework. 

Flensborg, SEB: From an intermediary’s point of view, third party verification means the borrower has been going through the processes and been willing to share the processes. 

It also means that we can get an overview very fast. Let’s say we are invited into a deal we hadn’t known about, that we didn’t have weeks or months to work on. Suddenly we have to take a decision within one hour, so to get a very fast overview of not only the technologies but also the management and so on is very helpful with a verification. It’s the same for many investors.

Verification needs to be an essential part of a green bond. Then it’s up to us as a market to find whether the extra cost for creating this verification can be paid by the extra credibility issuing green bonds provides. From our perspective it’s been successful, but there’s still needs to be addressed. 


Hellerup, NIB: But you don’t update the second opinion. Normally an issuer gets a second opinion when it starts issuing the green bond. 

If that’s five years ago, there’s still something happening on each issuer’s framework, so it’s difficult or dangerous to rely too much on the frameworks sometimes. 

A credit rating would be updated annually, but this green opinion will not necessary be updated. Investors still need to do their homework.


: Do investors feel anything major is lacking from current reporting standards? What would you like to see added? 

Wigley, Mirova: We have to take a long term view. Impact reporting is important. But as investors, we can’t demand too much of issuers. There are various standards in reporting. We seem to get better quality from the supranationals than we do from corporates. But we don’t want the impact of regular reporting to dissuade corporates from issuing. We want it to be as simple and as easy as possible. 

If we were to set some long term aims for regular reporting, then perhaps we’d like to see more actual impacts rather than estimated. Perhaps, we’d like to see more than just carbon impact but also maybe some impact numbers in terms of water sustainability as well. But these are long term aims, they need to be measured and they mustn’t be too onerous for issuers because one of the most important things is to attract more issuers into the market. 

Eeles, AIM: Dialogue with the issuers is important in terms of encouraging them to report on impact as much as possible because there aren’t going to be easy metrics that you can place on reports from different issuers. They may not be entirely comparable — they may be operating in different fields. 

But from an investor’s point of view, part of the transparency of the use of proceeds green bond process is that one of the commitments is to reporting. That’s giving you more information about the issuer, the way they operate, their governance procedures and so on, which is to be encouraged. 

de Weert, EIB: On reporting, we have moved from reporting only the use of proceeds to enhanced reporting including the expected impact of the projects.

Now EIB is able to link projects to an individual bond. We have heard demand for ex-post reporting, so we have also started to produce completion reports for projects. However, one has to be realistic — this ex-post reporting may come a number of years after the bond has been issued. 

One important point is having comparable data and we need harmonisation of what we report, even if it’s an estimate. In 2015, EIB, together with 10 other IFIs, agreed on a set of metrics for impact reporting of energy efficiency and renewable energy. These efforts are being pursued in order to extend the reporting template to also include other sectors.


: One of the updates in June to the Principles were the introduction of templates to aid harmonisation. How useful will these be? 


Laurent, EBRD: Many investors were concerned that it was hard to find all relevant information on green bond issuance and especially how the issue/issuance framework is compatible with the Principles, so I think this is a huge leap forward in terms of clarity and ease of assessment.

de Weert, EIB: They should be useful. They are a quick way to check the green bond process of the issuer. 

Devos, ING: They’re especially very useful for newcomers, small issuers without the experience. If we can expand this it will enable new issuers to join the market. I’m talking about very small ones that probably only issue once a year and have green funding needs but are hesitating between a conventional and a green bond. 

We need to push every issuer with green bond potential to do a green bond. Then we can reverse the question on pricing. In time, they can ask why the conventional bonds were not priced wider than the green bonds, rather than vice versa. If we can bring the whole SRI world into this, that’s going to be the future. 


: What would people like to see in the next version of the Principles? 

Hellerup, NIB: More on reporting in general. A lot of work has been done on reporting in relation to climate change. 

A lot of reporting can be done on other subjects, such as water purification. There should be some numbers on, for example, phosphorus, nitrites or how much of the water purification area it serves. 

There’s the area of waste management where something can be done. For that it’s difficult to come up with a number, but developing that reporting will be important.

Flensborg, SEB: I agree. The guidance is going to increase. The Principles are basically a forum for collecting thoughts, administrations and good principles. That means they will not be extremely strict. They’re not going to go fanatic in a way that they define green, but they are going to give extremely good guidelines. 

Part of developing those guidelines is going into the competitive environment in respect to reporting — what should be reported, why should it be reported and how can it be reported. That will be for the next 18-24 months. 

Laurent, EBRD: I would like to see suggestions for impact reporting on the broader range of green bond project categories. 

Ross, HSBC: At ICMA we have six working groups addressing many different topics from impact reporting to new markets, standardisation and templates and so on. 

There is constant work within the executive committee to fine tune this. The working groups are starting up again after the annual general meeting so there is a lot of work that is going on behind the scenes. 

We’ll have to define the working mandate from each group and the goals and targets for this year, and then we’ll work our way through that and the outcome will be reflected in the Principles at the next annual general meeting.

Devos, ING: There’s still some development on social bonds. That’s much more difficult than green bonds but it’s about employment, healthcare, development and SMEs. There are so many areas that can be touched upon. 

It’s not easy for issuers to fully report on that, but more guidance there can be helpful, both for issuers and investors.


Robledo, Ico: It’s a very good point. We’re very interested in creating guidelines or social bond principles because investors have been requesting some framework related to the use of proceeds.

When we issued our inaugural social bond we used the Principles, but there was a demand in the market for something specific on social bonds. We have been working this year in a social bond working group under the umbrella of ICMA to set up these guidelines. We were able to add social bond guidelines to the Principles basically in relation to the use of proceeds, given that the rest is the same as for green bonds. 

But there is a lot of work to do. Within this working group, the idea is to add other participants — banks, investors and issuers — and to continue developing the guidelines to have more borrowers issuing social bonds. 


: Will there be a separation between green bond and social bond principles? 

Robledo, Ico: We are not there yet. The big players are the green bond issuers. We are newcomers. We are using the green bond methodology because it’s a very good framework. Why not use this methodology that’s been in the market for many years and already has a reputation among the investor community? 

The idea, in terms of reporting, is to switch the use of proceeds toward this new demand in the market. At this stage we’re not in a position where we need to separate green from social because we are talking about sustainable in general. If the Principles are there, we should follow them. 

Laurent, EBRD: The application of the four key Principles to social bonds is so clear, that it makes little sense to me for social bonds to be spun off.

Ross, HSBC: At ICMA, we had a long discussion about whether to have social bonds as a separate theme or whether to have them within the green bond framework. We agreed it was best not to duplicate too much work and to utilise all the good work that the green bond Excom group has done so far, so we created new guidelines for social bonds. 

But we are seeing a change in investor behaviour. In 2014 and 2015, it was very much around the green theme. But investors are now looking at ESG more broadly. The social aspect has a much broader appeal to many more investors due to that change. 

Over time, the social bond looks like it will grow up a little bit compared with where we are on the green bond side. Today we have a big brother and a small brother, but they might become equally strong over time. 

de Weert, EIB: But they are separated. We often see when we meet investors that some have a climate mandate and there can also be another part of their portfolio with a social mandate. 

Wigley, Mirova: When Mirova launched its green bond fund in June 2015, we had a lot of discussion as to whether it should be a green bond fund or whether it should be a green and social bond fund. Because of the challenges of climate change, we felt there was more demand for green bonds, so it is primarily for green bonds. 

However, there’s still lots of similarities between social and green bonds. There’s a lot of potential for social bonds and a lot of expertise on the Principles. Anything we can do to help develop the social bond market is positive. And whereas I can invest in green bonds for our green bond funds or sustainable bond funds, I can also invest in social bonds for our sustainable and corporate bond fund. 

Flensborg, SEB: I would be a little harsher. I fully agree, both from a personal and institutional level, with the need and urgency of social bonds. I also think they’re going to grow very rapidly.

But it’s important that we don’t forget that five or seven years ago we wouldn’t have this discussion. Over that time we’ve created a huge momentum around sustainability by isolating the pillars, not by combining them. 

The issuers around this table have been in this ever since they were born; investment banks have not. It’s extremely important for me, being an early adopter, to understand what I’m doing and be able to communicate that to my stakeholders. Isolating that either into social or into green makes it much easier. 

We have demand for social bonds both on the issuer and investor side. But green is a huge challenge noticed by the whole world and we have a momentum that we have created in the background — we shouldn’t forget that. We have cautioned against focusing on building the social market at the same time. We need to be extremely disciplined in not diluting what we’re doing. 

Kooijmans, Rabobank: They don’t have to hurt each other. You can take what you’ve learned from one market and apply it to the other. The social bond guidance is a big step forward. There is more clarity for everybody. 


: Are any of the issuers that haven’t yet done so considering a social bond? 


Meuwissen, NWB: We are. When you look at our balance sheet almost all assets qualify as green or social. About half our portfolio is social housing and we are looking to do something on that. I think a social bond is less straightforward than a green bond, it is not so easy to quantify the benefits. We need to have a good, transparent format and there’s a reputation risk at stake. We are working on a format that does justice to the social housing model.

Laurent, EBRD: We have been issuing microfinance bonds since 2010 and while our inaugural deal was targeted to retail investors, we have subsequently issued microfinance bonds for institutional investment. These “social bonds” were executed in ways that were consistent with our issuance of green bonds.

Kooijmans, Rabobank: That should be able to become a big market. Social housing, for example, is big in many countries. Bank Nederlandse Gemeenten issued the first social housing bond this year and was the first borrower to use the social bond guidance. We expect more. 

Ross, HSBC: We’d welcome some of the bigger issuers to consider this market as well, to become leaders and try to develop it. This is typically not within the mandate of the largest frequent borrowers today, but over time it should be put on the agenda.


Weyhausen-Brinkmann, KfW: Our mandate is to improve the economic, social and the ecological living conditions in Germany. So basically our entire DNA is about achieving positive impacts. 

But we are not yet willing to segregate our entire balance sheet into different kinds of thematic bonds. We’ll focus for the time being on what we have started — green bonds. We have achieved a lot but there is still a lot to be done. 

de Weert, EIB: We share the same view. Next to climate action, one of our mandates is to help deliver growth, jobs and cohesion in Europe. The social benefits of our overall lending activity mean that generally all EIB bonds qualify for ESG funds.

Robledo, Ico: Our mandate is to create wealth and employment in Spain. Most of our activities have a social impact. That’s why we have to go specifically for the social bond label. It’s a lot of work because the reporting is different than green. It’s really comprehensive. But it really makes sense and pays off.

While we’re having immigration and other social problems in Europe, which makes people wonder what politicians and European institutions are doing to cope with that, social bonds are a good way to prove that public institutions are doing something for social issues like employment creation, poverty reduction and access to basic infrastructure.

: To what extent would regulation help force harmonisation in the market? Would it be good or bad for the market? China is taking this approach, for instance.

Weyhausen-Brinkmann, KfW: No one should underestimate the reputational risk for issuers. When we started to think about issuing green bonds, we took that very seriously. The reputational risk outweighs all the benefits you have from issuing green bonds. 

After we developed our green bond framework, we were convinced that the quality and transparency of our green bonds are high. But for others, this might refrain them from issuing. If you set the bar even higher with more regulation, it would be very difficult for many issuers to enter the market. 

Laurent, EBRD: I believe that guidelines are preferable to regulation, as there is unlikely to be a static and uniform view of what is green both over time and across jurisdictions. 

I also don’t believe that a price benefit should necessarily change that, as it could be deemed sufficient to evidence compatibility with guidelines to receive the benefit.

Ross, HSBC: China is in a bit of a different situation. There is large government involvement in various sectors. Those policies make sense for China. For other countries with a different structure, it might not have the same tilting process.

Flensborg, SEB: The G20 has been working on green bonds and climate finance. It’s obvious that regulators will engage. They have the same challenge we do. Are they going to define or are they going to guide? My expectation is they’ll create some broad guidelines and that will be fantastic. 

Ross, HSBC: Guidelines are preferable to definition and regulation — unless there is a price benefit to the equation.