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FIG and corporate green bonds are flying, but who’s the pilot?

The green bond market began with deals from only the world’s top credits. But now, companies and financial institutions are a growing part of the sustainable bond world. Their commitment to the sector will be crucial in helping it reach full capacity — a necessity if the monumental task of financing the world’s transition to sustainability is to be achieved before it’s too late. But the market is still in its nascent stages, and there is much work to do before even senior unsecured green bonds are standardised, giving both issuers and investors the confidence in the asset class needed to scale it up effectively. GlobalCapital sat down with 13 market professionals on the sidelines of the Euromoney/GlobalCapital Sustainable & Responsible Capital Markets Forum in Amsterdam in September to talk about the big issues in the market.

SRI 7.1

Participants in the roundtable were:

Hans Biemans, head of sustainability, Rabobank

Daniëlle Boerendans, head of long term funding and

capital issuance, treasury, ABN Amro

Max Bronzwaer, treasurer, Obvion

Jeroen Dicker, group treasurer, TenneT

Ulf Erlandsson, senior portfolio manager, AP4

Christopher Flensborg, head of sustainable products and product development, fixed income and DCM, SEB

Lillian Georgopoulou, fixed income, green bond specialist, London Stock Exchange

Mike Koerkemeier, head of financial institutions, DCM, ING

Kai Poerschke, head of DCM origination, DZ Bank

Jonas Rosengren, portfolio manager, Vasakronan

Stephanie Sfakianos, head of sustainable capital markets, BNP Paribas

Bas Wetzelaer, ESG analyst, ACTIAM 

Bodo Winkler, head of credit treasury and investor relations, Berlin Hyp

Graham Bippart, moderator, GlobalCapital

: Let’s begin with the benefits that banks and companies get from issuing green bonds, besides just the reputational boost. Are issuers getting a pricing benefit, yet? Should they? 

Max Bronzwaer, Obvion: It certainly can help generate more awareness and respect for making assets more sustainable, as in our case with our Green Storm RMBS transaction this year, which comprised loans to improve the energy consumption and the CO2 generation from houses. 

As for pricing, there are two sides to the debate. One is from the more or less objective side: if there’s a difference in credit risk, in liquidity or in regulatory treatment then each of those elements, one could argue, should contribute to tighter pricing for a green bond. But you can look at it from a more subjective investor standpoint. Should investors be rewarded for or making a sacrifice for contributing to the climate cause by buying green bonds? 

My principle feeling is that in certain cases there should be a difference between regular bond and green bond pricing. Let’s say that for our next deal, we would be promoting the reduction of energy consumption by homeowners, giving them an incentive by giving them a lower mortgage rate, giving up (part of) our profit margin, for investments in energy reduction programmes.

If investors on the other side would not be able or willing to reward that in the form of a lower spread on the Green Storm bonds backed by those mortgage loans then ultimately we as an issuer would be stuck in the middle, subsidising energy reduction. I think both issuers and investors have a responsibility here. But I would like to hear the opinion of the investors and issuers around the table. 


: Jeroen, what’s TenneT’s perspective on pricing for green versus traditional bonds? Is there an advantage for the issuer?

SRI 7.2

Jeroen Dicker, TenneT: TenneT is playing a major role in the Energiewende in Germany [the movement to transition to a low carbon economy] and the energy change in the Netherlands. So, green bonds fits very well in our overall strategy. We have four green bonds outstanding as well as traditional bonds, and what we’ve seen is that in the secondary market, there is a pricing difference. So, it seems that there is something going on once the bonds have priced. But we did an academic study on the pricing of green bonds compared to normal bonds. And we can’t prove from an academic standpoint yet that there is any difference. 

What you see is that when you start bookbuilding on a green bond, there are certain investors who just are very willing to take larger parts of our offering, putting in big offers and being less price-sensitive than a lot of others. So, there is some sticky money involved in our green bonds. I don’t think they are willing to buy completely independent of price, but they are less sensitive than others. That was the case for the last four bonds that we issued. I hope that will continue to be the case, because if investors are supporting this market, it gives corporates an incentive to issue green bonds. 

Stephanie Sfakianos, BNP Paribas: The pricing discussion isn’t going to be settled any time soon, clearly. I have some sympathy for investors who point out that they buy on a risk return basis, and with a green bond, you are still after all getting corporate risk. Having green projects might make that issuer less fundamentally risky than other issuers, but the bottom line is their ‘green’ debt has the same risk-reward profile as their ‘brown’ debt.

SRI 7.3

Christopher Flensborg, SEB: But with regards to more than short-term value, there’s a decision to make for issuers. It is possible to price through the traditional curve at times, but that decision also means that issuers will end up focussing on the niche market, which is less price sensitive, at the expense of engaging mainstream investors. Pension funds, insurance companies and treasurers — they all have a financial and fiduciary mandate and they’re not allowed to pay half a basis point more for green than non-green bonds, at least not currently.

And that means that if we really want to engage the mainstream, which will be one of the biggest successes of the green bond market, then we need to understand if there are other values that can be extracted other than just a basis point being saved. What we have seen is that there is extra value being created for issuers, one being that you, from a treasury or a chief financial officer (CFO) point of view, have the chance to act and check whether your organisation is up to date with rapid changes in technology and regulation and to keep the overall environmental standards of the company up to date. 

We saw big volatility in asset prices in the automobile industry last year, of course due to the mismanagement of environmental regulations by some auto makers. So you can see the importance of keeping up to date and on top of regulations and technology. Importantly, when we look into our own organisation and we look into many of our clients’ organisations, the treasury departments normally don’t get involved in those discussions. When you do a green bond, it forces you to consolidate relevant experience inside the company, and that makes it possible for the treasurer to check whether the organisation is on the right track. They can focus on important questions like: are we transitioning our technology well? Are we exposed to climate stress? Do we have buildings in areas that are going to be flooded? Are we protected? Are we insured? And are we implementing environmental regulations aptly and appreciating that is what this society wants from us? 

So issuing a green bond gives the opportunity for operations, engineers and the treasury to have this discussion when they otherwise often don’t. And a treasurer that is not doing that homework before going to a green bond market is running an enormous risk. We are seeing that the treasurers of companies doing green bonds are doing that homework, meaning they are getting a better track on their organisations. 

Dicker, TenneT: I agree with that. For our last green bond we had a review by ratings firm Oekom of certain projects we’re involved with, and there were some items that we raised with our operations director on the board. He was then able to plan to address those items. A couple of the issues were easy fixes, a couple were a bit more difficult. But in the end we were able to improve certain issues creating even better projects that are even more sustainable. That was interesting, and I think a treasurer can be the internal linking pin between environmental initiatives and the overall business, and even to the financial markets. 

SRI 7.4

Lillian Georgopoulou, LSE: And issuing a green bond does help diversify issuers’ funding bases. When Axis Bank issued the first Climate Bonds certified dollar-denominated green bond by an Indian private sector company, the issuer said that they managed to actually tap into new investors who had never looked at Indian credits before. About 21% were new green investors that only looked at the bond because it was green, the credit aside. We’ve been hearing that once an issuer establishes a green bond framework, it creates economies of scale. So for subsequent issuances it becomes easier and cheaper, and you tend to see issuers who launch a bond and then can come again more regularly after that. So I think there is a lot of value for issuers launching green bonds aside from the benefit to reputation.


: Bodo, what about from a bank’s perspective? What are some of the benefits?

Bodo Winkler, Berlin Hyp: By the issuance of green bonds Berlin Hyp refinances green buildings. They represent the direct link between our sustainability measures and our core business: commercial real estate lending. For many investors it is important that you’re business is directed in a core way to sustainability. And issuing green bonds adds value by drawing a bigger focus from outside that investor base to what the bank is doing, in terms of environmental, social and corporate governance (ESG) activities.


: Daniëlle, what about for ABN Amro? Has issuing green bonds done anything to promote sustainability in other areas of the bank’s business?

Daniëlle Boerendans, ABN Amro: Sustainability is one of our core values, too. But we noticed that by issuing green bonds, more and more people inside the bank have become aware of sustainability and it helped to make it more concrete. Our first green bond was quite a lengthy process. It took us seven months to get it done, but for our second green bond, we started seeing parts of our business go directly to treasury and asked if certain projects they had, like a new commercial real estate project, could be used in the next bond. And what you see now is that the policy in the commercial real estate department has actually changed since then, and is more directly related to sustainability. So, yes, green bond issuance has helped within ABN Amro to get sustainability on the agenda for the overall bank. 

Kai Poerschke, DZ Bank: Daniëlle, you have already done two green issues, so you have a small curve, at ABN Amro. Can we agree that there’s a tendency to price tighter versus the traditional ones? 

Boerendans, ABN: Yes. Our first green bond was priced 10bp inside our conventional curve. That helped us to print a second bond without any new issue premium. Right now, the first one is trading 2bp-3bp inside the traditional curve, and the second one still 10bp inside, but I think that has to do with the whole market. Spreads have tightened quite dramatically and as soon as spreads start to widen in the broader market we’ll expect our green bonds to be less impacted. I think the buyer base of our green bonds are really buy-and-hold investors. So we expect that, as soon as spreads start to widen, our green bond curve will stay where it is, or not widen as much as our traditional senior unsecured bonds. 

Ulf Erlandsson, AP4: I’ve been buying some of the products here and I think you shouldn’t underestimate the value of the fact that when you’re issuing a green bond you get access to quite a much broader investor base than you do usually. TenneT would be an off-benchmark name, which I would normally not have time to engage with, but I’ve been participating in their deals because it’s been an interesting green bond concept and that means that I’m understanding and reviewing the credit more.

That has a positive effect not only on the green bond curve but also in terms of allocating capital to the rest of the capital structure. It’s not only a question of the green bond — you are able, as an issuer, to potentially push down the whole of your outstanding curve, including traditional bonds. And there, I would like to make a point along with what Christopher was saying: if I see green bond issuers coming to market and we are going to have to fight about the last half basis point or basis point, just so the issuer can get inside the secondary curve — which seems to be some key target function for a lot of treasuries — then I would question the commitment the issuer has to actually doing the green product, especially when it’s as new a market as it is.

We’re not talking about large sums of money here. One basis point on a short-dated bond — many marketing departments spend that on sponsoring the local football team for a couple of games. And to me it’s a big thing, now. People are trying to take away the last little bit for us. That sometimes makes us unable to actually buy new green bonds coming to market, because they just get too tight.

SRI 7.5

Sfakianos, BNPP: I think it is quite challenging in the current market for most issuers to argue the benefits of diversification and oversubscription quite so convincingly since the initiation of the European Central Bank’s (ECB) Corporate Sector Purchase Programme (CSPP).

Mike Koerkemeier, ING: But for an issuer it’s extremely difficult if you see that the book is really oversubscribed and you have strong demand from all sorts of investors. Sometimes you have investors who suddenly become green, when before you came to market they probably wouldn’t have looked at sustainable bonds at all. And those investors see the potential performance of the bond in the secondary market, so they jump in maybe with an inflated order and then you get huge oversized order books. Then it is very, very difficult for an issuer to say, ‘Look, I’m not squeezing on price and trying to get the best deal out of this as possible. There’s simply a lot of demand in the book and that drives the pricing dynamic.’

And if you do over a billion euros or maybe more — and ING has done $800m in dollars and €500m in euros — if you have an order book of several billion on that, that half basis point or one basis point does make a difference at the end of the day. I hear what you say, and I agree that if you are committed to socially responsible investment, that fighting about half a basis point seems beside the point, but at the end of the day that’s a lot of money and it does make a difference. 

Erlandsson, AP4: But it’s the name of the game of bond trading and bond syndication. It’s nothing different from the syndication of ordinary bonds. But if I see a green bond being very tightly priced and there’s no follow-through in the secondary market price action on the back of that, as I would expect in a traditional corporate bond, then I’m getting slightly wary of what’s going on there. 

Koerkemeier, ING: Fair enough. 

Winkler, Berlin Hyp: This isn’t a discussion that originated in the green bond market. There are, as a matter of fact, issuers that take advantage of oversubscribed books trying to get everything out of it as they can, no matter whether it’s a green bond or whether it’s a conventional bond. And there are other issuers that are a little bit more forward-looking and say, ‘Well, I want to welcome investors into my next order book again, and if I squeeze investors in the primary market, they are not going to be there next time.’ So, that is a decision every issuer has to make for himself.

Dicker, TenneT: It’s not just about squeezing on price, though. It is about the fact that we are trying to do something good — we are a part of society and we want to change things for the better in this world. A lot of issuers make a real effort to do that, they spend the money and effort get these green bonds out. I can question whether some investors are that committed, too. Sometimes I’ll ask them: ‘If this is going into a green fund, what if our standard of reporting doesn’t fall in line with that fund’s requirements?’ And they’ll say, ‘Well then I’ll just put this bond in my normal fund’. Then there is no real commitment from their side to this effort, and what I’m looking for is that we, as issuers, are trying to get a commitment in the financial markets to doing better for society. 

Investors, too, should put some effort in doing better. That’s what we should aim for. And it helps an issuer to do more green bonds if it has confidence that its buyers are dedicated to that. We put in effort also, financial efforts, so I think investors should also put in some financial effort toward that cause. 

SRI 7.6

Winkler, Berlin Hyp: Where it comes to burden-sharing, I’m fully on your side. There is no need for the issuer to have to put in all the effort exclusively. Fully agreed. 


: What about the investor base? What should be the benefit they receive? More allocation?

Hans Biemans, Rabobank: In order books now, more and more, issuers are screening potential investors against sustainability criteria, to make sure that the bond really ends up in the right books. And I also have seen that some issuers with very low sustainability ratings who wanted to issue normal bonds have actually ended up on exclusion lists by traditional investors. We have explained to them that because of the low sustainability rating or high controversies score, some investors may not want to buy them at all anymore. The books in this case were nevertheless four times oversubscribed. So, if we hadn’t told them, they would probably not have realised that immediately. It’s important, I think, that this is also happening on the both sides — issuers are excluding investors because they are not green buyers and, on the other hand, issuers are excluded because they are not sustainable enough. 

Flensborg, SEB: Sustainability becomes a credit issue more and more.

Boerendans, ABN: We’re not excluding investors. In the end we’re still a commercial bank — you still need to make money. We’re not a pure-play issuer, so it would not help us if we excluded investors, because you also need to raise capital, senior unsecured, and other forms of funding.

SRI 7.7

Bronzwaer, Obvion: But it also depends on the maturity stage of any product. We issued the first green RMBS in the world and we made it clear from the start it was about getting the market started, not about spread, not about size and that’s why we explicitly wanted to have only green investors.

Boerendans, ABN: But what’s the definition of a green investor?

Bronzwaer, Obvion: Well, you can debate about that, but we certainly tried to make that as objective as we possibly could, looking at not only the reputation of the investor, but also whether they had made concrete commitments, like subscribing to the UN’s Principles for Responsible Investment (PRI) and supporting the Green Bond Principles. We looked at whether they have dedicated green funds as well. You cannot always be 100% certain that an investor is indeed a dedicated green investor. But, actually, to be honest, almost all of the investors who were excluded from Green Storm 2016 certainly understood why — because we were trying to establish a new market and reward investors that are committed to it. And that exclusion may be even an incentive for them to go back to their companies and start talking about whether they should have a dedicated green fund. So it can be good for issuers to focus on syndicating to green investors only or at least predominantly.

Dicker, TenneT: I can image that in the future, or maybe it already happens, that certain issuers that have a very low sustainability rating will or already are excluded by investors. In the long run I think sustainability will become a real credit issue, like Volkswagen faced after its issues with emissions tests. We try to give dedicated green investors better allocation and, I think that at some point certain investors may end up being excluded by more issuers because they are still investing in, say, weapons or other not socially responsible products and services. It might not be next year, but both issuers and investors who aren’t playing the game risk the chance of being excluded. 

Koerkemeier, ING: To some extent that’s already happening. If you take your allocation process seriously and you look at the order book that you have and you go over each and every name together with your syndicate and with the issuer, you can basically label your investors as green or not and allocate the bonds just to the former. 

Jonas Rosengren, Vasakronan AB: If you’re excluding certain types of investors, many of whom are still allocating more money to green funds even if they do invest in more controversial assets, aren’t you pushing them to invest more in the latter? 

Bas Wetzelaer, ACTIAM: Yes, issuers would be sending the wrong signal. Likewise, it is not useful to exclude a green bond issuer — especially a first time issuer — because it’s not a very green bond from an investor perspective. Only if the issuer is on our exclusion list we will not buy their green bond. Otherwise you need to include them to make the market stronger down the road and keep the dialogue going to commit the green bond issuer to a stronger company wide energy transition strategy and green bond framework. 

SRI 7.8

Erlandsson, AP4: I just have to throw in a reminder that this is not a symmetrical market. We are allocating capital to people who actually need money, and we can stop doing that if we choose to. At some point we might get to a different part of the cycle. But right now there is no real ability of issuers to exclude investors, not to the extent we have the power with that process to actually exclude issuers. There’s no symmetry there. Yes, right now you have Mario [Draghi] buying half of everything, so it may feel like you have that power as an issuer, but one day that will change.

Poerschke, DZ: I find it extremely difficult to allocate to only the most accredited green bond investors, to be honest, because you are under time pressure. You have a multiple times oversubscribed book and the issuer, as well as the syndicates, are sitting there waiting and you’re looking at an asset manager that has got dedicated green funds on the one hand, but he’s also got lots of other investments that aren’t green. I find it extremely difficult to differentiate and then allocate well. 

Erlandsson, AP4: But again, that’s the process of bond markets, right? It’s your relationship with the bank — the support it gives your bonds in the secondary market, your social relationship with the issuers, and so on — all of these affect the process. It’s actually under the MiFID II rules where we have much less leeway in terms of allocating different sizes to different investors. So my question is: will this even be legal, to say non-green investors can’t get into a book? I don’t know. 

Sfakianos, BNPP: I completely agree that there are potential challenges on the allocation process. There is clearly regulatory pressure for more transparency so we need to be careful in making decisions on which investors are ‘green, greener, greenest’. These opinions are subjective, and it may not always be clear that an investor’s order will be 100% allocated to a green fund. It could easily be split between a number of funds.

Bronzwaer, Obvion: Would you agree, Ulf, that an investor who doesn’t subscribe to any of these green initiatives, who doesn’t have a green fund is a different animal than somebody who ticks all the boxes in terms of supporting green initiatives, exercising green funds for his clients, etc.?

Erlandsson, AP4: I mean, I’m here as an effort in terms of my bond book, making relationships with a lot of people in this market and making a real effort, and I expect there to be a payback in terms of the relationship — getting better allocations than the deals I actually like purely as credits, for example. And that’s not a quid pro quo — it’s nothing different from what we should do on any transaction. 

Biemans, Rabobank: It’s a transparency driven market, so the issuers need to be more transparent and, probably, in the end, the investors also need to be more transparent about their goals and standards. So, it’s not even about excluding non-green investors, I think. 

Boerendans, ABN: Well, but what should the requirements be? Subscribing to the Green Bond Principles? There’s no obligation at all after you’ve done that. So, if that’s the requirement, then it’s quite easy to become a green investor.

Biemans, Rabobank: Yes, but that should then not be the only criteria. It’s quite complicated to define the right indicators but that’s something I think the investor community should work on. There just needs to be more communication between the two parties, I would say. 

SRI 7.9

Wetzelaer, ACTIAM: From an investor perspective, it’s sometimes disappointing when we engage with a potential issuer before a roadshow, trying to help them make the bond stronger by giving them our feedback, and then we see in the allocation process that we’re not getting the rewards for putting that time in. So, we are putting a lot effort in making the green market more experienced and also putting our input into what is a real green bond, and then, after the allocation process, looking at the portfolio management and tracking the deals. But it doesn’t always pay off in the primary market. 

Koerkemeier, ING: That’s an interesting point. But roadshows are not a one way street, right? The issuer introduces the credit and the story behind it, but it also gives you the opportunity, as an investor, to introduce your green credentials to the issuer and really show them your dedicated fund and what you want to do with the money. So, it is also an opportunity for you to present yourself.

Winkler, Berlin Hyp: Right, a roadshow should lead to a better understanding between the issuer and investor before the deal, and this basically is one of the questions that needs to be discussed at those events. It’s not only the projects that we are financing, for instance, and the structure of our green bond but, of course, it’s also the details regarding how we as an issuer go through the allocation process — what are our preferences if we have the opportunity to express them, if the order book is big enough. And an investor who gives honest feedback during a roadshow — takes time to listen to you and shows interest in your projects — should get a preferential treatment above those who simply don’t have the time to engage that way and who just want to wait to see how the order book builds and then put in an inflated order once its become highly oversubscribed. Of course I have problems with this latter sort of investors, and we let them feel it in the process.

Flensborg, SEB: This is very much a discussion about inclusion and exclusion, and being naïve as I am, I like inclusion. I think a lot of people actually want to go in this direction to create a better society. Yesterday I spent some time at Gesellschaft für Internationale Zusammenarbeit (GIZ), which is a technical co-operation partner of KfW with respect to setting sustainability goals, and I can tell you: where we are standing right now is miles away from where they are. They are so much bigger than we are, at least most of us, in respect to sustainability, and they are not questioning our justification for entering into this market. 

It’s not a short term goal, it’s a medium to long-term goal. Dark green or light green or grey or whatever — engage in the dialogue. I don’t see the need to exclude anyone.

Biemans, Rabobank: I think issuers at the moment are giving more than they are receiving, which is very good because these markets can only start when issuers are doing that.

On whether or not the market should be inclusive of different types of issuers and investors. I tend to say that the market should grow to about 15% green of the total bond market. And it should do so with various shades of green. Because not all projects are as green as wind farms. We can enable investors who are socially responsible but not core-SRI help to gradually enter the market and become greener over time. Instead of excluding them, I think we need to include them and motivate them to move forward.


: The need for greater supply is obviously pressing, given the size of the funding gap that needs to be bridged globally to stem climate change. Where is that going to come from? 

Koerkemeier, ING: Based on our discussions, much of the increase in supply is really going to come from the financials sector. ING, for instance, has sustainable transition clients and assets of about €28bn, and our aim is to increase that to €35bn. And of that €28bn, around €7bn is pure green assets. That should also be increased by, let’s say, €3bn-€4bn, over the next couple of years, with the aim of financing that via green bonds in the market. And if you look at all the financial institutions, if they have the right framework to report on the green and sustainable assets they’re actually lending on, there can be an enormous amount of financing coming to the green bond market, really.

Poerschke, DZ: I definitely agree that financial institutions will see a big increase in market share and volume. The challenge is that for smaller banks, it requires more extra effort than for big institutions, which have many of the resources internally. 

Wetzelaer, ACTIAM: I have my doubts that financial institutions will enter the market in a really mainstream sense, especially because many of them have lots of project financing and loans into fossil fuels. First, they need to have their strategy in place if they want to expand green lending. But what about the possible negative exposure if they don’t have this strategy yet, or if the answer is not what investors are really looking for? Because on the one hand, yes, banks need to be ambitious on its ‘greenness’. To illustrate, we would like to see more banks to stop financing new coal mines. On the other hand, what do you do with existing clients in the fossil fuel industry? Banks cannot just cut them loose because they are a, for example, coal based utility. Other (less responsible) banks could step in to replace the connected bank. Maybe banks want to help that coal based utility to transition to a more sustainable model. So it’s not black or white.

Poerschke, DZ: We have one client that has been putting an emphasis on improved energy efficiency mortgage lending. It’s smaller than what Berlin Hyp has done, but they’ve been flagging eligible loans for some time and they are building up a portfolio that they can later separate out as a green covered bond pool. So there are definitely smaller issuers coming to market.

SRI 7.10

Rosengren, Vasakronan: Issuers that already have issued green will continue to do so, because it’s a great tool to put focus on your sustainability work. And in so doing, we’re attracting many new investors, and that’s leading to tighter pricing. That should attract other issuers to the market, once you can show there’s a benefit for those issuers that have a green bond curve over those who don’t. But right now you are not able to see the difference between a normal bond and a green bond curve, or even a curve that integrates both compared to a traditional one. I know we already touched on this, but since one of the problems right now is getting more issuers in the market, I do think that’s a good point to reiterate.

Biemans, Rabobank: For banks, it is relatively easier to scale up green financing, as most of the banks have large portfolios with renewable energy assets. Rabobank, for example, is number five in the world for clean energy financing. It’s 96% of our energy portfolio. And then we have about €15bn in sustainable small and medium sized enterprises [SMEs]. And we did not even report, at least quantitatively, energy efficient housing in our annual report. So banks do have a lot of opportunities in the green bond market. The big challenge is, really, the normal corporates who have very different types of eligible green projects or specifically sustainable businesses. 

In the last version of the Green Bond Principles there is a reference to existing sustainability standards in certain sectors because these could encourage corporate bond issuers to enter the market. The green financing world should reflect the real world in terms of all the green projects that are out there, in all their shades of green, I think.

An example of existing standards that the Principles could co-opt are the green certified buildings, like Building Research Establishment Environmental Assessment Method (Breeam) or Leadership in Energy and Environmental Design (Leed), but there are so many other sectors that use sustainability standards. If you just, let’s say, show issuers the opportunities that there are for certified production processes and products that can be financed with green bonds, then you will see that the market will certainly grow.

Dicker, TenneT: I was just wondering, to issue green bonds, all you need is to be an issuer of bonds and you need some degree of ‘greenness’. And, just take the Netherlands — how many corporates are issuing bonds? It’s not a huge amount, but surely many corporates have some degree of ‘greenness’ and are funding themselves through bank lending. So, logically, banks should be able to have much bigger funds or portfolios to issue green bonds from than corporates. I’m surprised it’s not much more.

SRI 7.11

Boerendans, ABN: Commercial banks have a lot of assets available, but setting up a green bond framework is quite a task, especially if all of the information and data you need is not available. 

Dicker, TenneT: But that’s the task, I think — setting banks up so they can get that data.

Boerendans, ABN: Banks also have a lot of cheap funding options now too. We’ve got the ECB’s TLTROs, for example.

Erlandsson, AP4: We really need the banks to scale up. They are a big part of the fixed income market — roughly 50%. Unless we include bank loans and bank bonds within the green bond framework, it’s not going to get to the market size that we actually need. I’m actually looking forward to when we start getting subordinated capital green bonds and other types of green debt — where we can actually go in and start taking a little bit of equity risk as bond investors. I think that’s going to be quite exciting.

Flensborg, SEB: Another challenge for most banks that can issue green bonds is that many are fairly old banks. That means that we have old infrastructures for a lot of different finance systems. On the finance side, for traditional finance it works extremely well and it has been consolidated over decades. 

However, what we need to do for aggregating green portfolios is to go back into our loan systems, our finance systems, and restructure them for green financing — flagging green assets that are in their portfolios. And that’s quite complicated to do for retail systems, for example. It might have to be that banks are not just invited to get that infrastructure together, but forced. The issuance of green bonds from the financial sector will really increase the more structures set up to flag or track green projects. 

Koerkemeier, ING: I’d say that 70%-80% of the financing in the sustainability sector is done by bilateral loans, project loans, rather than the capital markets. So the banks are doing a lot on that side. 

Dicker, TenneT: Yes, I think securitization can help get those loans into the debt capital markets.

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Koerkemeier, ING: And the awareness of that is definitely there with the banks. I agree, you need to have the framework internally, and while banks are large institutions with a lot of resources, you’d sometimes be surprised how they work in terms of their credit approval processes. But I think slowly but surely the banks are getting there. They need to be able put the sustainable sticker on eligible loans and really segregate them and make people aware, within the organisation, that process is important and that sustainable business is better business, as we say at ING.

Winkler, Berlin Hyp: I still think there has to be a real commitment from issuers, though, whether bank or corporate. It has to be lived in the organisation’s everyday life for them to be able to be credible as a green bond issuer. It just makes no sense if the organisation just off loads green assets because they happen to be there.

Biemans, Rabobank: Last December, we launched a programme called the Rabobank Impact Loan for SME companies. It is a loan for SME companies that have sustainable impact. And in the past three years we have reported how many loans we provided to such SMEs. There are some criteria for that, which are externally verified, so it’s a relatively open format using sustainability certifications. It created enormous awareness within the bank because we earmarked all the SME clients in the credit system who are potentially eligible for green loans. That way the relationship managers can see in their own systems who the most impactful clients are. And then last year we received funding from the EIB to finance these companies at an attractive rate. So when you have all the clients earmarked and you can then provide sustainable funding them, it really makes an immediate impact.

Poerschke, DZ: And these loans could back up a new issue, for example, to start thinking creatively about this.

Biemans, Rabobank: I hope green investors are interested in financing environmentally certified SMEs.


: What are some other techniques for aggregation that can be used by banks? Are there ways to scale up the market other than securitization?

Poerschke, DZ: The traditional alternative is covered bonds, which Berlin Hyp has done, and MünchenerHyp did an ESG covered bond. And others will follow.

Wetzelaer, ACTIAM: But the focus so far in securitization and covered bonds is on real estate and mortgages. In order to get more investments into smaller clean energy projects, as well, they need to be packaged together to bring them to a size acceptable to large investors. So for a utility company securitization could therefore also be interesting. Coupled with the current tight bond spreads, investors however are not willing to accept the higher perceived risks of clean energy projects. At the same time, we think for utilities it’s really a struggle to commit to these kinds of aggregation techniques as they are not willing to widen the spreads.

Biemans, Rabobank: Green private placements is, of course, a route. We did a few and we are now roadshowing one. Of course, the amounts are smaller, but some issuers just prefer to issue smaller size because they don’t have enough assets or it’s easier for them to do smaller projects. 

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Poerschke, DZ: And green Schuldscheine, which TenneT has done and others are looking at the same product. That is also a format which we will see more of from mid-sized corporates.

Boerendans, ABN: We did a senior unsecured bond because we wanted to use green financing for different asset classes, but we can’t issue covered bonds under the Dutch covered bond law with different asset classes and this is also a bit difficult for RMBS.


: Max, is there much of an opportunity in green securitization for other jurisdictions and other asset classes outside of real estate?

Bronzwaer, Obvion: In terms of jurisdictions, I think so, because there are comparable programmes in other countries in Europe regarding energy labelling, improvement programmes, etc. I should think that other issuers, like in the UK, should have the opportunity to securitize more energy efficient homes.

Biemans, Rabobank: But ABS in itself does present a lot of opportunities. We have seen the hybrid car loans market increase, for example. But there are all kinds of equipment assets that could be eligible. There even copy machines that are leased with sustainable paper and ink and so on, that really are ‘green’. So I think the ABS universe still is not used to full capacity.


: What about green corporate hybrid bonds? Is that a possibility in the future?

Flensborg, SEB: It is going to come, but it is challenging. Basically, the capital structure makes it difficult. The first thing an issuer needs to pay back is basically the senior unsecured. Do they have to sell the green assets underlying those to pay that back? If they do, is the hybrid still ‘green’? It’s going to come, but there are some considerations that are challenging. 


: What about potential growth in emerging markets and high yield? 

Koerkemeier, ING: Emerging markets are going to be interesting. You obviously have the National Bank of Abu Dhabi looking at doing their first green bond now. But banks in that region have an interesting asset base. 

We’ll need to watch what else comes out of that region, which, at first glance, wouldn’t be necessarily the top of the list for greenness or sustainability. But potential issuers there are gearing up for more sustainable issuance going forward.

Erlandsson, AP4: The story of the green bond market began with supranationals of the world, then down to the corporate spectrum. But we shouldn’t forget that there was high yield — the first high yield green bond issue blew up spectacularly when Abengoa filed for bankruptcy. So there are some caveats to that market. But in the emerging market high yield area, there’s some interesting prospects. You look at India’s coal power plants — they have half the efficiency and twice the emissions of European power plants. You can have a really big impact via pretty small means, there. 

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Biemans, Rabobank: I think in almost all asset classes you could have green formats, including what you’ve just mentioned, hybrids. But it’s important that hybrids are not linked to individual projects but to a portfolio of projects, I think. For example, if it has a perpetual tenor, the issuer needs to acknowledge that in the way they manage the proceeds.

Georgopoulou, LSE: Sovereign issuance is another area where there is a lot of opportunity. There are cities, like City of Gothenburg, that have issued approximately $600m through six green bonds listed on LSE, but we haven’t yet seen any sovereign actually taking the lead. 

Biemans, Rabobank: And there’s a straightforward solution to getting them access to the green bond market. They would just allocate their environmental budgets to green bonds. 

Poerschke, DZ: We have seen regions get access. Land North Rhine-Westphalia has issued and the City of Gothenburg, as well, so it should be a natural next step to have sovereigns jumping in.

Biemans, Rabobank: Yes, in the case of Land NRW, you saw that the bond perfectly aligned with their new sustainability strategy, and that should be the case, it’s for sovereigns that have policies in place.


: Let’s talk a little bit about regulation and policy, given COP 22 is coming up. What can governments do to help grow the market? Does there need to be more harmonised regulation, for example? More tax incentives for green bond issuers?

Wetzelaer, ACTIAM: It would set a good example if a sovereign issued green bonds. But I don’t think all kinds of tax incentives will really have an impact, since there are so many issues going on like lagging adaptation of green standards that are keeping this market from evolving as quickly as we’d hoped for. Besides that, tax incentives could send the wrong signal, and I think actually the market can and should go without subsidies.

Winkler, Berlin Hyp: Green bonds are still a small niche market that needs to grow. Every additional rule would only hinder it, and it would limit the creativity employed by people acting in it. But I think at a later stage, when we’ll have managed to further grow this market, it could be helpful to get some political support for it, maybe in the form of a minimum standard that is set, for instance, within Europe by the EU Commission, or some other authority, just to give it a clearer shape. But we are not at this point yet. I think at the moment we really need all of the creativity of all the actors — the issuers, investors, intermediaries — to get a growing market that includes as many participants as can be found.

: The French have implemented sustainability reporting standards for asset managers. That’s a popular concept with many people. Do you support that initiative?

Biemans, Rabobank: It’s a nice example because they’ve only asked investors to report. And in the end, sustainability is always about transparency. When you buy a chocolate bar in the shop it has some sort of sustainability label on it, nowadays. And you can require, if you do it gradually, that investors and issuers become more transparent. But it has to be gradual to not risk hindering the market.

Poerschke, DZ: I fully agree. I think the French have chosen an excellent method because they don’t really interfere with the way assets are allocated. It’s simply increasing transparency, and that will put moral pressure on the rest of the market to do similar things.

Biemans, Rabobank: Yes. In the Netherlands, we have the Dutch Green Funds Scheme since 1995, which a fiscal stimulation scheme in which companies get an average of 1% off their market interest rate to be involved in green projects. That aids innovation.

Koerkemeier, ING: I do think alignment and harmonisation, not necessarily in the form of regulation, would definitely help in this sector because, obviously, everyone now is jumping on this sustainability train, whether it’s been rating agencies, or issuers or other forums. If you bring everything together and really have joint rules and harmonisation in that respect, I think that’s extremely helpful for both issuers and investors.

Georgopoulou, LSE: And there are other things that could be done. Sovereigns could not just look at strategic green bond issuance, they could also pursue strategic public investment in some corporate bonds or provide credit enhancements, for example. Governments can help to establish green project aggregation mechanisms, as well. There are means outside of regulation to incentivise supply and maintain the integrity of the market.