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US green bond market wrestles with reporting and reputation

On the eve of the G20 summit in September, the US and China formally ratified the Paris Agreement, boosting the chances it will become international law before the end of the year. At least 55 countries accounting for 55% of global emissions must ratify the treaty for this to happen. With China and the US accounting for 38% of global carbon emissions between them, the announcement was a major step forward for the agreement.

Climate change and green finance was a central topic at the G20 summit in Hangzhou. In the communiqué issued at the end of the event, the G20 leaders said it was necessary to scale up green financing to support environmentally sustainable growth, and that challenges facing the sector such as maturity mismatches, a lack of clarity in green definitions and information asymmetry could be overcome by collaborative approaches between the public and private sectors.

The world, it seemed, had turned its head towards the socially responsible investment (SRI) bond market, and was now watching intently.

It was against this backdrop that GlobalCapital held its US SRI Capital Markets roundtable on September 8 in New York. 

SRI 11.1

Participants in the roundtable were:

Laura Fan, head of funding, treasury division, 

Inter-American Development Bank

Akinchan Jain, derivatives and structured finance,

capital markets, World Bank

Stephen Liberatore, managing director, lead portfolio manager for TIAA Global Asset Management’s socially responsible investment fixed income mandates

Esohe Denise Odaro, financial officer, investor relations, IFC

Swami Venkataraman, vice-president – senior credit officer, global project and infrastructure finance, Moody’s

Toby Fildes, moderator, GlobalCapital

: Given the increased global focus on environmental, social and governance investing as a result of COP 21 and the G20, do you think we will see more socially responsible investment bonds as a result?

Stephen Liberatore, TIAA: I do. It’s a combination of factors that are going on that, regardless of who the issuer is, they are receiving tremendous amounts of pressure from stakeholders to have a policy to address what they can do positively to combat climate change.

The pressure comes not just from bondholders or advocacy groups. You’re also seeing it from equity holders, regulators, other investors, that are interested in what the impact can be, as people become more aware of potential financial ramifications to not dealing with climate change.  

So you have that, combined with ever-increasing interest from younger investors, female investors, people who are demanding more change. So you’re going to see more securities come that are environmentally beneficial or socially beneficial, if for no other reason than to allow the issuer to talk about the positives they have in combating climate change. 


: So you think the G20 will be seen as a positive tipping point for this sector?

Liberatore, TIAA: I think so. One of the challenges of investing in this sector is what’s socially beneficial or what’s environmentally beneficial is different for everyone. There’s not a common definition available yet. But the more support you have behind addressing the issue, the better. 


: Swami, do you agree that we’ll look back at the G20 in Hangzhou and say it was the true beginning of the global fightback against climate change and the broad acceptance that green finance could be a part of that fightback?

Swami Venkataraman, Moody’s: I agree that we will look back and see that a great amount of growth has happened. I don’t know if the G20 would necessarily be the beginning. Some people would point out the Paris Agreement as a beginning. But I think we could argue about what is the tipping point. Climate change has been a big topic of discussion for decades now. But I fully agree with the idea on growth. We will look back to see that a tremendous amount of growth has happened in five years from now. 


: What about you, Laura? How important was last weekend to this whole industry?

Laura Fan, IADB: It’s going to be crucial, because it obviously focuses investors, as well as the issuers, on this particular topic. If investors are more focused on climate change and sustainability, then it motivates corporate issuers to assess how their activities affect the environment. Such assessments can lead to positive change. 

Denise Odaro, IFC: If one were to look back as to where this product began 10 years ago, we have made a lot of progress. However, I see the recent efforts by the G20 and the parallel political promotion in a number of countries as a bonus for the growth potential of SRI bonds.

SRI 11.2

Akinchan Jain, World Bank: It’s definitely a milestone. But if you look at this in perspective, ESG investing, overall, has been there for a long time.

What started off was with equity investors traditionally applying filters. They wanted to make sure that their money was not used for certain things, such as tobacco or alcohol. It has evolved — also for fixed income — into something more what I would call purpose-based financing: ‘I want to invest, but I want to make sure that the money is being used for certain specific activities’. And then we saw the growth of the green bond market. 

So the environment story has clearly taken shape, but we are starting to see it in broader areas, as well. Since the crisis, corporates are increasingly looking in terms of what their footprint is, in terms of social governance. We are seeing a lot of retail investors, clearly in the millennial population, being increasingly focused on what their money is being used for.

Liberatore, TIAA: Historically you’ve had ESG investing, but focused on the equity side. Now that we have finally got to a place where we have fixed income funds and fixed income products that investors can directly find and invest in, that have the ability to make impactful investments and direct investments, where you get direct and measurable impact — that’s made a bigger difference too.

Venkataraman, Moody’s: In recent years, we’ve also seen more traditional investors coming into the space, as well as growth of specialist investors too.


: So how has the investor base evolved in recent months? 

Akinchan Jain, World Bank: I agree with Swami that as well as more specialist investors, now we’re seeing mainstream investors having dedicated portfolios for SRI. Another factor that’s driving this is regulation. France, for instance, has introduced mandatory climate change reporting for institutional investors. Investors are being asked to integrate ESG reporting into their investment policies. 

If we look 10, 20 years out, we’ll find that portfolio managers will automatically be overlaying qualitative criteria on top of the traditional quantitative criteria — for all investments, not just those dedicated to SRI.

Odaro, IFC: The key change is a fundamental shift from exclusion-based to inclusion-focused portfolio management. 

Initially, investors would typically operate an exclusion list, such as, say, gambling, tobacco etc. But the trend now is more proactive and specific inclusion of exposure to ESG in investment portfolios, which is filtering down from a high level. 

France’s recent regulation is a really good example. We’ll see what the effect is going forward, in terms of the increase of investor demand and issuance there. But I think that would be a paradigm shift.


: Stephen, you are seen as one of the pioneers of this market. But is life getting harder for you as more investors come on to this scene, or is it becoming easier because there’s more liquidity and more awareness?

Liberatore, TIAA: We’re fortunate because our firm has, historically, had a focus on social investing. And we have significant resources that we’re able to bring to bear in the market, which allows us to be able to turn these types of strategies into true, mainstream, core fixed income strategies, which are attractive to a wider array of potential investors. We can look purely across fixed income in every sector. 

We’re large enough that we are called sometimes by people who have a potential deal that falls into this space. We talk to the issuer and the underwriters about what we want to see, as far as how a deal is going to be structured and done. I could spend hours with an issuer, and if the deal comes too tight, we don’t participate.

But we view that time spent as an ability to educate and try to promote best practices, try to promote more disclosure and transparency, so that what you end up having are more investors in because of that, and it provides that additional liquidity.

It hopefully provides more rigour, as well, but it also makes the market one where increasing liquidity and increased interest is always beneficial in the long run. 

You’re able to provide more clarity, and more transparency, and more disclosure, the more demand there is for something. The more interest the better, in my view.  

SRI 11.3

Fan, IADB: You do see more interest from different types of investors for this particular space. A lot of that is driven by stakeholders and shareholders. 

For example, I met with several pension funds in Australia. They are increasingly interested in this space and looking at formulating policies for SRI investments because their stakeholders (the retirees) are asking questions about how their money is utilized to impact postive social and environmental change. 

Though some do have policies as to what not to buy, e.g. no tobacco or alcohol, many are not pro-actively searching for SRI investments. 

However, it’s not just pension funds asking the questions. Central banks or official insitutions and bank treasuries are increasingly allocating or thinking of allocating a portion of their assets under management specifically for SRI bonds.

Odaro, IFC: A big factor in the increased investor participation is the size of the issues. Up until 2013, this was quite a niche market. The average size of a transaction was around $200m-$300m. So once we started seeing benchmark sizes, beginning with the IFC’s $1bn issue in early 2013, we started seeing a new investor class coming in.

Liberatore, TIAA: The real key development to bringing in more investors has been the move into a more diversified pool of potential investments. 

We are a credit shop with tremendous credit expertise. So we prefer, when possible, to look at the actual wind farm deal than look at a supranational issuer. 

SSAs are tremendously important to the market, providing a very valuable function with those large, liquid benchmark deals that provide liquidity for you to trade in and out of. But for somebody like us, we would rather do the credit work and take that additional risk.

If I’m looking at a wind farm deal, then I understand the risk, but I’m also receiving all the reward. If I invest in a supranational issuer, all of the benefit goes to the supra, but they also bear the risk.

Because you’re now seeing corporate issuers do this, you’re seeing structured securities, you’re seeing municipalities issue, you’re seeing a much more closely aligned risk-reward package for the investor. That’s really helped to develop the market more fully. 

Fan, IADB: To add to Steve’s point, SSAs are a great opportunity for new investors to enter this space as they may not have the resources or expertise to research project-specific credit risk.

Hopefully, as they gain familiarity, they may expand into direct project investments. I believe that this is where the capital should be going, as this is where there are the most pressing needs. 

For example, there are huge infrastructure needs in Latin America and the Caribbean. A prime example is the expansion of the Panama Canal, which was recently completed. 

The project cost $5.2bn, of which IADB provided $400m of financing. The rest came from other sources, especially the private sector.  


: How much of a role are low interest rates playing in attracting investors into SRI credit?

SRI 11.4

Liberatore, TIAA: The value of the multilaterals is that they effectively act as not only a conduit vehicle, but for an investor that’s smaller and doesn’t have expertise, but wants to get involved, they become not only the financial evaluators of these projects, but also the environmental evaluators.

So they’re utilising the issuers’ expertise, because as the investor is small and doesn’t have the resources, they don’t have that capability. So they’ve effectively outsourced it, but it’s allowed them to get into a new market and provide more liquidity, and they’ve tried to learn and become more confident.

Venkataraman, Moody’s: The emergence of very large corporates as issuers has played a big role, as well, in terms of genuine perceptions of our mainstream investors. So whether that’s Apple and Starbucks in the US, or Toyota in Japan, you have these large corporate issuers.

Mainstream investors now see large corporates, with huge deals, talking about issuing green bonds and it’s sunk into their consciousness, it’s in their understanding, even though they may not, today, have an explicitly dedicated portion. 

It’s been a huge issue in the power sector. Every mainstream investor we speak to is talking about how climate change risk is going to affect his or her portfolio. And while that’s a very mainstream credit consideration, a lot of them are seeing the type of investments that would be supported by green bonds as something that would be a counter to those risks. 


: You’ve all painted a very positive picture of what’s been happening. But of course, a lot more needs to be done. This brings me on to my next question, which is, given the lead taken by China, with the greening of its financial system written into its new Five Year Plan, should governments be doing more to promote bigger and better climate finance markets, perhaps through tax incentives or bank regulations?

Venkataraman, Moody’s: One thing that would make a huge difference is if climate bonds or green bonds could attract a lower capital risk rating. 

California has done something slightly different — but in the same vein — where the insurance commissioner has tried to mandate that all insurance companies should not be investing in companies that get a certain share of revenues from fossil fuels. So there could be various types of regulations that could make a difference.

SRI 11.5

Odaro, IFC: A sovereign issuing a green bond could create huge impact in the market. It establishes a

different benchmark. It is suggested that France is considering such a bond. 

Fan, IADB: It’s not necessarily just specific policies. For example, if you are building a wind power plant, it is crucial that a public or private sector entity commit to purchasing the power at a specific rate over a period of time. Of course, this commitment may be facilitated by government policies, but it could also be motivated by the fact that it makes sense from a purely monetary or diversification perspective for the entity.

Odaro, IFC: We’ve seen government promotion in two ways. France I see as promoting by incentivising demand, which should, essentially, generate supply. 

China, on the other side, is incentivising issuance, which, hopefully, should feed into the demand.

Whether by tax incentives or mandatory disclosure by investors, the objective is the same — growth in the market. The next year will be a good time period to assess the impact of these initial governmental efforts.

Liberatore, TIAA: What we really want to see from a policy perspective is a consistent approach. 

Domestically, you think about the solar tax credit, or the wind production credit. If you have a stable, predictable policy, what ends up happening is you end up having more consistent issuance, and more consistent market opportunities for those types of projects, which keeps it in people’s minds more frequently.

Just look at the wind production tax credit that was due to end on December 31, 2015. We needed to ram through all these projects, to qualify for that, but then it gets extended five years. If it was a more consistent approach, what ends up happening is your issuance becomes more consistent and more frequent.

And that type of frequency of deals brings about more investors because they see more potential deals, and they see it as being more of a developing class of projects.

Then you also want to see innovation from the governments in how they can be supportive. The one that comes to my mind is that Georgia Power did a green bond.

We worked with them very closely. What they did was work with the Department of Defense to find unutilised land to put up solar panels on. And that power’s not given back to the Defense Department, it’s put back into the general grid.

When you look across the United States, the largest landowner remains the federal government. If there is a way to create a template for putting renewable projects on unused government land, or surplus government lands, where wind or solar could be beneficial, that’s the type of thinking that you want to see, going forward, to come up with creative ideas and solutions.


: You mention federal land. Will the municipality sector be the key driver of green bonds in North America?

Liberatore, TIAA: Yes, I absolutely think so. They have, historically, been a great issuer of green bonds.  What’s been interesting is that just because something’s called a green bond, it doesn’t necessarily mean that it is. And just because it’s not called a green bond, it doesn’t mean that it isn’t.

So it’s a matter of being able to analyse and evaluate whatever a particular issue is. If you go all the way back, municipalities have been a leading issuer of securities that benefit the environment, whether it’s clean water transactions, energy efficient transactions, renewable energy transactions or qualified energy conservation bonds, for example.

They have been a true leader, and how they benefit the market, as a whole, is they are excellent with disclosure. Their entire purpose is being able to be transparent.

So when you talk to them, and you say; ‘I need X, Y, Z information’, they say ‘no problem. We provide that to everyone anyway, so we’re happy to give it to you.’ 

So they serve as a true template for clear and concise use of proceeds. They’ll explain to you what they’re going to do, and then subsequently have the transparency and willingness to provide you with data to explain why this was a green bond, and what the benefits of it were.


: How can we get more states to buy supranational bonds, some of which are green?  We have had some recent wins, such as California and Washington. But how can we get more state treasuries to start buying the kind of stuff you’re buying, Stephen? 

Fan, IADB: We have to differentiate between state and municipal treasuries, which is what you are talking about, versus the state pension funds. Because various state pension funds are actually more active in the SSA space. Of course, California is at the vanguard of both the SSA and green spaces, from both the treasury and pension fund sides.

Many state and municipal treasuries are very conservative. They are focused on safety and liquidity, as the money needs to be readily available at any time. Most of them are very used to buying US Treasuries and government-sponsored enterprises. They are not as familiar with the SSA space. So first, they will focus on the large US dollar global benchmarks. Then, they can expand to include specific green and social bonds.

But I still see that as further away, especially for the state and municipal treasuries at this moment in time. Whereas the state pension funds, you can perhaps see more activity in a shorter time span.  

Odaro, IFC: As supranationals, our challenge with that investor base has been education about our credit. This category of investors are often led by investment codes which warrant the explicit mention of credits approved for investment.

We the Washington supras have formed a coalition, so to speak, where we we’ve attempted to approach this market and effect amendments in these codes, to include our issuer sector. And we’ve gained momentum. We have done a lot of work, travelling to lots of capital cities, to pitch this and the response has been positive.

Washington, like we said, has recently approved us; California did earlier, and of course that trickles down. Once the state treasury approves it, then the municipalities etc. can also participate.


: Does the fact that you’re now issuing SRI or green bonds help your cause with them?

Jain, World Bank: It creates a dialogue. It creates an entry point with investors who are new to our name, where it helps us talk about our purpose and get them interested in the impact of projects we finance in our member countries. 

Liberatore, TIAA: As you go forward, a bigger tipping point would be if you’re able to finally dispel that notion that you have to give up performance to buy a green bond or socially responsible bond. That is one of the biggest hold-ups for some of these investors that are new, or don’t understand fully, or haven’t participated yet.

I’ve seen it occur in deals where I end up being told that there are what I call non-economic buyers, who have some mandate that 10% of their funds must be in green bonds. So the deal’s really supposed to price at swaps plus 5bp, but it ends up pricing at swaps plus 3bp.

Because the non-economic buyer doesn’t care, they’re just buying it to fulfil a mandate. And that has stuck in a lot of people’s minds as how this market works. Until people become more comfortable that it is a truly efficient market, they will be more reticent to join in.


: What about green bonds by US companies? We’ve had Apple, and we mentioned Starbucks. But should we be disappointed by the overall corporate dealflow?

Liberatore, TIAA: I don’t think so. Obviously, you always want to see more — a larger amount of liquidity, a larger investable pool. But it speaks a little bit more to where we are, as far as the evolution of this market. When I talk to potential issuers, the one thing that seems to be the biggest hang-up for an issuer is the disclosure.

They seem uncomfortable, or unwilling, to share information. And that’s a multifaceted issue. A lot of the issue revolves around the syndicate process. The syndicate process is supposed to be one that balances issuer needs and investor needs, but we’ve become so efficient, and it’s become so rudimentary to get a deal done now, that it’s all about what the issuer wants.

And if the issuer thinks it may have to do extra work, it becomes a problem. If I speak to somebody planning to come to market with a green bond, then they need to explain to me why they’re doing a green bond. And if they’re going to tell me it’s to fund five windfarms, I need to see the data for those five windfarms.

I need to know how much power is produced, how much emissions are being mitigated, and going forward, what is it that you anticipate these projects doing beneficially? You really can revolve around just the amount of emissions mitigated, as well as the amount of power produced. So how many homes you’re powering with that, and the emissions being reduced. Yet, when an issuer hears that, they seem to become concerned that all of a sudden, there’s a cost involved in that or there’s work involved. Well, the reality is you’re asking me to borrow my money, and calling it something green.

Then you’re going to have to prove that it’s green. The amount of ‘cost’ around that is de minimis. That’s an excuse. If you’re a utility company, for example, and you’re going to run a solar power project, I am convinced you already know the answer to the question. 

And if you don’t have those answers, I’m not lending you my money. So it’s getting over that hurdle of the concept that providing any level of information is more work. A lot of it goes back to the syndicate process in investment banks, in general, wanting to try to do whatever is easiest, and then move on to the next deal.

What ends up happening is that you don’t get more issuance than what we’ve seen so far, because we haven’t had the educational process. 


: I’ve always presumed that it was a supply issue, i.e. not enough companies were willing to put in the work and that it was easier to do a conventional bond. But you’re saying that there is also a hold-up on the bank side?

Liberatore, TIAA: I think so — in the syndicate process, because there is more work that needs to be done for that, and more information is required.


: Is that a function of the US capital market, which typically has a more cookie-cutter approach to corporate deals?

Liberatore, TIAA: Yes. Again, it’s because the syndicate process has become so standardised that any deviation from that standard process and people are less willing to do it.

SRI 11.6

Venkataraman, Moody’s: It’s a governance issue. Given that there’s no price advantage at this point, really, the board and management needs to perceive, at least, some sort of ESG governance benefit from doing this. 

The incremental work, again, is de minimis. I agree that the information is all there. But they need to see some sort of advantage or benefit, at least from a corporate governance, publicity, image perspective. And companies that see that will do it. 

Liberatore, TIAA: We are trying to mitigate climate change through our efforts here, and that’s where the companies that have issued see the benefits of issuing green bonds. 

They also recognise the opportunity they have to broaden out their investor bases. Especially for larger issuers. Utilities are large fixed income issuers — most investors are going to be full on utility paper, or on most utilities that issue. So the ability for a utility to diversify its investor base further has tremendous benefits associated with it.

Fan, IADB: Well, the banks may have concerns regarding litigation. So if a corporate is issuing a green or SRI bond, the banks need to conduct proper due diligence, e.g. ensuring that the documentation will be available to the investors, so as to make sure that they’re covered from a litigation perspective.

Liberatore, TIAA: Which is interesting, because green is not an SEC trigger word. So again, I’m not sure where that comes from. 

Odaro, IFC: It’s a perception of increased exposure to litigation.

Liberatore, TIAA: I think that’s an incorrect perception.

Odaro, IFC: What does exist is the reputational risk. That is real.

Fan, IADB: Especially for the banks which are at the forefront of green bond development. If you had advised and led a bond that was by a corporate which subsequently gets into problems of an environmental nature, that’s potential reputational risk.

SRI 11.7

Liberatore, TIAA: I guess that calls into question the underwriting process that the banks are supposed to have done to bring that issuer to market to begin with. 

Whenever I hear “reputational risk, compliance and legal”, to me, that is an indication that no one’s really doing the exact work they’re supposed to be doing upfront. To me, when a bank runs out of factual arguments to make and calls “reputational risk”, which is indefinable, it’s just an excuse not to do it.


: But isn’t reputational risk more about saying you are green and then doing something very un-green? For example, you are a big company and you issue a green bond, it’s great because you use the proceeds to make your factory carbon-neutral, but then in a separate division you have a big chemical leak and destroy a river’s habitat and ecosystem. That’s the reputational risk I think people are talking about.

Liberatore, TIAA: And those are unrelated risks, in my view.


: But the public are going to put the two together. If a tabloid newspaper picks up on the story and has a big front page headline accusing you of hypocrosy for issuing a green bond and then polluting the world, isn’t that what they’re worried about?

Liberatore, TIAA: Absolutely. And I think that’s why what we’ve seen is the evolution to where we are today, which is that the use of proceeds are signed off by the company’s auditors now — and not just have management do it, which is what happened previously.

There’s tremendous risk in the world, and I think there is always going to be, potentially, some issue that prevents somebody from doing something.

But I think you have to go forward. If you want to issue a green bond and believe that you have a reason for it, give us those use of proceeds, tell us how you’re using it, and give us those ultimate impacts.

Because that’s what you’re trying to get to. There’s always going to be a potential risk that no one can foresee.

SRI 11.8

Odaro, IFC: We’ve always had to deal with that risk as MDBs, but the difference is we’ve also always had to be transparent. So all our projects are publicly disclosed. 

Now, corporates have to disclose more than they used to, with ESG bond issuance and the recomended use of new external verifiers, as we call now opinion providers etc., in the Green Bond Principles. 

Some of these providers not only look at your green bond programme but rather at the entirety of your profile as an issuer and institution. 

So whether or not you have a project that’s doing something they consider brown, they may bring that into the report.

Jain, World Bank: For me, a big question is how important is the green bond label, even if I’m giving all the disclosure. And you mentioned, Stephen, some companies already have the data, but if they don’t issue a bond that’s labelled, would you still consider buying it?

Liberatore, TIAA: Absolutely. When we look at something for us, we look at a much broader array of securities than just what’s labelled a green bond. Because again, it’s not an SEC trigger word. We can all issue a green bond sitting in this room, and if we don’t live up to the green components of it, there’s no legal ramification to that issuance. 

So you have to be able to understand what it is you own. And when I look back at a lot of the project finance deals I own, none of those were labelled as green bonds, but they are wind farms, or solar projects. 

To me, those have very high environmental impact. As an investor, you need to understand everything you own, but in this space, particularly, you really need to understand why you own something.

And what you’re speaking to, really, goes back to where we are as an investor base now. We’ve moved away from exclusionary screening to that best of industry class and funding of solutions approach.

Fan, IADB: So, for a corporate issuer concerned about such reputational risk and, if there is no cost advantage to issuing a green bond, then they may wonder why go through the additional work, payment for Sustainalytics, evaluations, etc, if an investor is already willing to buy their conventional securities?

Venkataraman, Moody’s: There is no financial incentive.

Fan, IADB: For now, there isn’t from a bond pricing perspective. But maybe in the future that could change.

Liberatore, TIAA: This is something I talk to people about all the time — what is the cost differential? 

Does Sustainalytics charge $12m to do a review of your green bond programme, or is it $20,000, or $10,000? Is there actually extra work? That’s the question I have, because I don’t believe there is. 

Because the issuer already has all this information. And again, the benefit isn’t just purely monetary — every single time I’ve participated in a green bond, I immediately get a question of whether I want to be involved in a press release.

So there’s the marketing value. There’s the value of diversifying your investor base. There’s the ability for you to speak to the positives that you were doing as an entity. To me, that’s really what the focus is.

Fan, IADB: For multilaterals, the information is readily available — loan  proposals, results matrices, etc. Plus, we have a dedicated web page for the EYE bond programme. For an issuer new to the green space, it may appear to be a daunting task to meet investor demand for such information.

Venkataraman, Moody’s: I want to go back to something Denise said — I thought it was important. She talked about how external reviewers don’t look at just the project, but also the broader corporate. I don’t know if that’s necessarily true. At least in terms of the Moody’s green bond assessment, we explicitly do not do that.

We focus on the green bond programme, and the organisational process that the issuer uses to review, select and monitor projects. And then how they manage the proceeds, how they disclose. Is that true of others? 

Let’s take BP. BP invested a large amount in wind projects in the US. They could have issued green bonds, not that they did, but they could have, and they would be seen as green bonds.

But then they have had a massive spill in the Gulf of Mexico. The Moody’s green bond review is not necessarily focused on that before the fact, although we factor that in our broader fundamental analysis.

Odaro, IFC: IFC’s opinion is provided by Cicero, who reviewed our use of proceeds, the programme. MSCI for inclusion in specific SRI bond indices look at your broader ESG profile. And while it may not be a huge weight, in terms of your overall rating or score it still counts towards it.

Liberatore, TIAA: What’s interesting when I’ve read the second opinions, and maybe I’ve missed something, is that basically all the second opinion tells you is that they’ve reviewed a programme that’s presented to them by management.

If the programme is followed, there is an environmental benefit associated with it. But that doesn’t necessarily mean that it’s followed. 

It’s a preliminary, upfront view that doesn’t really provide any outcome data. It’s more about saying that they’ve talked to them, and in their opinion, if the issuer follows through with the programme, it’s reasonable and there are benefits to it, but they’re not attesting to the fact that at the end of the day, this will be done.

So far we only have, to my knowledge, two issuers that have third party auditing of their actual outcomes. That’s Apple, with Sustainalytics, and KfW in Germany that uses ZSW. 

To me, that end auditing is more valuable than the upfront opinion, although they both add value.

SRI 11.9

Venkataraman, Moody’s: That’s why we have an annual refresh after the issue. We follow through on the disclosure and the quantitative assessment, and so on.

Jain, World Bank: All the MDBs have the impact reporting. At the World Bank, we have always done detailed reporting on our projects, with preset baselines and targets across a range of metrics. 

For instance, on a rural water supply and sanitation project in the state of Punjab in India, we have done detailed reporting on metrics like how many women and children have access to toilets and clean drinking water. 

What we are doing more and more is to aggregate and distil data from all the projects into one impact report, designed for investors to make it easier for them. 

Odaro, IFC: Impact reporting is an intrinsic part of the Green Bond Principles — reporting is the fourth cornerstone of how we term a green bond. We’ve worked very hard on coming up with this framework, which is now ratified by 11 issuers. But it’s also available as a template for other issues, corporate or otherwise.

Liberatore, TIAA: That actually may be one of the reasons you haven’t seen more corporate issuance. What you guys do is very detailed, very focused. 

In a lot of cases, I think that unless the issuer really has a conversation with investors, they may be under the impression that it is not a template, but a requirement. That they’re going to need to come up with this pretty chart, with all these levels of data and the issuer is saying: ‘I’m just putting up a wind farm in Kansas. What I can tell you is the power output.’ It’s an educational process. 

To a lot of issuers, the reporting sounds very complicated and daunting. But the reality is that when they talk to an investor, they may get a clearer answer on what is expected of them as an issuer.


: Is there a danger that certain corporate issuers are being priced out of the market by the high levels set by the MDBs? 

Liberatore, TIAA: That’s where the education comes in. Their investment banks need to be able to lead them and provide them information. And if the bankers don’t feel as though they’re in a position to have enough information to share that, then they really need to reach out to larger green bond investors and have meetings and conversations like I have with issuers, to get a clearer picture on what is expected.

Jain, World Bank: A lot of this infrastructure is already in place to help corporate issuers. The Green Bond Principles set standards for the process and for what is expected. Independent assessments like the one Moody’s offers, second party opinion providers such as Cicero, reports from companies like Sustainalytics and Oekom, and all the reporting from issuers provides information and valuable resources for investors. 

All of this provides corporate issuers a standardised template for their reporting. For instance, the impact report we published last year has been used by other issuers.

Odaro, IFC: It would be interesting to get an investor’s perspective as to appetite for a wider range of corporate issuers, perhaps such as  a green bond from a fossil fuel generating company.

Liberatore, TIAA: I would certainly look at it, absolutely.

We have reached a stage where our investors want us to engage with issuers. On the fixed income side, we don’t have the shareholder vote, so we can’t go to annual meetings and shareholder meetings, and request for things to be put on the agenda etc. But what we can do is engage through the purse strings, of dealing with an issuer and trying to get them to change behaviour. 

We implement a threefold process, One, we find an attractive total return candidate. Two, we look to fund a solution, so in this example we have funded BP’s wind farms, which are contributing to renewable energy, lowering the cost of capital of renewable energy, making it more cost-competitive going forward.

And three, what you hope you’ve done, and you’re starting to finally see this really come out, is that you’ve changed the conversation at the issuer level.

If you’re a utility and you have a large nuclear fleet, you can, in your next capex project, talk about building a nuclear power plant which is really costly and really time-consuming. Or you can refer back to your really good experience with renewable energy when you got off balance sheet financing for wind farms, lowered your own cost of capital, expanded your investor base, and diversified to a group that doesn’t invest with you normally.

Venkataraman, Moody’s: It’s the same with China — we all want China to issue green bonds, as a country, even though they’re today the world’s largest emitter of CO2.

SRI 11.10

Fan, IADB: It’s almost as if you have to practise what you preach. The IADB specifies environmental criteria for its projects but if the IADB was not practising what it preaches, it would seem rather hypocritical. 

For example, IADB has committed to incorporate environmental sustainability measures in the design and construction of all new and renovated corporate facilities, of which our headquarters and offices in Panama and Costa Rica have achieved LEED certification.  

Maybe it’s different for corporates. But for me, a company can’t just use green finance for specific projects and not implement aspects of it in their own corporate policies as well.


: So let’s say you invest in that green bond from a fossil fuel company in good faith, and then two years later, there is a Gulf oil spill by that company, and you’re a holder of their green bonds.  What do you do then? 

Liberatore, TIAA: This is why we like very discrete, simple, straightforward use of proceeds language, and subsequent reporting. So that in the event that that happens, and somebody asks me if I own a BP bond, I can say quite emphatically that we don’t, we own a BP wind farm which sells their wind into the general grid.  


: But is the question a rhetorical one?  

Liberatore, TIAA: It is somewhat, but again, what did you, as an investor, finance? You’re not tied to the general corporate. You didn’t finance the Deepwater Horizon. In this hypothetical situation, you financed five wind farms that are selling into the grid.


: We’ve already touched on this, but is a second opinion now de rigueur for issuers? Is it an absolute requirement now in this market?

Fan, IADB: It depends on the issuer. For example, if you’re a multilateral, you’re already transparent. We have all the documents readily available online, as well as having results matrices, impact assessments, regular results reports, annual sustainability reports. Whereas if you are a corporate with less transparency, then yes.  

Liberatore, TIAA: It also might be dependent upon what the proceeds are being used for. If it’s something a little more straightforward, like a solar project, or a wind farm, probably unlikely, if you’re able to get the data from the issuer, themselves.

Odaro, IFC: The market doesn’t really expect one if the bulk of your revenue is from, say, manufacturing solar panels. 

Is your question solely related to green or does it include social? Because we’ve faced this very conundrum as part of the process of launching a new social bond programme. We contemplated whether we should get a second opinion. But it was difficult to identify a party who could provide such a review for us, given that we are probably at the apex of this specialisation.

Fan, IADB: We don’t have a second opinion on the EYE bond programme, but we’re very transparent. Every EYE bond project sets out a measurable results matrix, which is reviewed and reported on a regular basis. 

When you’re looking at green bonds you can, perhaps, have a clearer standard level because you’re talking about greenhouse gas emissions for all projects, for example. 

However, when you’re looking at social bonds, you can’t do that. For the education component of the EYE bond, you’re looking at many parameters like the number of schools built, number of teachers trained, number of children educated. It may be different for another type of social bond. What you need to be clear about is what the project results are expected to be, so that the investor is aware of it, and how you will monitor those results.

It’s also more difficult to measure impact. For example, the value of an education can’t be measured until that child is 30, 40 years old. By then, your financing has long since matured.

SRI 11.11

Jain, World Bank: I think Stephen captured this very succinctly earlier when he said that the second opinion is a supplement. It doesn’t reduce the need for investors to do due diligence on any particular issuer. The environmental assessment, the second opinions, they’re all additional tools that issuers can provide to investors, to help them with their assessment. 

: In conventional bonds ratings are wired in to the process of investing, especially in the US. Do you think the same will happen to the US green bond market, to attract the big mainstream
investors? And will they need standardisation? 

Fan, IADB: You have to be careful with that question. There’s a lot of discretion for templates and standards, which can be discussed with the respective investors, versus standardisation, which is very specific. If you don’t have that type of flexibility, I think that will really be detrimental to the growth of the market. It’s a fine line, yes, but it’s also a distinct line.

Venkataraman, Moody’s: I also think there are two different types of services that are currently clumped under external providers. To take an analogy, in project finance, you have credit ratings, and then you have independent engineers. Independent engineers go into the technical details of the project, they talk about costs, performance, and so on. Similarly, here, you have the technical people who can go in and measure the emission reductions and ensure the benefits. 

And then you have something like what Moody’s does, which looks at the process, whether those measurements are disclosed and so on. As a result, our GBA provides a framework for investors to compare green bonds across companies, sectors and countries.