Green-aware investors take the lead in driving SRI growth
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Green-aware investors take the lead in driving SRI growth

Responsible investing — and green and social bonds in particular — are still not a mass market among US investors. But the fund managers leading the charge are optimistic: consciousness has moved a long way in a few years.

When GlobalCapital gathered several investors, issuers and investment bankers in New York in early September, they argued that demand for green and social bonds and for all kinds of ESG and SRI investment strategies is swelling.

Some issuers are still reluctant, but growth in green securitization and innovations like catastrophe bonds for emerging markets give plenty of cause for hope.

Participants in the roundtable were:

Benjamin Bailey, senior fixed income investment management, vice-president of investments, Everence, Praxis Mutual Funds

Hervé Duteil, managing director, corporate social responsibility and sustainable finance, Americas, BNP Paribas

Aki Jain, senior financial officer, capital markets department, World Bank treasury

Mahesh Jayakumar, senior ESG investment strategist, State Street Global Advisors

Nancy Kyte, head of funding and investor relations, treasury, Export Development Canada (participated by telephone)

Tessie Petion, vice-president, responsible investment research, Domini Impact Investments

Ashley Schulten, head of responsible investing, global fixed income division, BlackRock

Toby Fildes, moderator, GlobalCapital

: Will the volume of SRI or green bonds fall in the US, after President Donald Trump’s decision to take the US out of the COP 21 Paris Agreement?

Ashley Schulten, BlackRock: We get that question a lot. Not necessarily only about green bonds, but the future of green finance in the US. Our general response is that there are things that are happening in renewable cost curves, electric vehicles and battery technology that are outside the political realm. 

So we don’t see a big effect of the US pulling out of COP 21 on the issuance of green bonds, per se. Obviously, it’s a disappointment for those of us that are focused on climate, but, if anything, it may help spur the concern that private capital has about having to do something, in the absence of public efforts towards the low carbon transition.

Hervé Duteil, BNP Paribas: We concur. Interest in ESG is really, really strong, and, if anything, the Trump election has been a call to action for some. 

First, we saw it in the international context, where the large emitters, like China, India and the EU, reiterated their commitment to COP 21. And then we saw it in the business sector. 

Aside from green bonds, you have Breakthrough Energy Ventures, a $1bn fund led by Bill Gates, Jeff Bezos and others, that was launched just after the election, to invest in companies and technologies that have the potential to reduce greenhouse gas emissions. 

And then you have the We Are Still In movement formed in May, made up of mayors, governors, tribal leaders, college and university leaders, businesses and investors. Drivers for clean energy are, now, at the state level, much more than the federal level. What happens in Washington DC, to some extent, is not a big brake. And finally, as we have unfortunately seen in recent weeks, the forces of nature are much more long term and persistent than any short term election or political decision.

Schulten, BlackRock: The emergence of the We Are Still In coalition of cities and states coming together to comply with COP 21 probably would not have happened without the backlash reaction to the US announcing that it would seek to leave the agreement.

One interesting effect is that it’s brought the topic of climate change to the kitchen table in American households, where maybe it wasn’t a popular topic to discuss before.

Mahesh Jayakumar, State Street: It’s interesting that you have some ‘red states’ [i.e. Republican-voting] and red governors of blue states honouring COP 21. Take Massachusetts — a blue state with a red governor. They have teamed up with states like California and New York that are absolutely going to honour COP 21 and have set very impressive and clear renewable energy targets for themselves.

Aki Jain, World Bank: We see a general trend with investors that is part of a much longer term story which continues to play out. Even as far back as 2005, I remember the World Bank was teaming up with La Banque Postale, the French postal system, to offer a new investment product for French retail investors to help fund, and have direct information on, the World Bank’s programmes in developing countries. And in 2007, we launched a product for Dutch retail investors that was specifically focused on climate, through an equity index-linked feature. 

Ever since then, we have seen investor interest, not only caring about what they’re buying, but also what their money is being used for. It’s evolved, continuously, from investors looking to avoid ESG risks to, increasingly, seeking out investments which have a positive impact.

: Nancy, you’re based up in Ottawa in Canada, of course. Is this a great chance for Canada to take a lead in combatting climate change and developing climate finance?

Nancy Kyte, EDC: Yes. We have a Liberal government that’s very focused on their climate change agenda. That’s a large part of the reason why we came out recently with the Canadian dollar green bond. Historically, we don’t raise funds in Canadian dollars, but it was a way to assist with the development of the green bond market in Canada. It was a very successful idea and received a lot of attention — the government was very pleased.

Benjamin Bailey, Everence: On the one hand, it definitely could be better — we could be all on one team, we would have all parts of the economy including the government working towards making sure that we can combat climate change. 

But it has been interesting to see corporations, states and local governments talking about the things they’re going to do, to make sure we don’t start to go backwards.

: Are companies and issuers beginning to be judged on environmental criteria when they issue normal, conventional debt?

Jayakumar, State Street: Climate change is one of the very top themes that companies are increasingly focusing on, regardless of whether they issue green bonds or not.

Green bonds, as part of the larger SRI/ESG phenomenon, has driven the concept of sustainability and climate change to the forefront in what companies are now expected to report — for example, provide their two degree scenario modelling estimates to investors. 

So the good news is green bonds are making issuers and investors more aware, but this is happening even if you don’t issue green bonds.

Tessie Petion, Domini Impact Investments: The biggest change is there’s just more demand. There’s a bigger market that’s looking at specifically green criteria. 

But, fundamentally, most investors still aren’t paying attention to these issues. The onus is on us to drive demand, to increase the market. But if you’re doing a general Apple green bond, or just a general Apple bond, most investors aren’t asking for green criteria, they’re not looking at it yet.

: Even if they’re putting the money into a specific green portfolio?

Petion, Domini: I think not. They’re making the determination on whether they would invest in Apple in general and the green criteria are a bonus. I don’t think that most investors are looking at these criteria and making the decision based on that.

Duteil, BNP Paribas: At the portfolio level, I would very much agree with that. But at the same time, at the macro level, we see some leadership being taken. 

In the fixed income market, several funds recently announced they were shifting to ESG benchmarks. I’m thinking of Swiss Re, which recently announced replacing all its benchmarks with ESG versions, but also the Japanese Government Pension Investment Fund (GPIF), the world’s largest pension fund, which was the very first one in Japan to make the announcement that 3% of its passive domestic equity investments, about $8.8bn, would be also benchmarked against three ESG indices.

But even at the portfolio level, it is not so straightforward. When we underwrite or launch green bonds, we get requests for allocations from companies that have general and green portfolios, but sometimes it’s the green portfolio that drops out when there is a tightening in pricing, while the general portfolio stays in — which is puzzling because you would expect the support to come, first and foremost, from the green portfolio.

Bailey, Everence: I had an interesting thing happen not too long ago, when we were doing a fixed income call with a corporation. I asked a question on ESG, about how they’re treating their employees, and I said their social rating was low, and I listed the reasons. 

And he was oddly excited. He’s said it was the first time he’d ever had anyone ask him an ESG question.

On one hand I was glad I was the first, but on the other, I was sad because it meant that they hadn’t been hearing these questions. And this wasn’t his first week in the job — he’d been doing this for quite a long time and this was a pretty large company. So this is still in the early stages for some companies.

Jain, World Bank: At the World Bank, we see a huge amount of interest in sustainable and responsible impact investing. We see it as an opportunity to engage with investors. Our mandate is to reduce poverty and boost shared prosperity, and every single project we finance in our member countries is vetted through rigorous social and environmental criteria and is designed to contribute to our twin goals and have a positive social impact.

We have responded to increased investor interest on reporting by summarising work done by our colleagues on the ground. For each project, we establish metrics and we measure and report on their impact. We have also partnered with our peer issuers to develop reporting criteria and a format for summarised impact reporting to investors. 

And we see a great response from the investors. It’s like we’re partnering with the private sector to promote sustainable development, one bond at a time.

Schulten, BlackRock: There’s a growing realisation that sustainability metrics are an indicator of operational performance and can highlight business tail risks.

So there’s a lot more engagement going on, from the general, vanilla investment side, about some of these metrics and thinking about what the materiality is of them. Can they highlight information, maybe, in a mosaic of information about a company, that’s maybe not in their financial reports?

There used to be conversations between the sustainability analyst and the [investor’s] corporate governance person, and the treasurer and the portfolio manager, but those are starting to merge and there’s a lot more sharing of information.

For us, clients are interested in looking at the ESG characteristics of their vanilla holdings. That’s something we’re reporting on. The emergence of scoring methodology has really helped people put their arms around, maybe not what is the nuance, but at least what might be the bottom tail risks from an issue perspective.

Jayakumar, State Street: The emergence of SASB standards across numerous sectors is proof of what Aki just said: companies are trying to understand what information they need to provide to investors. An example I came across recently was JetBlue Airlines. JetBlue did their first SASB compliance report — it was fascinating to see a large American airline adopt the standards so quickly.

Schulten, BlackRock: That’s an interesting example. Another one would be recent shareholder proxy votes about climate reporting at oil companies. So the engagement is happening. The reporting is certainly better than it was two years ago — maybe it’s not where we hoped it would be, but the trajectory is definitely positive.

Duteil, BNP Paribas: I’d like to stress that point, which I think is really a tipping point. We saw shareholder upheaval earlier this year at ExxonMobil, but at other companies, too, such as Occidental Petroleum before. It’s really turning the tide. You see large pension funds, especially state pension funds, leading the charge and focusing on the larger emitters in their portfolios.

For example, CalPERS has announced that of the 10,000 companies they are invested in, just 80 are responsible for 50% of their portfolio’s greenhouse gas emissions. They’d rather focus on those and really engage the boards.

: Nancy, as an issuer, is that something you’ve noticed?

Kyte, EDC: 100%. We have a corporate social responsibility department that really has expanded what they’re reporting in the CSR report, the most recent of which we published a couple of weeks ago. The depth of what we are explaining has really grown.

Petion, Domini: One of the advantages of fixed income is that you have people who are thinking about the long term and thinking beyond quarter-by-quarter. That’s the reason why we’re seeing this interest, from people like State Street, looking at the 10, 15 and 30 year timeline.

: We are on course to hit the $100bn mark for SRI or green bond issuance this year. It’s taken only 10 or 12 years to get this far, after issuance really took off in 2013. Can we expect this kind of trajectory to continue over the next couple of years?

Duteil, BNP Paribas: While the growth is impressive, it’s still a tiny market. It’s a bit over $300bn outstanding, 0.3% of the entire fixed income market. Even if you double that, it’s still tiny. I would hope it would sustain that type of growth, because there’s still a long way to go.

Bailey, Everence: The breadth of the market is important, too. That’s going to be necessary: more and more countries, more and more currencies, more and more issuers. That’s what we need for a healthy market.

: What’s keeping it back from becoming a $500bn market? Is it the issuers or the investors?

Jain, World Bank: The market is continuing to grow, for both green bonds and sustainability. Since our first green bond in 2008, we’ve issued more than $10bn. Initially we focused primarily on fixed rate vanilla issuance, but we also wanted to engage a wider group of investors, including retail. 

We partnered with Hervé and colleagues at BNP Paribas to issue a series of green growth bonds, which were basically green bonds in terms of the use of proceeds, but the returns offered to investors were linked to the performance of an ethical index. That got a lot of interest. We’ve issued more than 15 bonds, with $500m issued across the Americas, Europe and Asia.

And to meet investor interest around the broader framework of the Sustainable Development Goals, we partnered with BNPP to issue notes linked to an index which tracks corporate performance against the 17 Goals.

Of course, all World Bank bonds support the SDGs because of our mandate.

: You’ve done work with Mexico around catastrophe bonds, haven’t you, which could, potentially, be part of the SRI universe too?

Jain, World Bank: Yes. Since inception, when we’ve talked about green bonds, the message has always been that investors are not taking project risk. Investors get the full triple-A balance sheet of the World Bank. A lot of our core investors such as central banks and institutional investors still want that triple-A, in principle protection. 

But we saw that there were a lot of our client countries that were facing different types of risks. So back in 2014 we set up a separate programme called Capital at Risk notes.

From this programme we issued catastrophe bonds, initially for a group of Caribbean islands and, more recently, for Mexico, where we transferred earthquake and hurricane risk to private investors.

Most recently, in June, the same platform issued a pandemic bond. This transfers the risk of six different strains of viruses to two private investors. 

This was part of the response to the Ebola crisis of 2014. We were working with a mandate to see what we could do in the capital markets to transfer risk and be better placed to address future crises.

These bonds are set up in a way which are parametric, so if there’s an outbreak and the disease spreads from one region to another, and there are a certain number of cases, then the money’s triggered automatically and it can be immediately deployed to countries, so that they can prevent contagion.

We have heard that investors are making this link to the SRI market, since when bonds are triggered, they are used for social purposes.

Duteil, BNP Paribas: On the issue of market size, the biggest hurdle to growth is very much on the corporate side. For the MDBs, because of the work they do, the story is fairly easy to communicate. But on the corporate side, the problem is the standards — or rather lack of them.

On one hand, we could say that we don’t need standards. Repsol, the Spanish oil company, issued a green bond and then later attracted controversy. So you could say, because there was a controversy, it shows the market is actually self-governing. 

But issuers who have not yet issued a green bond are going to think twice about it, because there is a risk that it is going to backfire on them. The lack of standards is really a problem for issuers.

: You mean they can only see the downside?

Duteil, BNP Paribas: Today, yes, because issuing vanilla bonds might sometimes be safer than issuing green, even though you are doing something which is incrementally positive for the environment.

Bailey, Everence: From my perspective, it is the tug of war between issuers and investors over pricing that is holding back the corporate market. 

Issuers want to come to the green bond market to pay less than they would if they weren’t issuing a green bond. Meanwhile, investors want to be able to tell their clients that they’re not paying up for it.

When I’ve talked with a couple of green bond issuers, one of the things they say is they loved being the first, they loved the marketing aspects, they loved growing the pool of investors, but they were disappointed they weren’t able to come tighter than their conventional curve. There are costs involved and they wanted to be reimbursed for those.

We have also heard from some issuers that there is just not enough incentive to stick their necks out and do a green bond. They think there are too many risks that it might backfire on them. 

As an investor, I understand some of these concerns, but there are a lot of positives also.

As investors, we’re doing extra work too. We’re making sure it’s meeting all our criteria and, later on we are analysing reports and impact data. There are extra steps to do, other than just looking at the credit itself.

Jayakumar, State Street: Your question was why is it not a $500bn market? There is still onus on issuers to do more work pre-issuance and post-issuance, and not every issuer is ready to do that. In many cases, they just don’t want the extra work. 

Given how easy it is to issue vanilla bonds in a very deep and liquid market like the US, they might say: “You know what, I’m OK not doing the extra work and going through what I need to do to issue a green bond.”

So until you can change that perception — and this is where I think standardisation comes in — and make it easier for companies to disclose information, there will be a lot of entities who are reticent when it comes to issuing green bonds.

: Mention of the downside is almost ironic because a lot of the growth of this market has come through issuers wanting to do it for good marketing purposes. They haven’t been able to get the pricing advantages, so they’ve done it for brand recognition.

Jain, World Bank: One additional benefit for issuers is investor diversification. Your green or labelled SRI deals will bring in some investors who will only focus on green or SRI issues. It might not be as direct a benefit as pricing, but it is still a big benefit.

Schulten, BlackRock: Let’s not forget that this is a market that is four years old. We have a new asset class; we have $300bn of debt outstanding; we have S&P and Moody’s doing ratings; we have major index providers providing indices; we have funds getting launched; we have country guidelines being issued by China, Japan, Brazil, hopefully the EU; there’s enormous public support and interest in this asset class in a very short time frame. So I think we’re asking the wrong question. 

Kyte, EDC: Our SRI bonds have priced flat to our US dollar curves. We could have upsized all of them — our recent green Canadian dollar deal was three times oversubscribed. 

To your point, it’s more work on both the supply and demand sides, but people believe in the long term direction and where this market is going.

There are many, many achievements that have happened in a short period of time, so notwithstanding the fact that it is a lot of work and there are a lot of unknowns and there are wrinkles to work out, it’s been a fantastic experience for all of us here, to move forward and get involved.

Our experience with investors has been that although they would definitely like to have standards, they just want people to get going and to improve and to move forward. There’s a really nice camaraderie among all constituents. That’s been our experience here in Canada and around the world.

Schulten, BlackRock: Corporates need time in their funding calendars. They don’t just wake up and say, “I’m going to do green bond” and just do a green bond. 

The standards question is last year’s conversation. I think it’s pretty clear now what a green bond is. It’s very clear to most market participants what a Green Bond Principles green bond entails, in terms of structure, in terms of proceeds. 

There are some at the edges that come that label themselves green bonds without having done much due diligence on it. But 98% of the green bonds that come are, in our mind, legitimate Green Bond Principles-structured green bonds.

Duteil, BNP Paribas: It’s not about what is green, because I don’t think there is a single answer to that, but about what is safe to label as green, without getting market and press criticism. 

Back to the issuer’s upside. The upside is absolutely undeniable for issuers on all metrics; the question, though, is the cost.

In most cases, especially in the US, we see upside even without tighter pricing. We brought US utility Southern Power to the euro market. It was the first time for a very long time that an American utility had launched an issue in euros, and they certainly got more investors’ attention because it was brought to market as a green bond, highlighting their story of a massive transformation over the last decade to clean energy. So there is also tangible upside for issuers, beyond just pricing.

Finally, and most importantly, if we go back to the basics, pricing has to be tied to credit. But by issuing a green bond you communicate an outlook, you communicate a direction that your company is taking and which demonstrates a more positive credit outlook.

: It’s not just primary pricing we should think about, it’s also secondary. It might still be anecdotal, but green bonds are often said to perform better over time and during periods of volatility than conventional paper. This might be because the investors who buy green bonds tend to be more buy and hold, or at least longer term in their outlooks.

Duteil, BNP Paribas: They are less volatile because right now there is much more demand than supply. But if we fast forward to five years from now, when the market is much more liquid, I’m not so sure it will still be true.

On the other hand, what may happen is because an issuer is issuing green, its conventional curve might start moving into line, because the company is demonstrating that it is very conscious about handling long term climate issues.

Schulten, BlackRock: I’d actually argue the other side and say that there’s a pricing tension emerging in the secondary market that you’re not yet seeing in the new issue market. Probably, over time, we will start to see pricing tension manifest itself in the primary market. And that is a game-changer for this space.

: Nancy, has EDC noticed a difference between its conventional and green bonds in the secondary market?

Kyte, EDC: Typically, we issue a conventional US dollar global benchmark first, and then we follow with a green bond. The goal is to satisfy our loyal central bank, official institutional investors with the product they’re looking for, and then try and maximise allocation to green accounts. That strategy has worked very well for us. 

: We’ve mentioned that corporate supply has disappointed. But what about the banks? Are we surprised that we haven’t seen more of them issue?

Bailey, Everence: I don’t want to be too negative about this area, because there are a lot of positive things. In terms of the overall numbers and how quickly can we get to a certain level, banks will have to play a role, and they’re in a good position to do so. 

They’re doing a lot of really good environmental work, they’re already doing a lot of impactful loans, so they’ll be able to put those together and issue unsecured deals.

Jayakumar, State Street: US banks were some of the first issuers, after the multilateral development banks, to come to the market. Fast forward to today, they are among the more mature participants in the marketplace.

You are starting to see EM banks do a lot more green bond issuance, including a lot from China. You saw the announcement from the State Bank of India on a very large, multi-billion dollar bond recently. You also have the IFC Green Cornerstone Bond Fund, the explicit goal of which is to support EM finance and EM banking.

Duteil, BNP Paribas: EM banks have more opportunity than developed market banks. DM banks are transitioning, but their portfolios are mixed and they have to be cautious not to go overboard and be accused of greenwashing.

They have supported the market. They’re sincere in backing green bonds with real green assets that they have; but there is this fine balance to strike, which might explain why you’ve seen a slowdown of DM bank green bond issuance in recent months.

: How is the investor base changing, and what are they looking for?

Petion, Domini: Now that issuers are increasingly using the Green Bond Principles, it’s easier for us to get a sense of whether they’ve thought deeply about their criteria.

What we’ve seen is a change in issuer. The European Investment Bank’s Climate Awareness Bonds were one of the first to the market, and we’ve seen that, over the years, the market’s definition of what climate awareness means has changed. So for us, we just want to make sure that the issuers mean what they’re saying.

Schulten, BlackRock: This is a four year process and it’s taken investors time to digest what this new concept is. There are certain investors that sort of wait and see on the sidelines. Green bonds were a new topic for them a couple of years ago, and now everybody knows what a green bond is. 

As a large asset manager, we have conversations with asset owners all over the world, and in most conversations there’s now a comfort in the credibility of the green bond market and an increased willingness to look at it as part of a portfolio.

One change we have noticed is around impact reporting. We’ve always been somewhat demanding on the impact reporting side — we feel like that’s a really strong argument for the green bond market. A couple of years ago, issuers would tell us that they couldn’t do that, that legal would not let them publish it, it was too difficult, etc. Fast forward to today and we recently did an impact report on our green bond fund and 85% of the issuers in the fund had some sort of impact reporting. Three years ago, if you’d have told me that, that would have been a dream. So we’ve become more sophisticated in thinking about impact reporting, and the conversations with the issuers are getting more sophisticated about metrics.

: That’s fantastic but is that because most of your investments are in MDBs, which were early adopters of impact reporting?

Schulten, BlackRock: No — 85% of issuers, not just MDBs. MDBs are probably only 50% of the green bond market now. Their percentage is shrinking a lot. Half the market is now corporates. I should point out that some corporates are more sophisticated than others. Some just give me an emissions number, but at least they’re giving us something.

Jayakumar, State Street: One of the things we’re seeing that amazes me — as a large asset manager that serves a plethora of asset owners, institutional investors, the retail channel — is how mainstream investors are increasingly aligned with their ESG and SRI goals. There is a deep desire to understand more about ESG integration into mainstream portfolios, beyond just green bonds.

At the end of the day, green bonds are one way of implementing your ESG exposure. It’s important for us to grow this market, but also not to lose sight of all of the other ways we can have positive impact in the fixed income space.

Petion, Domini: Because I’m exclusively focused on impact investment, everything I do in the fixed income space is looking for impact, whether it’s social impact, affordable housing development etc. So yes, the green bond is just a sleeve within that much larger context. It’s important for us to grow this market, but also to not lose sight of all of the other ways we can have positive impact in the fixed income space.

Jain, World Bank: We see the same thing. On an annual basis we issue about $50bn-$60bn of bonds, and while climate is a key focus for us, there are other priority projects that are related to health, education etc. 

When we work with banks, the enquiry will come in: “I have an investor who’s interested in a green bond.” But then we sometimes test it: “Is it exclusively interest for green or it broader SRI/ESG?” And a lot of times, they end up saying the interest is much broader. 

Recently, I was reading that since 2000, we have done more than $50bn of projects in education, the biggest education investment in the multilateral world. We see that really resonates well with the investors.

Duteil, BNP Paribas: One investor trend we see, at least among the most sophisticated or advanced ones, especially in the Nordics, is the broadening of the theme. We’re now beyond green, beyond carbon foot-printing. Now, these investors explicitly refer to the Sustainable Development Goals. There was a coalition of investors in the Netherlands of about $3tr of assets which recently declared that they would align their investment much more closely to the SDGs. This was followed by a similar announcement from the six largest institutional investors in Sweden.

That’s why BNP Paribas, working with the World Bank, brought that structured equity-linked green bond, which is a sustainable bond indexed to the SDGs. We saw this really start to emerge after COP 21. COP21 was the year of climate, but as soon as we had closed the chapter, in December ’15, we moved to the ’17 goals. So that’s the new trend in Europe. We don’t see it, from my vantage point, so much in the US, though.

One last point, and it’s more a wish. What I’d like to see is an interest beyond vanilla structures. So far, the interest seems to be mostly in standard structures, often because they fit easily into traditional portfolios. But there are lot of really great products around, like hybrids between debt and equity, that are somewhat bespoke. However, they don’t get the attention, especially in the US, because portfolio managers can’t fit them in their traditional buckets. 

: We’ve got a mixture of investors here today, including specialists and mainstream. Starting with the former, are the number of specialists increasing in this market?

Petion, Domini: I think a lot of the growth is coming from the BlackRocks and State Streets of the world. The specialists have a role to play, but our investors have really particular interests and really specific cut-offs that I think would be really difficult for a BlackRock or a State Street or a Paribas to address, because they wouldn’t create a product that’s so niche. 

We’re for people who have very explicit requirements… they may not want nuclear, fossil fuels or genetically modified organisms. Most of the market wants to know that they’ve invested some money, that it’s going to projects they want to support. That’s why the growth will come from a broader product. Most people just want to do good with their money. 

The specialists are really for: “I would like to do well for my money, and also I want you to have animal welfare principles and this and that and that.” You get much more specificity from the specialists.

Bailey, Everence: We’re a much smaller shop, to say the least, than BlackRock or State Street. But the exciting part is that we’re seeing good growth. In terms of percentage growth, it’s still a really exciting space to be in, because when you talk with either institutional investors or retail investors, this is a great value proposition. The investor can have great returns for retirement, for your kid’s college fund or whatever it is, and you also have specific positive impact that you can quantify, that you can talk about. To be able to get both the returns and the impact, instead of just getting a bond index fund, why not? 

Kyte, EDC: We’re seeing what I would call the wait-and-see crowd starting to get involved. In our recent bond, we had quite a few orders from different cities across Canada. They don’t have specific mandates but they are public sector and they are not only interested in investing in this product but, potentially, in issuing too. So that’s an interesting and very beneficial development — the next wave is now becoming engaged.

: The 0.3% share of the market was mentioned earlier — what’s that going to be in five years’ time?

Duteil, BNP Paribas: The trend is there — 0.3% is green bonds, but there’s so much more that’s not labelled green, and that’s really what matters. The climate issues are growing and the solutions have to be built — and they will be financed, one way or another. 

Schulten, BlackRock: I think there’s definitely room for growth in products. We are going through a sustainability revolution in society and there is an increased interest in sustainability in all products — whether it’s the milk you drink, the sheets you sleep on — and financial products are no different. 

I would love to see some retail products that are available for people’s 401(k) around these themes and encourage growth there.

Jayakumar, State Street: You can go back and look at the exchange-traded fund market, look at the ESG ETF market in both equities and fixed income, and you will find products that didn’t exist two or three years ago. Some of us at the table have competing products that address ESG themes as retail products. They’re accessible to, increasingly, the millennials and institutional investors.

Petion, Domini: That’s such an important point. Maybe five or 10 years ago, we were often asked questions around our decisions to exclude or not exclude companies or sectors. Now, fewer people are surprised about the decisions we make, and this is because it’s being integrated into mainstream thinking — everyone’s thinking of ways to create alpha, to add value to the process. 

The biggest change is that they understand that these factors can help identify that, can be an additive part of the process.

: Are we going to see more project-specific deals, so green project financings, more green securitization? 

Duteil, BNP Paribas: More securitization? Certainly. You’ve got the Property Assessed Clean Energy loan deals already coming through. 

And we issued the Solar Mosaic Solar Loans 2017-1 transaction earlier this year, our first securitization of consumer loans secured on residential rooftop solar systems by Mosaic. 

But project bonds? –I’m not so sure, because of the bespoke nature of those deals. 

Securitization, asset-backed securities, are the ones which have seemingly passed the hurdle, with the early deals having been accepted. We’re probably in the second phase now of growing that market. 

Project bonds have been around for longer, but I think they will remain a niche market.

: Because of construction risk?

Duteil, BNP Paribas: Yes, but maybe also the structuring of the investment takes a long time, and funding projects on corporate balance sheets is sometimes easier.

Jayakumar, State Street: You can fund long term infrastructure projects without necessarily calling them green bonds. You can aim them at a certain set of investors looking for asset-liability management in terms of those long structures, without necessarily making it a public bond that is listed in an index, for example. As a result, there aren’t that many project finance green bonds in mainstream indices.

As for securitizing green assets, absolutely, you’re going to see a lot more of it. In the US you saw Fannie Mae come to the market recently and green auto ABS issuance has been strong for a few years now. 

And then you have the good work that the European Green Securities Steering Committee has been doing around what needs to be done to promote green covered bonds 

Jain, World Bank: We haven’t done securitized bonds, but I have already talked about the bond we issued for Mexico, where we transferred earthquake and hurricane risk: those bonds are not labelled green bonds but there was an extremely positive reception from investors, and some have made the link to SRI.

: Are investors happy with the current level of reporting in green bonds?

Schulten, BlackRock: More is always better. I have been very impressed with the pick-up in acceptance of the concept of impact reporting. To be able to run an impact metric on one green investment versus another really opens up the conversation. 

I’ll give a specific example. Recently, we ran an impact report on a green bond fund and compared it with a renewable infrastructure fund, and we kept thinking: “There’s something wrong here because the green bond fund looks a little bit stronger than the renewable infrastructure fund. How can that be? Obviously, I must be doing my math wrong.” 

And what we realised is that, like we said, 50% of the bonds in our portfolio were from the SSA community, and a lot of those projects tend to be in emerging markets. 

So when you’re looking at different baselines, between renewable infrastructure projects in Germany versus baselines of a renewal infrastructure project in an emerging market country, you’re actually seeing a lot more impact. 

So that opens up an interesting conversation, thinking about EM versus developed market green bonds. And if you were a true impact investor and really green investor, thinking, “Where am I getting most bang for my buck in terms of impact return?”, you can get that through thinking about impact reporting. 

: Let’s talk about the non-green part of SRI bonds: social bonds. Can we expect this sector to grow like its green counterpart?

Petion, Domini: The structure’s there for green deals, so it’s easier. Social bonds are more amorphous — they can be anything. So that’s why we talk so much about the green bond market. However, our fixed income fund has about 60% that’s high impact; only about 3% of that is green bonds, so there is a ton of interest from people thinking about health, education, community development or affordable housing. It’s just that there isn’t yet a structure in place that makes it as easy.

Jayakumar, State Street: The larger investment community have been talking about social bonds for a while, but we’ve just not seen the social bond structure and market take off like green bonds have. Social impact lends itself more easily to non-public security structures, in terms of how you deploy the capital and how you measure impact. 

Bailey, Everence: Now we have the Social Bond Principles. That’s a good positive step. At the Praxis Impact Bond Fund, for a little while now we’ve talked about wanting to make sure our investments are having an impact on the climate and the community. The community part could be affordable housing or health care or immunisation bonds. There are lots of really interesting stories out there. 

Having the combination is really interesting, because certain investors might care about green but might also really care about social or community aspects too. 

Duteil, BNP Paribas: In northern Europe, we see the emergence of interest in social themes. However, beyond measuring the impact, the difficulty is how to aggregate the impact. Aside from affordable housing, which is well understood, how does an investor report and communicate to its clients and its management? There is the desire to do these deals, but the bucketing is hard to achieve.

: Is one of the drawbacks of social bonds that they tend to be much more local — by which I mean specific to a certain city or region — and therefore don’t get the same international investor interest and take-up as a green bond might? Green bonds are meant to have a positive environmental impact, and the environment is a global concern, so relevant to all.

Duteil, BNP Paribas: It’s true, you’re right that social bonds are more regional in scope. Would Californian investors invest in a social bond in Connecticut? We have anecdotal evidence that some don’t, but would if the impact was in their state. 

: Let’s return to definitions and standards. In some European countries, and in China, regulators are starting to pay attention to the market and, in some instances, move towards an official definition of what is green. Ashley, do you want more standardisation in the market? If so, how should that be achieved? Does
government need to take the lead?

Schulten, BlackRock: The emergence of the green bond market has really happened in the private sector, and that’s interesting because there’s a lot of interest in the public space about what to do about the COP 21 goals. So there’s an interesting Venn diagram there about public-private partnership and trying to facilitate growth in the green bond market. This is a real asset class that has developed primarily from the private markets that, up to now, public markets have really not helped that much.

As a result, the standards have pretty much been set. They’ve been set by the Green Bond Principles, and although there are grey areas, we’ll work through them over time.

It’d be nice to have these not set in stone, but maybe put in guidelines, informal guidelines. It would be nice to have participation from public bodies as asset owners and investors. 

Obviously, we’ve benefited from the examples of France and Poland coming with sovereign green bonds. To the extent that we could get some sort of support for the market in terms of tax benefits or capital relief or whatever seems appropriate — I think that that would be welcomed.

Jayakumar, State Street: I saw a news article recently that ANSI, the American National Standards Institute, is talking about green bonds. That tells you there’s real interest in standardising. 

What China did was interesting: they made a bold statement in terms of green bond issuance and how they were going to be supportive of the market, without necessarily going down a step-by-step bullet point list of what is green.

There’s room for governments to support the growth of the market and existing issuance — I don’t think governments are going to step in and start writing laws about what is green. I don’t think they want to do that, but you are definitely going to see countries throw their weight behind it, just as China did. India did the same thing recently.

You’re going to see this more in EM, because they are catching up with green bond issuance and governments have a vested interest in the overall impact to society. Whereas with developed markets, I think it’s much more mature. There, private entities are doing their part already to push standards forward. 

Jain, World Bank: As part of our engagement with our member countries, we have seen a lot of interest from emerging markets in green bonds, and we have been formally or informally guiding some of them and showing them what they can do. 

Recently Malaysia issued the first ever green sukuk, an Islamic bond done as a green bond. It’s a process that takes time, so it’s good to see, in this case, Malaysia coming through with that issue.

: On the subject of emerging markets, does anyone have any sympathy for China when it says clean coal should be part of its green

Petion, Domini: For our investors, it would be

hogwash. We have a very specific point of view — we just don’t do coal.

Duteil, BNP Paribas: Just a thought, it’s not an opinion per se, and my initial reaction about clean coal is the same. But in a country where pollution is so prevalent, the impact of switching to “cleaner” coal is much more than environmental — it is about health and it is social. So, in some ways, I can understand how there can be a debate.

Schulten, BlackRock: If you talk to different environmentalists, some will say they do not want fossil fuel infrastructure build, and others will acknowledge that coal is a significant part of the energy generation in China right now, and working on efforts to contain emissions will make a big dent in their goals to a low carbon transition.

We, as an asset manager, will not make those judgements for investors. Some investors will say that fossil fuels are a no-go for them; others will want our opinion and say: “Is this going to have significant emission reduction in the short term?” The answer might be yes. So I think you have to put it in context.

: What difference has the greater involvement of the rating agencies made in this market? And do we envisage rating agencies becoming the main providers of second opinions, as well as impact reporting, in the future?

Jayakumar, State Street: Rating agencies are increasingly revealing how they take into account ESG factors as part of their score. So in a world where credit ratings are still paramount to certain investors, I’m glad the rating agencies have jumped in, because it gives investors, including mainstream investors, more answers.

: There are around 40 second opinion providers at this stage.

Jayakumar, State Street: The market will eventually flush out who does what. But at the moment, the more opinions the better, in terms of diversity.

Duteil, BNP Paribas: We’ll probably see some integration in the sector.

Jain, World Bank: One area where we have had discussions with rating agencies is about whether they can reward a sovereign in its rating matrix, if it buys insurance protection against disasters, for example with catastrophe bonds. Logically, if, say, Mexico has protection from these risks, they’re in a better position fiscally, in terms of their debt rating, than others that do not have the protection.

When we structure catastrophe bonds we spend a lot of time talking to governments, and often there is a reluctance on their part, because they face having to spend precious public money on issuing the bond as an insurance vehicle, but they obviously don’t know if it’s going to pay off or not. So a lot of times, they are on the fence.   

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