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Global issuers flock to Japan’s ESG theme park

By GlobalCapital
29 Sep 2017

Japanese retail investors have been keen buyers of ‘themed’ or ESG (environmental, social and governance) bonds for many years, and institutional investor appetite for green or socially responsible issuance is now growing rapidly. This is creating a wealth of opportunities for international and local issuers in the ESG market. A multinational panel of issuers in the global and Japanese capital market gathered to discuss the prospects for increased Japanese investor demand in this fast-expanding area.

Participants in the roundtable were:

Flora Chao, head of funding, Asia Pacific, International Finance Corporation (IFC)

Roland Charbonnel, director of group funding and investor relations, Groupe BPCE

Antonio Cordero, head of funding and treasury, Instituto de Crédito Oficial (Ico)

Ryu Hihara, general manager, credit investment department, Nippon Life Insurance Company

Hiroyuki Kato, director general, treasury department, Development Bank of Japan (DBJ)

Mariko Kawaguchi, senior analyst, management strategy research department, Daiwa Institute of Research (DIR)

Carlos Martabit, chief financial officer, Banco del Estado de Chile (BancoEstado)

Piotr Nowak, undersecretary of state, Polish Ministry of Finance

Satoko Tanaka, director, capital markets division, treasury, finance and accounting department, Japan International Co-Operation Agency (JICA)

Keith Werner, head of funding, African Development Bank (AfDB)

Phil Moore, moderator, GlobalCapital

globcap: Principles for Responsible Investment (PRI) commented recently that Japan is the world’s fastest growing market for ESG investment. What have been the main drivers of increased institutional participation in ESG investments? 

Mariko Kawaguchi, DIR: I agree with PRI’s assessment. Abenomics has been the driver. The introduction of the Stewardship Code together with the Governance Code, as well as the signing of the PRI by the Government Pension Investment Fund and its commitment to promoting the UN’s Sustainable Development Goals have been especially important in accelerating this growth.

The Stewardship and Governance codes have created a common platform for a dialogue between investors and corporate management about the long-term value creation that ESG factors can generate. The empowerment of women is another theme of Abenomics, which has also helped investors and corporate management to focus on the social elements of ESG. 


Roland Charbonnel, BPCE: We believe that some large Japanese institutional investors, especially life insurance companies, are keen on expanding their ESG-type investment. Many have dedicated funds or separate pockets of investment for this. It looks as though the policy of the Abe government is to encourage investors to allocate to this market, which is a significant incentive.


Ryu Hihara, Nippon Life: Since the government signed the Paris Agreement, the importance of ESG has become more widely recognised in Japan, with investors such as the Government Pension Investment Fund (GPIF) and Nippon Life signing the PRI. The commitment of these investors has contributed to the development of the market and encouraged more international participation.

Nippon Life was involved in discussions with the Ministry of Environment when the Green Bond Guidelines were drawn up. These should encourage an increase in supply and demand in the Green Bond market, so we hope they will contribute further to the development of the broader Japanese ESG market. 


Satoko Tanaka, JICA: We think increased participation in ESG investments has not only been because of the initiatives by the Japanese government, but has also been driven by the global agenda including the UN’s PRI and the recently adopted Sustainable Development Goals.


Antonio Cordero, Ico: Clear frameworks and regulations for social and green bonds have all made institutional investors willing, comfortable and happy to add thematic bonds to their portfolios. These framework milestones are drawing investor attention and encouraging investors to formulate strategies in this market, fuelling proactive approaches to the incorporation of impact-oriented bonds in their investment policies. 

Investors are also taking notice of the support of governmental and official institutions for these initiatives, along with the more vocal interest of depositors. They are responding to what society is demanding from them in terms of contributing with their investment to a more sustainable and social-friendly economy.


Flora Chao, IFC: We see growing ESG awareness in Japan, as seen in the first green bond conference taking place in Japan this year. Although the market is still catching up with regions such as North America and Europe in terms of actual investment, some Japanese institutional investors have taken on ESG mandates and are keen to diversify their ESG investments with newer products such as social bonds.

The publication of the Green Bond Guidelines is evidence of the growing interest in this market in Japan. It is a very good summary of the green bond market, which is written in Japanese and acts as an excellent reference for Japanese market participants.


Carlos Martabit, BancoEstado: Japan is definitely an attractive market for SRI issuance. The Japanese investment community is very responsive to social and green themes, and the development of the market has been helped by government initiatives such as the Green Bond Guidelines. 


Piotr Nowak, Polish Ministry of Finance: The benefits of green bond issuance are clear. Diverse multinational climate agreements and country-level programmes are pushing states around the world to finance environmental projects to achieve sustainable development and climate objectives. However, the transition to a low carbon economy is very costly. The amount of money that will need to be raised over the coming years is such that the development of a deep, liquid and transparent green bond market should be of interest to everyone. Implementing clear guidelines should obviously help to create a well functioning green bond market.


globcap: In the international market, DBJ issued Japan’s inaugural green bond in 2014 and its first dollar denominated SRI bond in October 2016. Kato-san, can you give us an overview of DBJ’s strategy in this market?

Kato, DBJ: DBJ’s commitment to sustainability issues goes back to the 1960s, when we provided financing to end-of-pipe technologies, together with investment in factories and power plants to cope with the pollution that was the by-product of Japan’s economic growth. 

In line with the evolution of global initiatives such as COP [the UN’s Conference of the Parties] and the Social Development Goals, we are now addressing wider sustainability issues ranging from pollution and carbon emission reductions to business continuity in the wake of natural disasters, and even community development including education and healthcare. We are very proud to have been a pioneer of sustainable financing in Japan through the Environmentally Rated Loan Programme in 2004, which finances our clients using DBJ’s own ESG rating, and the Green Building Certification in 2011. 

This fiscal year, we have clearly identified sustainability management as one of our top priorities by establishing our corporate policy on sustainability. We have just released the integrated report for the first time. 

Having seen the rapid growth of the ESG bond segment in recent years, driven by leading SSAs and institutional investors, we came up with the idea of issuing green and sustainability bonds to match our commitment with those investors’ interest and to raise funds supporting businesses and projects addressing sustainability issues in a more transparent manner. As the first Japanese issuer in this market, our commitment to issuing sustainability bonds annually has been endorsed by DBJ’s top management.


globcap: Have your international bonds been targeted principally at mainstream investors or dedicated green funds? 

Kato, DBJ: Our primary objective in issuing green and sustainability bonds is to diversify our investor base, especially by reaching so-called green or SRI investors who have not participated in our international bonds, including our traditional government-guaranteed issues. This objective has been met: more than 60% of last year’s sustainability bond was allocated to investors with green or sustainable mandates.

This year’s updates to the Green Bond Principles, and the introduction of the Sustainability Bond Guidelines by ICMA, will encourage more market participants to participate in green, social and sustainability bond markets. As a new member of the GBP, we will continue aligning our bond structure with these global frameworks. We are also planning to expand our eligible asset categories for upcoming sustainability bond issuance to include financing for real estate properties and Reits with a rating from GRESB [Global Real Estate Sustainable Benchmarks], as well as renewable energy and clean transportation projects.


globcap: Have your ESG bonds been certified by external third parties, and how have the proceeds been allocated?

Kato, DBJ: Sustainalytics provided the second opinion on our 2015 and 2016 sustainability bonds. We allocated the net proceeds to financing under the Environmentally Rated Loan Programmes and the Green Building Certification scheme. Sustainalytics reviewed our new issuance framework and provided its latest second opinion in September.


globcap: Tanaka-san, JICA was the first Japanese borrower to issue yen bonds in accordance with the Social Bond Principles (SBP) published by ICMA in June 2016. How would you describe JICA’s experience and strategy in the social bond market? 

Tanaka, JICA: Our investor base has been significantly broadened due to the issuance of the first social bonds as a Japanese entity in accordance with the SBP. A number of investors with ESG mandates invested in our bonds, including some life insurance companies. To advertise their ESG commitments, some investors have disclosed the purchase of our bonds on their websites or annual reports. This had not happened before we started issuing social bonds.

As for our plan for the fiscal year 2017 ending in March 2018, we intend to issue a maximum of ¥80bn ($720m), ¥40bn of which has already been issued, in the domestic market. All of this will be in social bonds. 

In the global market, we launched a $500m issue in April 2017, although we have not explicitly labelled our global bonds as social. Our issuance plan for the 2018 fiscal year is yet to be determined.


globcap: Has JICA’s social bond issuance in the yen market been certified by an external third party, and how have the proceeds been allocated?

Tanaka, JICA: In line with the SBP recommendations, we obtained a second opinion from an external third party, the Japan Research Institute (JRI). Its report published in 2016 is available on its website and comments that “as a result of the review with reference to the four components of SBP, we evaluate that JICA bonds are aligned with the character of social bonds, defined in SBP, where the proceeds will be exclusively used for social projects to address social issues”. This also explains that “the proceeds of JICA bonds have been managed in a highly transparent system”.


globcap: Turning to international borrowers, what is the AfDB’s strategy in the ESG market?

Keith Werner, AfDB: The African Development Bank has been supporting both environmental and social investment with the promulgation of a new 10 year strategy (2013-2022) in which the bank outlined two overarching objectives to reflect a vision of transformation on the continent — achieving inclusive growth and helping Africa gradually transition to green growth. 

Then, in 2015, the bank identified five priority areas, referred to as the “High 5s”: “Light up and power Africa”; “Feed Africa”; “Industrialise Africa”; “Integrate Africa” and “Improve the quality of life for the people of Africa”. They were devised to accelerate the achievement of the 10 year strategy. The High 5s should help Africa achieve 90% of the sustainable development goals and are intrinsically linked to the African Union’s Agenda 2063. 

Between 2011 and 2015, the bank approved approximately 260 climate-related projects for an estimated $12bn, and 70% of the bank’s projects were designed, sited, implemented and managed to cost-effectively build resilience and minimise climate risk. 

In this context, and with growing demand from investors for socially responsible investments, the bank established a green bond framework in 2013 and issued six green bonds, raising a total of $1.5bn to finance 29 green projects in 15 African countries and contributing to a GHG emission reduction of 43m tonnes of CO2. Given the success of the green bond framework in highlighting the bank’s important work in the green sector, we recently began the process of launching a social bond framework to issue social bonds by the end of this year.

globcap: Flora, can you give us some background on the development of IFC’s ESG issuance and future plans?

Chao, IFC: IFC’s green bond programme was launched in 2010, and as of June 2017 had raised about $5.8bn through 79 bonds. These have included the market’s first benchmark-sized 10 year green bond, and issuance in several emerging market currencies. 

In March 2017, IFC launched its social bond programme to meet growing ESG awareness and investor demand by merging two existing socially responsible bond programmes — the Banking on Women bond programme and the Inclusive Business bond programme. 

In both our green and social programmes, IFC now has a platform to build out the programme in a variety of markets, including benchmarks, private placements and retail, and we would look to issue as we see investor demand so we can finance IFC’s green and social client projects in developing markets. 


globcap: Ico is well regarded as one of the most innovative pioneers in the ESG market with its social bond programme. How has this programme evolved?

Cordero, Ico: Ico started to issue social bonds in 2015 after some banks approached us with a proposal to issue green bonds. The bulk of Ico activity is in the social spectrum with the second-floor facilities to finance SMEs, so we decided to set up a social bond platform, where job retention and creation is the key aspect.

For this purpose we defined a scheme with three criteria: SMEs, Spanish regions with GDP per capita below the national average (which are also the regions with the highest unemployment rates) and exclusionary criteria for activities not considered ESG.

In line with our commitment to issue a social bond every year, we have already issued three benchmark transactions totalling €2bn. International investors have consistently bought our social bonds, accounting for distribution of between 65% and 85% of the three transactions, about 50% of which have been placed with ESG investors.


globcap: Poland has been a notable pioneer of the green bond market among governments, launching the world’s first sovereign green bond last year. Minister Nowak, can you give us some background on this transaction? 

Nowak, Polish Ministry of Finance: Poland was the first to demonstrate that the green bond market can be successfully tapped by sovereign issuers. In December 2016 we issued a €750m five year green bond priced flat to a hypothetical five year conventional bond. Demand reached €1.5bn and was well diversified both geographically and institutionally, with 61% of the allocation going to designated green accounts. 

The main objective of our issue was to finance — or refinance — projects with a positive impact on the environment. We have listed several sectors eligible for green financing and after internal assessment decided to issue green bonds. Besides the main benefit of financing green projects, our transaction attracted many new investors, especially those with green mandates that otherwise wouldn’t buy our bonds. 

This issuance demonstrated investor appetite for sovereign green bonds and set a strong precedent for governments to lead by example in building liquid and robust sustainable financing markets. 


globcap: How important has the Japanese investor traditionally been for Poland, either in benchmark, private placement and/or Uridashi format? 

Nowak, Polish Ministry of Finance: Japanese investors are among the most important foreign investors in our domestic market, and since March 2017 they have been the most active among non-resident investors. As of the end of July 2017, their holdings amounted to Z21bn ($5.86bn), which constituted a 17% share of the domestic debt held by non-residents, excluding omnibus accounts and central banks. 

Our aim is to issue green bonds with some degree of regularity. Of course, such transactions are contingent on many different conditions, but our intention is not to do a one-off exercise. The market for green financing is growing rapidly, and we would certainly like to be an inherent part of it.


globcap: Turning in more detail to the Japanese investor base, how have attitudes towards ESG investment changed among retail investors over the past decade? What role have so-called theme bonds in the Uridashi market helped in the development of a retail base for ESG securities in Japan?

Kawaguchi, DIR: The Japanese retail investor base has been expanding over the past decade, supported by a growing number of different themes. The first of these, in 2008, was the International Finance Facility for Immunisation’s vaccine initiative, which was followed by the World Bank’s CO2L certified emission reduction bond, or the ‘Cool Bond’ as it is sometimes referred to. Both of these were lead managed by Daiwa. Since then, we have seen 15 different themes attracting a broad range of retail investors.


Chao, IFC: Although Asian investors have generally not accounted for a big part of our dollar benchmark ESG issuance, we are seeing sustained interest from the Japanese retail Uridashi market for both our green and social bonds. Historically, the Uridashi market worked well as a channel to introduce our SRI products. Some Japanese institutional investors have contributed to the further development of our socially responsible bond products, and we find that a private placement format enables us to offer a tailor-made transaction to investors seeking exposure to impact-investment products.  


Werner, AfDB: The Japanese investor base has a long history of supporting AfDB’s funding needs in both private placement and public formats as well as in both the retail and institutional markets. 

The bank has seen continued institutional support in sizeable private placement format, but more recently that interest has been focused on SRI-themed bonds. This interest in SRI bonds also applies to the retail sector in the form of Uridashi bonds denominated in several emerging market currencies, in order to capitalise on the carry trade. 

Since 2010, there has been a surge in demand from Japanese retail investors for transactions offering a social return by financing projects linked to specific themes such as clean energy, education or water. In 2016, the bank started issuing bonds aligned with the High 5 priorities under the themes mentioned earlier, since when we have issued a total of $1bn. 

The themed Uridashi market was in some ways the predecessor of the green and social bond markets and, although the proceeds from theme bonds are allocated on a best-efforts basis, they are very important to supporting sustainable and social investment projects. 


globcap: Nippon Life has been among the most proactive institutional investors in the Japanese ESG market. Hihara-san, can you give us an update on your strategy in this market? 

Hihara, Nippon Life: Nippon Life accelerated its investment in ESG bonds in 2014 and has now already invested more than ¥200bn in the market. Nippon Life’s new mid-term management plan for fiscal 2017 to 2020 has set a quantitative target of investing an additional ¥200bn into ESG bonds. 

The concept of ESG investment fits in well with our investment policy as a life insurer. In our new mid-term plan, we include the concept of “insurance + α” in order to work on social issues that cannot be addressed by simple life insurance products. We would also like to deliver the values of “insurance + α” through our ESG investment activities.


globcap: Of the ¥200bn-plus that you have already invested in ESG bonds, how much of this has been in Japan, and how much has been in international borrowers? When Nippon Life has bought ESG bonds from overseas issuers, has your preference been for Samurai issuance, such as the EIB or EDF bonds, global yen, and/or private placements? Also, has Nippon Life invested in any of the green benchmarks in dollars or euros from borrowers such as Poland, France, KfW and others?

Hihara, Nippon Life: Most of the bonds we have invested in have been from international borrowers. We are flexible in terms of the format, and can invest in all the types of bonds you mentioned, including benchmark issues.

We don’t think there has been enough supply yet from Japanese names compared with international borrowers. But we look forward to the further development of the Japanese market and to more supply arising from more dialogue with issuers. 


globcap: Has there been enough domestic issuance in the green or social market?

Tanaka, JICA: We have not seen a rush to issue green, sustainability or social bonds among other borrowers in Japan. We think this is because the development of the green market needs to be given time, especially in Japan. Nevertheless, we remain committed to issuing social bonds in accordance with the SBP.


globcap: The Japan Sustainable Investment Forum commented in its most recent survey that many institutions in Japan are still “in the trial and error stage”. Is this a fair observation?

Tanaka, JICA: Many institutional investors are still at that stage. We feel that financial factors, including bond performance, are still a primary rationale for investment decisions, although a few investors with clear ESG mandates are proactively considering ESG factors as well. Nevertheless, we feel that there is a growing awareness about ESG investments among investors these days. Perhaps it would encourage investors if there were more studies and analysis to show that as well as benefiting society at large, ESG investment is also generally profitable. 


Chao, IFC: While some Japanese institutional investors have been active in ESG investments for some years, many others are still considering this market carefully.


globcap: Are pension funds embracing the opportunities presented by ESG investment?

Kawaguchi, DIR: The strong commitment that GPIF has shown to the market is encouraging asset managers to engage in ESG investment. However, due to lack of experience, most of them are still in a learning phase, and need more training to evaluate ESG factors. 


globcap: Are Japanese institutional investors with target allocations in the green or social markets also adopting an activist role, either as equity investors or bondholders, and influencing management decisions on ESG issues at investee companies?

Hihara, Nippon Life: It is important for equity investors to engage in constructive dialogue with investee companies on ESG issues, which can influence management decisions. Although we haven’t been benchmarking any equity allocations to ESG indices, we take ESG factors into consideration when we make equity investments, and we have been having internal discussions about how we can make this process more sophisticated. 

Bondholders are less influential than equity investors because they don’t have voting rights. But they are still able to initiate a dialogue regarding ESG considerations and encourage the issuance of ESG bonds.


Kawaguchi, DIR: Investors are obliged under the Stewardship Code to maintain a dialogue with companies about ESG issues. But most of this dialogue has been focused on governance issues. I think the environmental and social components of ESG will become more prominent in this dialogue in the coming months, as investors gain sufficient knowledge about these issues.


globcap: Roland, in June BPCE became the first bank to issue a yen-denominated social bond in Samurai format, raising ¥58.1bn (€470m) in a four-tranche deal. What was the background to this transaction?

Charbonnel, BPCE: First, our joint lead managers had identified a specific demand for ESG types of investment, in particular from lifers.

Second, having been the first French bank to issue Basel III-compliant tier two debt, and the first bank to issue senior non-preferred debt, BPCE wanted to remain at the forefront of innovation in the Samurai market. 

Third, the regional banks within our group have a substantial amount of social loans eligible for a social bond.

We departed from the traditional green bond approach, which is project finance-based. We have limited project finance potential, but considerable potential for social bonds as a way to fund green or social eligible loans, which are part of the everyday business of our regional co-operative banks.

After our social bond in the Samurai market in June, we had demand from Japanese investors for similar types of investment in private placement format under our EMTN programme.

Given this demand, we plan to issue more social bonds in the Japanese market, and we are committed to the Samurai market as the most efficient way of doing so.


globcap: How important was the basis swap to BPCE when you issued your social bond? Was achieving cost-efficient funding or investor diversification the main objective? 

Charbonnel, BPCE: Achieving investor diversification was the main objective. As I said before, BPCE has a long-term commitment to the Samurai market and therefore the arbitrage opportunity potentially arising from the basis swap is definitely not our main consideration when we issue in this market. At the same time, we are careful to avoid issuing in a situation where the after-swap cost to us would be substantially more than our cost of issuing in the euro market.


globcap: Was the BPCE bond certified by an external third party, and how were the proceeds allocated? Among the investors that you met, how interested were they in use of proceeds? 

Charbonnel, BPCE: Our social bond was not certified by an external third party at the time of issue. However, the use of proceeds for eligible social loans as defined in the legal documentation of the issue will be checked and certified once a year during the life of the social bond by a large international audit firm. The certificate will be available on a dedicated section of our website. 

The proceeds were allocated to our regional banks on the basis of their eligible social loans which were earmarked for this bond. The investors were indeed interested in understanding our intended use of proceeds.


globcap: How much institutional demand has AfDB seen for its SRI issuance? 


Werner, AfDB: Japanese lifers have already demonstrated their interest in this developing sector. Since the bank started issuing theme bonds linked to the High 5s in 2016, we have seen good demand from Japanese lifers as they wanted to highlight their participation in a specific High 5 theme, especially if it had not been issued before. So far, the bank has issued theme bonds under three High 5 themes: “Feed Africa”, “Improve the quality of life for the people in Africa” and “Light up and power Africa”, and each time the first investment was made by a Japanese life insurance company. 


globcap: How important has the Japanese investor traditionally been for Ico, either in benchmark, private placement and/or Uridashi format? Today, are Japanese investors buying in to Spain’s economic recovery story?

Cordero, Ico: Ico has built long-standing relationships with Japanese investors through its issuance in different formats ranging from euro and dollar benchmarks to private placements, Uridashi and Samurai transactions. As Japanese investors, broadly speaking, are conservative, they remained on the sidelines throughout the toughest part of the financial crisis. Nowadays, thanks to the strength of the economic recovery in Spain, we are seeing more investors regaining interest in Spanish exposure.


globcap: What role has the Japanese investor base played in Banco Estado’s funding?

Martabit, BancoEstado: BancoEstado has had a great relationship with the Japanese investor community. Since 2013, we have issued about $800m-equivalent in the yen market. Japanese investors have a very good understanding both of Chile and BancoEstado, and have always applied very rigorous analytical and due diligence standards to their investment process. 


globcap: Last year, BancoEstado issued an innovative and highly successful Women’s Bond in the yen market, which was subsequently reopened. Why did you choose the yen market for this transaction — investor diversification, arbitrage, or both?

Martabit, BancoEstado: A new trend in global markets is that investors are looking for a return with social impact. In the case of BancoEstado, we have an explicit social mission to accomplish, which is to ensure that Chile becomes a more inclusive and equitable country with opportunities for all. 

The background to our transaction is the composition of our customers. Approximately half of these are women, who also account for 42% of our mortgage loans. Also, we have an innovative programme which supports female entrepreneurs in Chile, and 37% of our microfinance portfolio is allocated to female borrowers.

We believed that Japanese investors’ sophistication twinned with their responsiveness to innovation and their search for longer maturities would make Japan a suitable market for a bond focusing on the empowerment of women.


globcap: Did the Women’s Bond live up to your expectations in terms of investor demand, pricing and maturity? 

Martabit, BancoEstado: So far, yes. It allowed us to become the first Latin American bank to issue a 10 year bond in yen, and the first Chilean bank to launch an SRI bond. We set out to raise 10 year funding and we found plenty of demand, which was why we were able to reopen the issue. Japanese insurance companies bought about 25% of the bonds, with 37.5% taken up by banks and the remainder by specialist lenders. 


globcap: Kawaguchi-san, you mentioned empowerment of women earlier as a notable element of ESG investment in Japan. How can issuers and investors support this important component of Japan’s overall revitalisation agenda? 

Kawaguchi, DIR: GPIF has selected an empowering women index, which will be a driver of increased awareness. But even before this, various research reports were helping to enhance investors’ understanding of the positive impact that the empowerment of women can have on companies’ valuations. Investors now regularly ask corporate managers about their policies on women’s empowerment. 


Kato, DBJ: In November 2011, DBJ launched the Women Entrepreneurs Centre to support women in their efforts to establish new businesses in line with the so-called third arrow of Abenomics. Since then, DBJ has held its New Business Plan Competition for Women annually. We have been providing comprehensive financial and technical support to the winners, who are selected on the basis of their plans to launch innovative, viable new businesses with strong development potential. 


Chao, IFC: IFC uses the proceeds of social bonds to finance projects in developing countries that help improve social outcomes for targeted populations, such as small-scale farmers and low-income households as well as women entrepreneurs. Some of these funds are used to support financial institutions that lend to women-owned enterprises. Although IFC does not finance clients in Japan, we see this as an implicit signal of support.


globcap: Has the development of the ESG market in Japan focused more on ‘S’ (social) and ‘G’ (governance) elements than on the ‘E’ (environmental) component? Hihara-san, has Nippon Life had any preference for the type of ESG bonds it has invested in?

Hihara, Nippon Life: We have been investing in a variety of ESG bonds, including green, social development and healthcare bonds. We don’t have any preference, but I agree with the earlier observations about the empowerment of women, which we see as one of the most important components of Japan’s revitalisation agenda. We have invested in the women bonds issued by Banco del Estado de Chile.

Although there are not many investment opportunities from Japanese issuers at the moment, we are very interested in investing in these types of ESG bonds if appropriate opportunities arise. 


globcap: Antonio, in your recent roadshows in Japan, have investors expressed an interest in buying Ico’s social bonds? Do you have any plans to issue social bonds in Samurai, global yen or private placement format?

Cordero, Ico: As a general policy, we roadshow in Japan once a year. During our most recent visit, in April, Japanese investors expressed a strong interest in Ico’s social bonds. This interest has strengthened even more since the publication by ICMA of its new Social Bonds Principles in June. 

To meet this demand, we don’t rule out the possibility of exploring social bonds in currencies other than euros. The issue is that we focus on short to medium-term maturities, whereas Japanese investors are generally looking for longer-dated bonds. On top of that, the yen-euro basis swap has not been playing in our favour in recent quarters, so we would not have been able to issue at reasonable levels in the yen market relative to euros.

Having said that, we are monitoring the market to identify any improvement in market conditions that may enable us to tap the yen market any time soon, and in June we updated our documentation to allow us to issue in Samurai or Uridashi format.


globcap: For international borrowers that have accessed the Samurai market in green or social format, or are thinking of doing so, to what extent does ESG certification and documentation add another layer of complexity to the process, increasing the burden of costs in terms of money, time and human resources?

Charbonnel, BPCE: It is more complicated, especially for first-time issuers. It is also a little bit more expensive, but it will be easier for subsequent issues and it’s worthwhile because it is a way of maximising the capacity available in the Samurai market, since there are some dedicated pockets of investment.


Cordero, Ico: There is no denying that the issuance of this type of product generates a more onerous administrative and IT burden for issuers. But I believe this is largely offset by the benefit of attracting a larger investor base and being able to communicate effectively the contribution that your institution is making to the development of a more sustainable economy.


Kawaguchi, DIR: This increased burden is not unique to the Samurai market, but is a common issue for borrowers who are keen on ESG issuance. 


Chao, IFC: The ESG market is seeking standardisation and harmonisation. To this end, certification and documentation is important.


Martabit, BancoEstado: The nature of BancoEstado’s social mission is such that the documentation required for this kind of trade does not differ substantially from regular trades.

Nowak, Polish Ministry of Finance: I agree that certification and enhanced documentation of green bonds are a burden to the issuer and definitely add to the complexity of the issuance process. But it is essential for borrowers who want their bonds to be perceived well.

Investors’ confidence in the use of proceeds is crucial for a successful issue, which is why we put so much effort into preparing a credible green bond framework. We wanted to make clear which sectors are eligible for green financing and for better transparency we explicitly excluded some of them. To strengthen the credibility of our transaction, we obtained an independent second opinion, which concluded that the proceeds from our issue will have a clear positive environmental impact. 


globcap: How deep is Japanese demand for dollar private placements of green or social notes?

Kawaguchi, DIR: From the big Tokyo-based institutions through to regional investors, demand for private placements has been developing well. 


Cordero, Ico: We have received some requests for private placements in dollars and yen from Japan, but we have not issued anything yet as our focus is on the short part of the curve and Japanese demand is for issues with maturities beyond five years. Once we can extend the duration of our funding we expect to get them on board.


Charbonnel, BPCE: There is definitely demand, since we did a dollar social private placement — a healthcare bond to be precise, since eligible loans were restricted to the healthcare sector — right after our social Samurai bond. 


globcap: Is there any pricing or liquidity benefit to be derived from issuance of green, sustainability or social bonds?

Kato, DBJ: We have not yet observed a pricing benefit from the issuance of sustainability bonds, although we know there are some cases where such a benefit exists. Our primary objective has been to diversify the investor base. 

We recognise the increasing interest of investors in secondary liquidity and are now trying to monitor the secondary performance of our outstanding bonds more closely, be they sustainability or normal bonds.


Charbonnel, BPCE: There is no real price benefit. But it is an efficient way of increasing the capacity of the market to absorb FIG issuance since there are some dedicated pockets of investment.


Hihara, Nippon Life: We neither see nor expect significant differences between ESG and other bonds in terms of price and liquidity.

Tanaka, JICA: We have not seen any price benefit, as our social bonds have been priced at the same premium as comparable agency bonds launched with similar timing in the primary market. We are also not sure about the liquidity benefits, as most of our investors tend to hold our bonds to maturity, which means that it is unusual to see our name being traded in the secondary market. However, we assume that increasing demand might naturally benefit liquidity.


Nowak, Polish Ministry of Finance: In our case the price was comparable to a theoretical new euro issue. There are no significant differences in returns. As to liquidity, 61% were bought by green investors who, I believe, prefer to hold bonds to maturity. However, the remaining part may be effectively traded on the secondary market. For Poland, diversification of the investor base was of primary importance.


Cordero, Ico: In terms of price there is no easy answer, because of the impact of the ECB’s QE policy on the euro market. 

France decided to issue its most recent green bond in OAT format to smooth liquidity concerns, which was very well accepted by investors. 

When we launched our social bond programme, our primary motivation was investor diversification rather than achieving a price advantage. It is true that as the typical investor in an ESG bond is a buy-and-hold account, this will have an impact on price over the medium and long term. Usually, ESG investors are less price-sensitive than others, so when building up an order book, you may perceive more price tension than in your ordinary issuance, although I doubt this translates into better pricing. 


Chao, IFC: IFC generally prices its ESG bonds flat to its regular bonds. As some studies show, ESG bonds sometimes have better secondary market performance due to investors being more buy-and-hold in nature. We have seen such movements in some of our bonds at some point, but it has not necessarily been a consistent outcome.


Kawaguchi, DIR: It is expected that there may be a cost benefit enjoyed by borrowers issuing in SRI format when the value of the idea becomes more broadly recognised, as is happening in the European market. 


Martabit, BancoEstado: In general there is a premium to be paid for this type of bond in the primary market, but for BancoEstado it is important that we target new social and green portfolios.


Werner, AfDB: In general, there is little discernible price or liquidity benefit in issuing a green or social bond that has the same financial terms as a benchmark bond with the same maturity and issue size. However, as demand for SRI investments continues to grow — and already we are starting to see demand exceed current supply in some markets — there is an expectation that investors will be willing to encourage more green, social and/or sustainable projects by providing a price benefit to issuers. 

globcap: Looking to the longer term prospects for the green bond market, what are the main hurdles to its further growth? 


Chao, IFC: Generally, market participants in Asia are of the view that, while the markets need to be consistent in principle, some flexibility and reflection of local market practices are still important. We are encouraged to see regulators continue to support the growth of green bond markets in the region, through initiatives such as the launch of green bond national guidelines in China and India, and Singapore’s green bond grant scheme to cover any additional issuance costs of issuing in green format. 

Under ICMA’s initiative, leading market participants, including IFC, are making continued efforts to establish a standardised framework for green and social bonds to secure transparency and proper governance. These efforts will differentiate true green issuers in the long-run.


Kato, DBJ: It has been widely recognised that the GBP, SBP and SBG are well designed, market-driven frameworks. Standardisation of the market, especially product structure, would certainly contribute to the development of the market, but from an issuer’s perspective, we would prefer that they do not lead to requirements and/or regulations beyond the provision of common practices and transparency that are widely accepted by market participants. 

What matters in green, social and sustainability bonds is the use of proceeds. At the end of the day, as long as consensus is reached about the use of proceeds between the issuer and the investors of each individual bond, it can be a green, social or sustainability issue.  


Kawaguchi, DIR: The lack of high quality green projects is one hurdle to growth. Reliable standards in the green finance market will be helpful to prevent greenwashing, but excess bureaucracy must also be avoided since there are widespread differences in the definition of green. New standards must be aligned with existing guidelines such as those recommended by the Task Force on Climate-Related Financial Disclosures (TCFD). 

Because of catastrophic events such as hurricanes, bushfires and other natural disasters, more investors are beginning to understand how material the costs of climate change are. A better recognition of the investment opportunities created by initiatives to counter climate change would also be supportive of sustainable growth. 


Werner, AfDB: Some of the main hurdles for the green bond market going forward are the difficulties in sourcing green projects, project readiness and the overall speed at which economies will continue to decarbonise. Therefore, governmental regulations, in terms of climate change mitigation and adaptation, could be an important accelerator as tighter regulations would lead to greater needs for climate projects and financing for those projects. 

Although there has been significant progress in terms of standardisation, the green bond market is still relatively nascent and there is still room for greater standardisation. Thus far, developed countries have been the main issuers of green bonds and the market has a good degree of comfort in the adherence of these countries to the current standards. However, it is perhaps even more important that emerging market economies look to the green bond market to facilitate accelerated investment in projects promoting climate change adaptation and mitigation. Further standardisation of the green bond market would be very helpful in accelerating this process.


Cordero, Ico: In Europe, France is leading this market and has introduced fiscal incentives for investors, which may be replicated in other countries. 

The EU’s publication last July of its interim report on ‘Financing a Sustainable European Economy’ demonstrates that efforts are under way to create standardisation. But it will be difficult to create something completely identical for all regions, especially in the market for social bonds, where priorities differ widely from one country to the next. As an example, job creation is much more important these days in Spain than it is in the Nordic region.

In terms of reporting and transparency, SSAs have a strong reputation to uphold, so are the most likely issuers to generate information requested by investors. 

We certainly can’t afford to be complacent about risk. We must all remain vigilant in order to ensure that market participants are behaving in compliance with the best market practices and regulation so that this market can develop and grow further. The bigger the market becomes, the more funds will be channelled to sustainable sectors, so we all share an interest in encouraging newcomers to the themed bond market.


Hihara, Nippon Life: I think the development of standardisation is important. But I agree that these standards should not be too strict, because that might increase the costs of issuance, which might in turn make borrowers reluctant to issue ESG bonds. We believe that a balanced approach is the most appropriate way to support the market in the early stages of its development.


Tanaka, JICA: I agree that from the perspective of borrowers, minimising the costs of issuance in areas such as segregating accounts and meeting disclosure requirements is key, alongside investor diversification.


Nowak, Polish Ministry of Finance: I think standardisation is important. Of course, it would help if the rules were universal. Another thing is the issuer’s attitude. Green bonds are perceived as very complicated, especially for sovereigns. Our example demonstrates that every hurdle can be overcome. It requires additional time and work but it is worth it. Looking ahead, I think the green bond market will become bigger every year with many new issuers and investors entering the market.    


By GlobalCapital
29 Sep 2017