Friday, 14 December 2018

Shoots and scores

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New-issuance of Green bonds is lagging over-enthusiastic targets set last year but the market continues to grow in stature.

If anything underlines the growing stature of the Green bond market and cements its longevity beyond basic primary flows, it’s the move towards transparent standards, and the emergence of a more evolved ecosystem that includes dedicated funds and the proliferation of major investment commitments, plus the availability of analytical tools and services such as indices.

The Green bond market reached two milestones in March this year that pushed the cause of transparency and a hardening towards consensus standards: the first anniversary of the Green Bond Principles (GBP) and the paper Green Bonds: Working Towards a Harmonized Framework for Impact Reporting, for projects to which Green bond proceeds have been allocated. The 2015 update to the GBP certainly articulated a clear direction of travel for the market that points towards ring-fencing of proceeds, creation of sub-accounts, moves towards more rigorous project selection and tangible impact reporting.

Market participants continue to be nervous about setting standards that are so high that they stifle issuance but as they stand, the GBP are what one banker defined as “the universally acknowledged necessary and minimum conditions for defining a Green bond”. A more transparent framework will help silence cynics and sceptics who are still out there, and will engender growing support for Green bonds as a component of an active strategy to reach global climate-change mitigation targets.

As for buyside patronage, news has come thick and fast. Mirova announced the launch of a global Green bond fund in June; KfW said in April it would start buying Green bonds in the second quarter with the aim of reaching a portfolio size of €1bn; in February Deutsche Bank said it would invest €1bn in a portfolio of high-quality liquid assets in Green bond format as part of its liquidity reserve investment.

Deutsche’s plans echo Barclays’ announcement last September that it would invest a minimum of £1bn in Green bonds by November as part of its liquid assets buffer. Zurich Insurance, an early mover in this space, raised its investment target in Green bonds to US$2bn, while several other firms are putting the finishing touches to their criteria for Green bond investments.

Increased buyside interest is certainly a shot in the arm for the market although it is putting increased pressure on the investment banks to create supply. The fact that this was somewhat subdued through the first half of 2015 is a hot topic of conversation.

On the plus side, the Green bond market has seen issuance to-date across some 18 currencies in fixed and floating-rate, convertible, stock index-linked, securitised and project bond formats; structures targeted to retail as well as institutional interest; the full range of short and long-dated maturities and an increasingly global issuer base across multiple geographies and industry sectors.

Analytical tools

These developments speak to the increasing depth of this emerging market and throw into sharp relief the greater potential levels of activity that beckon. The arrival of benchmarking and screening tools, such as Green bond indices, is also vital because they will drive more productisation. This will allow a more heterogeneous set of players to find entry points into the market in a manner that suits multiple investing styles and builds towards multiple outcomes.

The Barclays/MSCI Green bond index family that was launched in November 2014, for example, added an independent and objective overlay to offer investors greater comfort around the market. Evaluations are conducted along the four key dimensions: use and management of proceeds, project evaluation and reporting. Speaking to the productisation point, State Street Global Advisors launched its Global Green Bond Index Fund in May 2015, claiming it as the first UCITS-compliant mutual fund tracking the Barclays MSCI Green Bond Index. MSCI has also had various incoming enquiries about Green debt ETFs.

“My take has always been that standards will continue to emerge over time but we needed something transparent, something easy to understand and somewhere basic to start. We didn’t want the standards to be so out of reach that they wouldn’t be attainable”

“We did a pretty lengthy consultation to get a feel for what the main challenges were; to gauge investors’ expectations and provide some clarity to investors, to issuers and to the market more generally about what constitutes a Green bond and to draw some lines around the market,” said Laura Nishikawa, executive director at MSCI, speaking about the development of the index. “Investors’ views may differ, but our definitions drew a line in the sand and at the very least formed the basis of a conversation.

“My take has always been that standards will continue to emerge over time but we needed something transparent, something easy to understand and somewhere basic to start. We didn’t want the standards to be so out of reach that they wouldn’t be attainable,” she added.

At this stage, the index is used for informational purposes but as the market develops, expectations are that it will morph more into a benchmarking tool. As well as labelled Green bonds, it includes unlabelled issuance by pure-play renewable energy companies (as long as they derive at least 90% of their turnover in the qualifying categories) as well as qualifying securitised issuance and project bonds.


The index used the GBP as a starting point. “One of the main pieces of feedback we got from investors was concern around potential greenwashing or potential abuse of the Green bond term by issuers as the market started to diversify away from supranationals towards corporates and other types of issuers. They wanted to know if there was some sort of additional insurance or additional evaluation of those bonds,” Nishiwaka said.

The reporting piece is a key element of the index’s utility. Given where we are in the cycle of Green bond issuance, the first waves of reporting have started to roll in since the end of Q1.

“The sceptic in me wondered if we would see any reports at all this year but we are starting to see some. While some reporting has exceeded our expectations, some hasn’t gone as far as we would have hoped. But as long as there is some indication of use of proceeds and an update on project-level reporting that’s useful,” Nishikawa said.

“There is still debate about what is dark Green, light Green or simply not Green so it’s no simple matter for investors to formulate policies for establishing specific Green bond funds with detailed environmental criteria”

The growing transparency of the market – notwithstanding the standards are voluntary and still allow for some paler shades to be marketed as Green bonds – is certainly helping assuage concerns around Greenwashing. Those concerns will likely never be fully expunged even though in truth there’s little evidence to-date that it’s a real issue. But heightened scrutiny will be helpful in that it will help to keep the market on the straight and narrow.

“The market is still in its very early stages – it’s only really 18 months since the big wave of issuance by non-SSA borrowers. Given how many investors there are with different views and philosophies, and how many jurisdictions are involved, each with their own take on environmental, social and governance matters, it isn’t at all surprising that the Green bond market is still working towards building a robust framework for issuance,” said Stephanie Sfakianos, head of sustainable capital markets (fixed income) at BNP Paribas.

“There is still debate about what is dark Green, light Green or simply not Green so it’s no simple matter for investors to formulate policies for establishing specific Green bond funds with detailed environmental criteria,” she added.

Here to stay

Given the developments seen to-date, talk that the market is a gimmick and could wither and die once issuers have squeezed dry the marketing benefits of a single issue look to be wide of the mark. The demand-supply imbalance bodes extremely well in these current market conditions for superior performance over conventional bonds. That creates a virtuous circle and an attractive option for issuers that have appropriate projects to fund, with an added benefit of buyside diversification into the bargain via penetration of the ethical and ESG universe.

As well as a flow of new issuers, repeat issuers are also starting to build as the investor pool expands and the market solidifies. “The market probably has to take a couple of steps forward before issuers are concerned about building a second [Green] curve but there are already examples of repeat issuers,” said Jonathan Weinberger, head of capital markets engineering at Societe Generale.

“If ESG considerations are integrated into your business, it makes sense to continue to use the structure. Certainly, there are fixed costs associated with issuing the first Green bond but that makes subsequent Green bond issuance relatively less expensive from an administrative point of view.”

The debate about burden-sharing between issuers, investors and other players in the environmental finance ecosystem to cover the potentially weighty costs of issuing and maintaining Green bond programmes is likely to continue.

At this juncture, investors will not contemplate wearing a discount to hold Green bonds. This will deter some issuers from the market but on the flip side, investor screening, project assessment and general due diligence also have their costs. Some participants say the fact that Green bonds price flat to senior is already a sign of buyside burden-sharing.

Whither US$100bn?

At just under US$15bn by mid-June, primary issuance levels were not keeping pace with the slightly exaggerated US$100bn number thrown out in late 2014 as a target for this year by market participants arguably over-enthused at how quickly the market had built to that point. Some bankers reckon the second half of the year will be busy, which should push the market closer to that target, although not all agree.

Bearing in mind the 20% decline in overall global DCM volumes year-over-year and in the wake of government bond yield volatility and rate uncertainty, missing that target should not be seen as too much of an issue. Nor should the slightly “out there” target of US$1trn in annual issuance by 2020 be seen as anything other than purely aspirational.

“The pace of issuance this year has not been as fast as many people had hoped but total issuance volumes are only one measure of the market. What is equally important is the composition of issuance that emerges.

”We are seeing more issuance that is tailored to specific investor needs across issuers, currencies and products in addition to issuers also working to ensure the integrity of their processes thus working to have sufficient eligible assets before funding. There are lots of different reasons for the lower total issuance volumes seen year-to-date but I don’t believe it should be a problem necessarily,” said Susan Barron, managing director in EMEA SSAR origination at Barclays.

Bankers give various reasons they think are behind the slow pace of issuance in 2015. One is division around the role of social finance, which might speak to why issuance is lower than some people estimated.

“Some investors have a very sensible view of the facts: that there are many funding instruments in the world that are doing the work that the GBP wants to see done – namely funding projects that will be net CO2 reductive. But they are not all labelled as Green bonds because they are either in the form of loans or in the project space and project borrowers haven’t felt it terribly important to attach the Green bond label,” said Weinberger.

“Part of the issue is the question of what one gets by self-labelling. Self-labelling is great for people who have a communications strategy that can be tied to the funding. But, for many borrowers, that communications goal isn’t essential or isn’t deemed necessary. So you have bonds out there that are doing the work of a Green bond without calling themselves that and that is fine.

“If there is no compelling financial reason to do it, there are many borrowers who could issue Green bonds who simply choose not to. As long as the funds are going in the right place I don’t think any of us should be concerned,” Weinberger added.


If 2014 saw explosive growth not just in deal volumes but perhaps more importantly in the diversity of the issuer base into the corporate sector, this year the market is seeing an equally important process of globalisation of issuance away from the European issuer base that tapped the corporate segment of the market for size in 2014.

Issuance continues to be driven by supranationals, agencies and municipalities – and that is likely to continue as there is a natural fit with the articles of incorporation of issuers such as the EIB, World Bank/IFC, EBRD, KfW and ADB and the environmental and sustainable principles that drive their core functions.

What is surprising is the lack of any sign of sovereign issuance. A liquid Green sovereign benchmark would certainly perk the market up at the same time as it would reinforce environmental credentials. DCM originators are nonplussed by the absence of sovereign borrowers but have had little luck in getting any into the formal pipeline. Likely early potential candidates for Green sovereign or quasi-sovereign bonds include Sweden and France; the US is also very keen on the idea and could come out with some sort of Treasury-linked or US agency bond.

“There is more awareness of sovereigns around the green bond topic. What started more from a investment perspective, may see further expansion in to other areas. It’s an interesting one to watch,” said Barclays’ Barron.


SSAR may be in the driving seat but corporates now account for around a third of sustainable debt issuance and the market has seen some promising issuance from a host of interesting names and sectors: Peruvian wind farm developer Energia Eolica (a US$204m 20-year amortising private placement and the first Green bond from Latin America); Yes Bank, the first Indian issuer with a Rs5bn issue in February; Export-Import Bank of India (the inaugural Indian issuer in US dollars – US$500m in March), and the inaugural Green covered bond from Berlin Hyp (a €500m Pfandbrief).

Other issuance worthy of note includes the first Brazilian Green bond (€500m for BRF), the first Green BeLux bond from waste management company and repeat issuer Shanks Group; the first Green bond out of Eastern Europe (€50m for Estonian renewable energy company 4 Energia) followed in short order by a €75m line from neighbouring Latvenergo; and the chunky €1bn two-tranche outing for Dutch electricity transmission company TenneT.

In high-yield, we saw the inaugural outing out of the US (NRG Yield for US$500m last August) followed by the debut European offering, from Spanish renewable energy company Abengoa (€500m in euro and dollar notes). Others have followed in their wake. On the cards are Green sukuk – Dubai or Malaysia set to debut – while nuclear-related issuance out of China that’s talked about at some point will provide a fascinating talking point and will be a key test of the market’s resilience and elasticity.

These examples all represent examples of what the market can achieve and how quickly it can blossom. Of course, any new market will be able to point to firsts of all sorts so the debuts shouldn’t be taken out of context. And to be fair, not all issues have received the same kind of rapturous reception but that’s a function of timing and the nature of bond markets.

The Shanks deal showed that banks can mobilise retail demand to boost the institutional dimension: of the €100m total size, BNP Paribas generated retail and private banking demand of almost €47m via 2,894 orders. As debate in Europe shifts towards the mobilisation of retail savings as Capital Markets Union evolves, the climate theme could provide a promising avenue for environmental productisation.

The market is divided about the emergence of more corporates. “It seems some corporates are not at this stage completely persuaded of the advantages of tapping the Green bond market for a number of reasons: for a start there is no pricing advantage relative to senior debt and this is unlikely to change any time soon. Absent a pricing advantage, some issuers are deterred by the work required to identify projects with which to support a transaction, the cost in terms of management time and the fees payable to third parties such as verification agents and auditors’ fees for monitoring use of proceeds,” said BNPP’s Sfakianos.

“Not all companies can see an obvious set of projects with which to support a sustainable/Green bond. On the other hand, companies that have the strongest environmental credentials often argue that everything they do is Green so a labelled Green bond adds limited value,” she added.

Barclays’ Barron echoes the comments about financeable projects but is optimistic about the corporate landscape.

“In previous years, corporates have been sizeable contributors to the total issuance. Whilst existing issuers continue to ensure that they have sufficient projects and eligible assets to fund, several also announced broader corporate responsibility frameworks at the time of their initial issues, which would provide for more deals in the future,” she said.

“Increased awareness of the market is also creating opportunities for smaller corporates, particularly in developing markets, to look at the possibility of accessing the market. Here (as with existing issuers), it remains important to take the time to make sure that they do everything correctly.”


The one area of the market that market participants do expect to pick up significantly is the FIG sector. At present, Credit Agricole is the clear stand-out Green bond issuer, with some 27 lines out there across 10 currencies. National Australia Bank, ANZ Bank. ABN AMRO and Bank of America Merrill Lynch among others have printed trades and FIG visible supply will build.

“FIG issuance will be an important source of supply over time. Banks are a natural borrower base because they have internalised for many years the sorts of review and monitoring processes that would substantiate a Green bond,” said SG’s Weinberger. “They are well positioned because they are aware of the assets that they can fund such an instrument with and because they are a pretty well positioned in general to report on the environmental impacts as well.”

If the US has been something of a surprising laggard generally in the development of the Green bond market, the one area it arguably leads is on the municipal side, where a number of cities and state authorities have tapped the market in greater numbers than seen in EMEA. Ditto the universities sector. Both segments offer huge promise.

And talking of laggards, the market has yet to see Asia flex its Green muscles: market participants say the prospects for issuance are positive, Japan is mentioned as a potential growth area but the really mouth-watering opportunities will come out of China and India as their governments increasingly get behind the Green agenda.

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