IFR ASIA: Welcome everyone. Terry, can you start us off with how important ESG – environmental, social and governance – criteria are in the capital markets. Why is it such an important topic to discuss?
TERRY FANOUS, MOODY’S: From a ratings perspective, our primary objective is to assess the creditworthiness of the issuers that we rate. So in terms of ESG, we are particularly interested in the material climate-related risks and the way in which they impact on the creditworthiness of the issuer.
There are a lot of issues that are relevant for ESG, but we often ask ourselves: so what? We want to make sure that we are focusing on the material issues. And as we talk to issuers we have noticed an increasing focus not only on ESG, but on Green bonds, because they feel that by issuing Green bonds they will start looking at ESG in a more fundamental way. Certainly, the companies that have issued Green bonds see it as a catalyst for embedding ESG in their corporate DNA.
If we look at the Green bond market, it has flourished this year thanks to China. We believe total issuance this year could reach US$80bn, which would be double last year’s global total, and we expect significant growth in Green bond issuance again next year. Certainly, we’re on the right trajectory.
IFR ASIA: Is ESG part of the credit rating?
TERRY FANOUS, MOODY’S: If the ESG issues are material and impact the issuer’s credit profile, then yes. I can go through some details about the framework that we follow in assessing climate risks and their impact on credit.
IFR ASIA: Sarah, have you done any work on securities with a high ESG score? Is there any evidence to suggest that these might outperform the rest of the market?
SARAH PERCY-DOVE, BLACKROCK: My understanding is that a lot of the number crunching regarding the benefit of ESG to bond portfolios really leverages off the equity markets, where there’s a lot more direct evidence to suggest that there’s a better outcome. We’re starting to build up that picture in the bond market, but it is still nascent. In Asia, this market has only really been active for three years.
For investors, there are push and pull factors. Non-financial, non-traditional metrics are just as important in many instances in assessing the underlying risks, so extending that risk analysis is very valuable. On the other side, the pull factor comes from our clients, and we have a number of clients who value ES&G, and particularly Green bonds, when it comes to choosing where to allocate their investments.
They do that for a number of reasons, and I don’t think the feel-good factor is really top of mind anymore. It’s universal investors thinking about the long-term impact of their investments and looking for much greater certainty regarding regulatory risk, climate changes, even social attitudes and the like. In the longer term, managing assets with that holistic approach provides a better outcome for their investments as well.
And that’s something BlackRock also supports, because we do see that we’re here for the long haul. We’re going to be investing in 40 or 50 years’ time, and we don’t want to invest in projects or industries where risks are going to increase.
IFR ASIA: Where does the Green market stand now in Asia?
BENJAMIN LAMBERG, CREDIT AGRICOLE: The dynamic, as we all know, started in Europe in 2007. The European Investment Bank, and thereafter the World Bank, developed this concept, and the market was primarily issuer-driven. The Green bond market reached a critical mass in 2013 in Europe, and then the Americas also embraced the concept. We have now reached an issuance amount of US$80bn this year, as Terry said, with new jurisdictions like China and India coming online. CA-CIB estimates are US$100bn of issuance for 2017.
Three years ago, when we brought European issuers to Asia to promote Green bonds, we had a mixed response from investors. We’ve been persisting, and I have to admit that over the last 18 months we have started to see a shift from investor behaviour moving from polite curiosity on the product to a real interest. We know at least 10 fixed-income investors in this region, who are seriously looking at putting CSR frameworks in place.
The Green bond market was originally issuer-driven, and then it became investor-driven in 2013–15, especially in Europe where we saw the emergence of a wide range of dedicated investors. Now this cycle is replicating itself in Asia but with an additional twist: the regulatory driver, which has been extremely strong in China, which now represents almost one third of the primary market. But beyond this regulatory push, we now have issuers who are convinced by the concept, and all these Green issues from Asia start a virtuous cycle, with more Asian investors getting engaged and looking seriously at the SRI segment.
TNG KWEE LIAN, SGX: You mentioned that investors are looking at the Green bond segment. Looking at how China is driving Green bonds with the regulatory environment, have there been policies or changes affecting investors in Asia? Of the companies that signed up with the United Nations Principles of Responsible Investment, fewer than 10% are based in Asia.
BENJAMIN LAMBERG, CREDIT AGRICOLE: As discussed, there are some issuer-related regulations in Asia, but no specific policy for investors. Of course, we would expect that investors look at the Green Bond Principles as best practice. With ICMA as the secretariat, these are now the cornerstone of this market. But as we have seen a regulatory drive in Asia, especially with the PBoC-endorsed Green Bond Guidelines, I would not be surprised to see some regulations soon weighing on investors too.
For instance, such soft regulations have emerged in France, where investors now need to report on the climate impact of their portfolio (the so-called Article 173) and need to hold Green bonds if they want to benefit from government-related green labels (TEEC). We know that several other countries are contemplating similar soft regulatory approaches.
But that’s maybe more a question for you, Sarah. How did you on the bond side decide what is considered as a Green investment? Do you use the Green Bond Principles?
SARAH PERCY-DOVE, BLACKROCK: Yes, we’ve adopted the Green bond principles as a primary template, for want of a better term. We don’t believe in rules, though. The assessment is really more of a holistic approach. In understanding what a Green bond really is you need to look at the underlying asset, what the funds are being used for, how they’re being implemented and the like. So it’s really not just one thing, but we certainly look to the Green bond principles as a foundation.
IFR ASIA: Let’s bring Louis in here, because we can’t talk about Green bond principles without talking to the CBI. So how have you seen the market develop, particularly in Asia? And how do the different rules evolve here?
LOUIS PERROY, CLIMATE BONDS INITIATIVE: Well, it has mostly developed around China and a bit around India. There are issues out of Korea and Japan, but in the rest of Asia there is virtually nothing – just one Green bond in the Philippines. China and India have rules around it, and actually these are the places where the largest number of bonds have been certified. Almost all of the issues so far in India have been verified and certified.
So there’s a big push to do things well in those two countries. As I was saying, in the rest of Asia there are no Green bonds whatsoever.
IFR ASIA: Of course, the less-developed part of Asia is where Green finance is needed most, isn’t it? How do you get from where we are now to where we need to be?
LOUIS PERROY, CLIMATE BONDS INITIATIVE: Green bonds are not exactly the same as green development to me. It’s more about refinancing something that is already established so that it can take the debt on. The need for green development in all these emerging countries is not necessarily an ideal market for Green bonds. It is a bit too early for institutional investors’ money at this stage in a big way via Green bonds. What you need is PPP and large international banks to get involved.
As you probably know, when Green bonds started in 2006, 2007, 90% of those bonds were from international development banks – the World Bank, IFC and the like. Nowadays that figure is only 10%. That’s a great thing, in the sense that it has switched to private issuers or some local governments. There should be more movement of institutional development money; yes! But I don’t think we’re at a stage where private money can get into those emerging markets. We are a few years away from this.
BENJAMIN LAMBERG, CREDIT AGRICOLE: Just to echo Louis, I love the way this market is developing, from a supranational and agency market to a new dynamic where more private organisations such as commercial banks and corporates are active. The much-awaited next step is Green sovereign bonds. France is expected to issue in early 2017, but we know that other countries are working on it too. Everyone is embracing the concept of Green bonds, confirming its universal value.
But it’s not just the issuer base which is changing; it’s also the instruments being issued. We started with issuance of traditional senior unsecured bonds and now we are moving into covered bonds and securitisation. That’s a great development as it also brings the concept to more investors.
RAHUL SHETH, STANDARD CHARTERED: I think the beauty of this product is that the guidelines do not stifle innovation. It’s very open in terms of what you can and can’t do, and that keeps the market going.
We have now seen the first forests bond from the IFC. It has been a number of years in the making in terms of concept and is a major innovation. it allows the payment of coupons in cash or in carbon credits. Bank of China is doing a covered bond, the first out of China. You’ve got very long tenors, and a very wide variety of currencies. The next generation will probably see Green sukuks and a lot of Middle Eastern issuers will be looking at that.
So far, a lot of Green bonds in Asia have been regulatory driven, rather than for investor diversification, which is obviously a very important, tangible benefit. Right now it is more about being the first or the largest or the most innovative from the region, which has a good ring to it. But that’s changing as people look at different assets – be it MTR from Hong Kong looking at energy-efficient transport or be it a property company in China. All of that has a nice ring to it in terms of innovation.
LOUIS PERROY, CLIMATE BONDS INITIATIVE: Without wanting to curb the enthusiasm here, you are talking about greening the whole of Asia. What we’re seeing at the moment is really very small compared to what’s needed. Even in China, where we’re probably getting close to US$50bn – they were aiming for US$46bn of issuance by the end of this year – it’s still a very small part of the whole bond arena. And if we project forward, taking into account the climate change issues and what the UN is trying to achieve by 2050, we are way, way behind what we should be issuing in order to make a difference.
IFR ASIA: One big question with Green bonds is how much of a development impact is this really going to have? Is it all for refinancing, or is there additional money coming in?
LOUIS PERROY, CLIMATE BONDS INITIATIVE: I think the bankers are probably better placed than me, but refinancing means that you’re freeing up cash which you can re-use elsewhere.
RAHUL SHETH, STANDARD CHARTERED: I think that’s a pertinent question and that’s been asked by a lot of people. If your primary objective is to fund something that’s already on your books then you’re probably not making the world a better place. However, the counter to that argument is if you’re doing a 10-year Green bond you are committed to keeping that asset on your balance sheet for 10 years. Yes, you could put the money to other uses, as money is always fungible, but you still have to keep that asset on your books. And that is a big commitment for an issuer, be it a bank, lending money to a wind farm operator or a power company which has both renewable and non renewable assets in its portfolio.
I think refinancing will drive the early stages of development, and that has allowed a lot of issuers to look at this product to start with. That’s a good thing. At least now more people are talking about it and this will bring with it a sense of internal discipline for the issuer
IFR ASIA: Let me bring Sandeep in here, because I’m interested in how this is developing in India.
SANDEEP BAGLA, TRUST GROUP: In India the need for money is quite high. What we find difficult is the isolation of assets, to make sure that the money is being channelled into the right structures where the end users and investors all on the same page. So far in a few structures we have seen that assets have been mixed, so it’s important to isolate the assets to provide the right kind of funding.
I do have one question. Is it possible for exposures to Green bonds to attract more lenient regulatory treatment? For example, if an investor buys Green bonds, would it be possible to reduce his capital requirement on those bonds or offer some incentive to drive more money into Green assets? Perhaps if an investor invests in a Green bond then his exposure limits to the issuer could be freed up.
IFR ASIA: Good question. Does anyone have a view on that?
TERRY FANOUS, MOODY’S: One thing we have seen is the European Commission determining at the end of last year to reduce the capital charge for European insurers’ investments in infrastructure projects. That means European insurance companies now need to allocate less risk capital against qualifying project finance debt. And the insurance regulator, EIOPA, is looking to broaden that to infrastructure corporates as well.
Now can that be replicated for Green bonds? I think some incentives would support development of this market. When Japan first rolled out nuclear power, they gave preferential treatment for nuclear bonds to encourage investment. There are other incentives that could evolve in the Green bond market, such as tax deductibility.
RAHUL SHETH, STANDARD CHARTERED: I think that’s a very helpful suggestion, because to keep the market going you need a bit of an arbitrage at the end of the day, because you’re in the world of capital markets. I can see a couple of challenges, though. Firstly, capital requirements are only a consideration for banks and maybe some NBFIs [non-banking financial institutions]. It may not be as helpful for funds.
The second thing is you will probably need a change to Basel regulations. For that, you would need standardisation. Basel would need to have some sort of say in the way Green bonds are structured, because right now you could have one without any certification, and another that includes assets like clean coal in China, which isn’t green under the CBI guidelines.
SARAH PERCY-DOVE, BLACKROCK: I think you need to take into account how the capital markets work as well. Green bonds could be bought by any investor, anywhere in the world. So any incentive needs to be usable, for want of a better word, by the investor. That can either come from the issuer’s home country regulator or taxation authorities, or in the investor’s home country. It’s not straightforward.
Incentives are a great concept. But capital markets work through arbitrage, and everything always comes back to a zero sum game. Unless you’re in the very first transaction, any incentive will be arbitraged away so that additional value quickly disappears.
There are a lot of other aspects to building a market. You still need to continue to develop size, liquidity, depth, diversity and so on.
BENJAMIN LAMBERG, CREDIT AGRICOLE: Incentives could supercharge the issuance of Green bonds, and maybe help boost the financing of the energy transition. Having said that, there are already some good examples that new money is coming to fuel the growth of the Green financing universe. Bank of China’s inaugural Green Bond, which raised in excess of US$3bn through five tranches, is the largest Green bond to date. There were investors in this transaction who had never bought any Chinese credit before, but went into this transaction on the basis of its Green credentials.
If I take the example of Credit Agricole CIB, there really is a virtuous circle. When you help a client raise Green funding, you need to make sure that as a bank you have a proper CSR policy in place, which can be used both on the asset and liability side.
It’s a chain reaction, and I love this concept. You can have one team getting engaged in SRI that ends up ‘greening’ the whole group. That’s something we’ve really experienced.
IFR ASIA: The fastest growing market right now is China, but as far as I’m aware there’s no tax incentive there. It’s about stoking supply, rather than demand.
BENJAMIN LAMBERG, CREDIT AGRICOLE: Talking about China, we shouldn’t forget the Chinese authorities have acknowledged that there is a lot of work to do to ‘green’ the country. This explains why there’s such a drive behind developing a Green bond market and domestic issuers and investors alike would embrace the concept, as they can see with the air pollution the effects in their everyday life.
IFR ASIA: Well the last headline I saw about smog was in Delhi! Let’s drill down into some of the challenges and how we can overcome those. The first is the extra cost of getting things certified as green. How are issuers coping with that?
RAHUL SHETH, STANDARD CHARTERED: The one element that’s different from doing a normal, senior unsecured bond is basically the verification Process. Two things about that - For any issuer the motivation has to be to showcase their sustainability credentials and investor diversification. There is an additional cost to it, yes, but it’s not a lot of money. It could be between US$20,000 and US$70,000, and in most cases it’s a one-time cost. Amortised over a five-year bond it’s a very insignificant number. But having said that, it does take time and you could be left with no arbitrage from going green. Predominantly the issuers that we’ve come across have looked at the far greater, intangible value, rather than a small cost like this.
And the second thing is we’ve worked with issuers who have used Green bonds to educate a lot of people within the organisation and pass these principles down the chain. They’re actually looking at it a lot more on a long-term basis.
The cost is not the hindrance. It’s more the mindset of wanting to do something with potentially no arbitrage.
BENJAMIN LAMBERG, CREDIT AGRICOLE: There might have been issuers a few years ago who did Green bonds driven by marketing considerations, but now when we speak to an issuer, it’s a strategic decision which reflect the values of the organisation and its top management and it’s not an isolated act from the finance division.
IFR ASIA: Thank you. Sandeep?
SANDEEP BAGLA, TRUST GROUP: I agree that the upfront cost is not significant, but later the yearly recurring costs of compliance with the terms of the issue might become onerous.
If the issuer is able to identify and attract a different set of investors and dedicated pool of money that would not have come to him if the bonds were not Green, then he will see a tangible benefit. That would make it more sustainable in the future.
IFR ASIA: And it has happened in India, through deals where IFC has come in as an investor.
SANDEEP BAGLA, TRUST GROUP: Absolutely.
TERRY FANOUS, MOODY’S: We hear that Green bonds are trading a little tighter in the secondary market, so that will help those issuers when they price bonds in the future. To my mind, a repeat issuer with a Green yield curve will be able to capture more capital dedicated for Green bonds.
IFR ASIA: Sarah, would you pay more for a Green bond?
SARAH PERCY-DOVE, BLACKROCK: I’m hedging my bets a little here. We have clients increasingly asking us to manage more and more investments with an eye on the environment. Over time, that can create a pricing benefit to the issuer, but the green aspect is never the only thing you look at. I can’t tell you we would buy a Green bond over a non-Green bond, because every case is different. If you had the same bond, for the same issuer, all things being equal, I might consider it.
LOUIS PERROY, CLIMATE BONDS INITIATIVE: I think we’re touching on two very important aspects here. One is how green should green be, in terms of verification, certification etc. How far should we go, so that when we talk about Green bonds or climate bonds, it does mean something? It does not mean just being slightly green.
And the second thing, you were talking about institutional investors dedicating money to Green bonds and so on. Well, the flipside of that is, are there enough green projects and green companies to invest in? At this stage I think we’re getting to the point where there are probably not enough assets.
BENJAMIN LAMBERG, CREDIT AGRICOLE: You’re absolutely right. We’ve started to see this year some Green bonds trading marginally tighter than standard bonds. When we approach an issuer, we never promise that a Green bond will be a cheaper means of funding, but it’s a subtle dynamic and at the moment demand from dedicated funds is driving Green bonds tighter.
IFR ASIA: Is the Green bond investor base less likely to sell when markets turn? Is that why these securities might outperform?
SARAH PERCY-DOVE, BLACKROCK: I wouldn’t characterise it that way. When you look at a portfolio of great investments, that doesn’t mean you buy and hold everything to maturity. Each of those bonds will have its own equilibrium in terms of value and risk. The fact that a bond is Green does not mean that the risk of owning that bond does not change. That reassessment should continue to happen and you should continue to sell bonds when you’re not getting paid for the risk.
Buy and hold investors are absolutely part of the market, but I think it’s actually the ones who are actively buying and selling who are ultimately driving the price
IFR ASIA: Louis brought this up just before: how green is green? How much accountability is there, after the issuance has actually happened?
RAHUL SHETH, STANDARD CHARTERED: In terms of mechanics you have a choice of using the verifier for an annual check, to confirm that the claims you made on the roadshow still hold. The other way of doing it is keeping the annual certification optional, but then your statutory auditor has to show that these assets still exist on the balance sheet. That’s an approach a lot of issuers have used.
You’ve also got the annual reporting requirements, either in your annual reports or on your sustainability web page. Tracking the use of proceeds is a requirement of the Green bond principles and the Climate Bonds Initiative, and that keeps the issuer on the hook.
IFR ASIA: But it’s not legally enforceable, is it? Is it something you could go to court over?
LOUIS PERROY, CLIMATE BONDS INITIATIVE: No, and most likely it’s going to remain this way. It depends on what the buyer wants, and I think, increasingly, buyers will want to know that what they bought is indeed Green. They will most likely favour the reputable, verified bonds rather than something which is Green on the surface of the documents…
RAHUL SHETH, STANDARD CHARTERED: You’re absolutely correct there’s no event of default. But the reputational damage from not doing what you promised to do is not going to sit very well with any company. That’s a very strong deterrent.
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