Blue bonds promote ocean health

Fiji, the host of the Asian Development Bank’s 2019 annual meetings, is a fitting illustration of the challenges facing the bank. Much like the ADB itself, the Pacific Island nation needs to respond to climate change and is pushing to enhance its relevance in an increasingly globalised world. It is looking to benefit from improved technology and connectivity across the region, but also faces challenges integrating a diverse population and ensuring its growth is sustainable. “Many of these issues are more salient in the Pacific countries,” said Takehiko Nakao, ADB President. “These are challenges and opportunities for Asia, but the scale of the economies and their remoteness means it is more clearly seen in these countries.” Nakao’s vision for the ADB’s next decade – formalised last year in a painstakingly crafted policy document, Strategy 2030 – could easily have been written with Fiji in mind. Poverty reduction is still the bank’s overriding objective, but the plan also calls for the ADB to do more for the least developed countries in its membership, address climate change and improve resilience against natural disasters – among other goals. For Nakao, the fact that Fiji is hosting the 2019 meetings is a sign of the ADB’s engagement with smaller countries. “I hope we can showcase the development and opportunities in the Pacific Island countries, and also the challenges,” he said. The strategic changes are evolutionary, rather than revolutionary, for the 52-year old institution, but they point to shifting demands from its shareholders after decades of rapid growth in the region. The 2030 plan gives more weight to frontier markets and social issues, calling for work to improve life in Asia’s rapidly expanding cities, and enhance education and health services. It also demands more innovative financial instruments and more partnerships, with defined targets for the amount of funds mobilised through cofinancing, for example. Nakao wants the bank to become a far more commercial institution by 2030, with a far bigger private sector balance sheet. Having won agreement from its 67 member countries (now 68, after Niue joined in March) at the 2018 annual meetings, he is now pressing ahead with putting those plans into action. Getting there, however, could be the ADB’s biggest challenge yet. New tools The long-term goal will require some fundamental changes to the way the ADB operates. The use of grants is a case in point: as more Asian economies graduate to middle-income and higher-income status, the ADB’s existing framework dictates that they are no longer entitled to handouts. Only a handful of countries, such as Afghanistan and the Pacific Islands, still qualify. Some donors see that as a missed opportunity, since the funds could still have a big impact even in relatively richer countries – through disaster risk management, tackling diseases or improving opportunities for women, for instance, rather than financing power plants or highways. “In Asia the role of grants is diminishing,” said Nakao. “Do we reduce grant operations, or can we use grants for other purposes for regional public good, such as communicable diseases?” The 13th replenishment of the Asian Development Fund – now a grant-only operation – will be under discussion at the Fiji meetings, ahead of the expiry of ADF 12 in 2020. Nakao believes grants could be combined with the ADB’s regular loans in some more developed countries, for instance to promote gender equality through additional training or capacity building. Any changes, however, will need the full support of ADF donors, who are keen for their funds to support the most vulnerable populations. “There are many elements we can support by blending grants with loans,” said Nakao. “We must start thinking about the goal of the concessional window.” Using development funds for richer countries has become a hot topic in the global community, especially with the change in leadership in the US-based World Bank. US Treasury

The Asian Development Bank has a broadly stable outlook on Asian economic growth, seeing a slight decline to 5.7% this year from 5.9% in 2018. The future of global trade, however, remains the “key uncertainty”, according to Yasuyuki Sawada, the bank’s chief economist. “Tensions between the US and China are still very high,” he said. Negotiations between the two economic powers have so far failed to produce much progress, even though the talk of escalation that dominated 2018 has softened. The challenge for economists, then, is that either outcome – a further escalation or prompt resolution – could have a big impact on their trade assumptions. Sawada, however, does not appear too concerned, noting that discussions could yet bring about a positive surprise. “The uncertainty is over which scenario will materialise,” said Sawada. “Earlier settlement of the trade dispute will generate a positive impact, so there is also a potential upside.” Even in the worst case, the ADB sees little risk of a serious hit to Asia, estimating that a mutual 25% tariff on US and Chinese imports would cause a modest 1% hit to Chinese GDP over two to three years. That is a more sanguine view than that of the International Monetary Fund, where managing director Christine Lagarde said in April that tariffs on all US-China trade would put 0.8 percentage points of global growth at risk. More concerning is the growing evidence of a slowdown in major western economies, which remain an important source of final demand for Asia – even though domestic consumption now accounts for over 50% of Asian GDP growth. Global trade growth has turned negative, and global PMI readings are trending down. “We see overall global trade shrinking, although we are not attributing this 100% to trade tensions or policy change, but rather there is a global cycle. This global cycle in production seems to drive more of this downward move,” said Sawada. “Overall developed economies are slowing down, and that is one of the main driving forces for why Asian growth is moderating.” NO RECESSION An inverted US yield curve has renewed concerns that the world’s biggest economy may be heading for a recession as the effects of President Trump’s tax breaks wear off. Economists do not see that as a given, however. The ADB expects growth in the US, the eurozone and Japan to cool to 1.9% in 2019 and 1.6% in 2020. “Our baseline is for a slowdown. Relatively rapid growth in the US last year was bolstered by the effects of fiscal stimulus, and we’re expecting that to fade somewhat,” said Joe Zveglich, deputy chief economist. “But not to the point that the US falls into recession.” Zveglich expects the Federal Reserve to keep rates steady this year, rather than reverse course. “The state of policy is going to be a bit softer this year than we might have expected in around September last year, but not such that it will provide a big push to the economy.” Closer to home, there are few visible risk factors within Asia that could derail confidence across the region. While cooling Chinese growth continues to raise concerns among international investors, Sawada argues the overall picture is stable. “Shadow banking credit is shrinking and total social financing is slowing down, which indicates the effectiveness of Chinese government policy at heading off financial system risks in general,” he said. Debt and default risks in China are also likely to be contained in the domestic financial system, given that most of the debt is in local currency and the country’s centralised government has more capacity than most to tackle non-performing loans and ensure stability. “You would need a very large and sustained shock to throw off global growth,” said Zveglich. “While there might be some regional spillovers, because Chinese demand is important, the government still has the fiscal space to take some of the debt issues on.” Elections across the region – with the potential for leadership change in India, Indonesia, Thai

The head of the ADB’s private sector operations evidently has a healthy appetite for risk. Ahead of the 2019 annual meetings, Mike Barrow will be spending some of his free time deep underwater surrounded by sharks. Barrow may be an experienced diver, but his sense of adventure will stand him in good stead as the bank scales up its exposure to Asia’s private sector. The ADB’s long-term strategy calls for Barrow’s department to make more commercial investments in companies and projects that are not government-owned, with the goal of filling gaps in the market and making money to boost its resources. The expansion has already transformed the bank’s role in the capital markets, for instance. It is ramping up pre-IPO investments in Asian equities and supported listings in the energy and healthcare sectors in 2018. While the ADB has a long history as a bond issuer, it has recently appeared on the other side, investing in private sector bonds that promote sustainable development. With growth comes more intense scrutiny. “Two of the four numerical targets in Strategy 2030 are aimed directly at me,” said Barrow. He’s only half-joking. The ADB’s long-term plan, approved by the bank’s governors in 2018, calls for the private sector department to account for one third of all operations by 2024, and for all private sector disbursements to mobilise at least US$2.50 of cofinancing for every US$1.00 of ADB money by 2030. (The other hard targets relate to gender equality and climate change.) The division has already been growing rapidly. In 2018 the ADB signed more than 30 private sector deals for a record total of US$3.1bn, and mobilised a record US$6.4bn of cofinancing – well on the way to the long-term 2.5:1 target. The next five years, however, come with a big expansion push that will require more people and a much broader range of projects. “In terms of number of signed deals, we’d like to double from around 30 to 60-ish annually,” said Barrow. “That will require a big change in our ability to process and manage that many deals.” The 2024 target is a numerical test, rather than a volume target, to incentivise staff to work on transformational private sector projects that carry a lower dollar value – for example in the Pacific Islands or other small economies. The bank is also pushing to diversify into new sectors, such as transportation, water, sanitation, telecoms and health. “We have been very heavy on power and energy. That of course will be core still, but we’d like to do a lot more non-power infrastructure,” said Barrow. The ADB has added expertise in agriculture and social sectors in recent years, and is now recruiting for a business development team to study early-stage incubation investments, especially around new technologies and climate change. “We will work with our donor partners to create platforms where money and expertise can be put in to help grow a whole swathe of new Asian companies focused largely – but not exclusively – on climate change,” said Barrow. Market development The newest team in Barrow’s department will focus on equity investments, both in private equity funds but also directly into projects or through equity stakes in companies focused on developing infrastructure. The bank can point to recent successes, such as pre-IPO stakes in Gulf Energy and B Grimm in Thailand, which have both performed handsomely since listing in 2018. It also helped anchor the IPO of Indonesian hospital group Medikaloka Hermina in difficult market conditions last April. “We have really committed to equity under Strategy 2030,” said Barrow. “Right now it’s around 10% of the private sector portfolio, and we’d like to increase that.” The cofinancing target of 2.5:1 has already had an impact on the guarantee and syndications unit, which is pushing to take a more senior, lead arranger role in projects. “If we’re confident we can help arrange a financing and put it together, then we are happy to take that role,” said Barrow. “We haven’t ha

The ADB is facing something of an existential crisis. Its traditional sources of funding – shareholder contributions and donations from higher-income governments – are drying up at the same time as the region’s needs are changing radically. The bank’s future lies in its ability to mobilise additional resources, both from established public sector partners and – increasingly – with new sources of commercial and concessional finance. “The world is changing. Our traditional co-lenders and grant donors … many of these people have their own priorities now,” said Jacob Sorensen, director of the office of cofinancing operations. “Thinking we can eternally continue to leverage this traditional money would be overly naive.” The fraught negotiations around the World Bank’s 2018 capital increase have yet to be repeated in Asia – the ADB has no plans to ask for money in the near future – but it is clear that some of the bank’s biggest shareholders are focusing more on their domestic markets. Aside from the US administration’s blanket opposition to multilateral institutions, there are questions over the UK in the event of a disorderly Brexit. The arrival of new multilateral development banks in the form of the Asian Infrastructure Investment Bank and the New Development Bank has also stepped up competition for development funding. “It is becoming increasingly difficult to mobilise money for developing nations in Asia,” said Sorensen. Expanding private sector cofinancing is part of the answer, but there are limits to risk appetite. Commercial banks and the institutional capital markets can play a role for countries like Indonesia or Thailand, but credit committees are less inclined to consider Cambodia or Kazakhstan. As a result, the ADB is also looking for more innovative ways to work with new and existing partners. It is exploring the use of donor funding to subsidise climate bonds, effectively adding a yield boost for investors that would allow a lower-rated borrower to access the market at attractive terms. The interest around ocean plastics could also open opportunities to combine concessional and commercial funds. Export-credit agencies could also be more important financing partners, given their ability to offer quasi-commercial terms for deals that suit their national objectives – if discussions can be structured to comply with the ADB’s country-agnostic procurement policies. The ultimate ambition, however, goes much further. “The holy grail for us – and all the other MDBs – is using our concessional money to de-risk a transaction that could then access commercial funding,” said Sorensen. That is no small challenge. Grant funding, which could help make projects ‘bankable’ by reducing blended funding costs, is in short supply. The ADB’s own grant operation – the Asian Development Fund – is reserved for only the poorest countries, leaving single or multi-donor trust funds as the main vehicles. The US$800m-plus Afghanistan Infrastructure Trust Fund is the biggest example, but smaller sums can be extremely effective. Sorensen notes that a France-sponsored grant fund for project preparation has delivered over US$300m of projects, leveraging the government’s contribution of less than US$5m by more than 60 times. The US$10bn-plus Green Climate Fund, launched under the UN’s climate agenda in 2014, is an important partner, both through grant and concessional lending. Recent examples include a US$29m grant for a desalination project in Kiribati and US$29.9m for renewable energy in Tonga – both alongside commitments from the ADB. Progress in the world’s biggest climate fund, however, has been slow, and transaction costs are high. Sorensen also notes that the fund’s resources come from the same shareholders that have backed the ADB and other multilateral lenders directly in the past. Ultimately, he argues, the ADB – and Asia in general – will need to rely more on the private sector to fund development. “At the end of the day concessional money

When Papua New Guinea was rocked by a 7.5 magnitude earthquake in February 2018, the resulting damage forced the country’s biggest liquefied natural gas project to shut down for almost two months. GDP growth tumbled from 3.0% in 2017 to just 0.2% in 2018 as the hit to exports and the massive clean-up bill took a toll on the economy. Smaller countries fare even worse. Cyclone Gita – a severe tropical cyclone with winds reaching over 230km/h – caused damage equivalent to 38% of Tonga’s annual GDP in the same month, while losses in Vanuatu from cyclone Pam in 2015 reached 64% of annual output. Asia is littered with similar examples, where natural disasters have had a severe impact on government finances. And, as climate change increases the intensity of storms and floods, it is little wonder that ministers are looking for ways to protect their national budgets. Catastrophe bonds may be part of the answer. Cat bonds allow sponsors – typically governments or insurance companies – to transfer insurance risk for natural disasters such as earthquakes and hurricanes to the capital markets. The idea first took off in the late 1990s in the US, where big insurance companies were struggling to manage the risk of hurricanes and wildfires in the reinsurance market. The capital markets offered a way to offset the exposure with a new group of investors, who would accept the risk of principal losses in return for a higher premium. The securities mainly trade based on event risk, and can appeal to investors for their lack of correlation to other financial assets. Unlike traditional insurance cover, which typically pays out well after the fact based on actual losses, cat bonds typically pay out as soon as an event occurs that meets certain objective criteria, such as the location and severity of an earthquake or tropical cyclone. That means they can be structured to provide a quick boon to national budgets in the event a disaster hits. Cat bonds made their debut in Asia in 2003, when Taiwan successfully issued a landmark US$100m deal to buttress its earthquake insurance scheme. (The three-year bond matured on schedule three years later.) Japanese property insurers have also increasingly turned to the capital markets to lay off some of their earthquake exposure in the wake of the devastating earthquake and tsunami of 2011, and interest is growing elsewhere in Asia. Singapore welcomed its first cat bond in February, thanks in part to a government subsidy that covered the upfront issuance costs – part of the city state’s efforts to establish itself as Asia’s reinsurance hub. The bond provides A$75m (US$53m) of Australia and New Zealand catastrophe protection to Insurance Australia Group through Orchard ILS, a special purpose vehicle, boosting IAG’s reinsurance lines. David Priebe, vice chairman at brokerage Guy Carpenter, which structured and placed the deal, said he hoped it would provide “a springboard for greater use of insurance-linked securities to close the protection gap in Asia”. MDB TEMPLATE The World Bank has issued cat bonds several times on behalf of governments in Central and South America, offering a template that could be applied to Asia. In this example, the World Bank acts as the issuer and effectively holds the proceeds in escrow until a disaster occurs. If the trigger points are hit, the principal is immediately transferred to the beneficiary government to provide emergency funding; if there is no disaster, the principal is returned to the bondholders at maturity. “By having a Triple A institution act as the issuer, you are effectively separating sovereign risk from the event risk,” said Jason Elder, a Hong Kong-based partner at Mayer Brown focusing on US securities law. “Cat bond investors would then use their own models to assess pricing based on the risk of a qualifying event, such as an earthquake.” The World Bank sold US$1.36bn of cat bonds in February 2018 to provide earthquake protection to Chile, Colombia, Mexico and Peru

The ADB is ramping up its presence in Asia’s local currency bond markets. In the first four months of this year, the bank has sold bonds in – or linked to – Philippine pesos, Indonesian rupiah, Kazakh tenge, New Zealand and Australian dollars, as well as US dollars, British pounds and Swedish kronor. The expanded local currency programme is a strategic move that fills a dual purpose. As well as allowing the ADB to provide more loans in its clients’ own currencies, it also aims to spur the development of the region’s capital markets. This year’s deals include several novel features. The Rp1.2trn (US$84m) Komodo bond – an offshore financing denominated in Indonesian rupiah but settled in US dollars – was the longest tenor local currency bond ever issued by ADB, with a maturity of 15 years. Lead manager JP Morgan sold 70% to European investors, with the remainder going to US buyers. Institutions, banks and retail investors participated in the issue in early March. The deal priced at a 7.8% coupon, well inside the Indonesian 15-year government benchmark of around 8.2% at the time. The ADB’s debut in Kazakhstan’s local market in January was the bank’s first inflation-linked offering in any currency. Led by local broker Tengri Capital, the five-year non-call three and seven non-call five offerings raised a combined US$80m and pay coupons linked to the local consumer price index. The proceeds will go towards funding an energy project in Kazakhstan, where tariffs are linked to inflation. In a further innovation, the domestic deal was structured under the ADB’s global MTN programme and under English law. The bank also sold its first offshore Philippine peso bonds in February, raising Ps5.22bn (US$100m) in a 5.25% four-year deal, arranged by JP Morgan. The ADB’s growing local currency programme reflects a strategic move to reduce foreign exchange risk for its borrowers. In 2018, more than 30% of the bank’s private sector operations were disbursed in local currency, and it is expected the volume will increase. “There is a big push to do more in some of the smaller markets,” said Michael Jordan, assistant treasurer. “We are building local currency pools and managing liquidity so we have funding ready to go when our clients need it.” Green finance is also a growing focus for the ADB, which smashed records in the Australian market in January with a debut A$1bn (US$713m) five-year Green Kangaroo bond. That deal, which took advantage of beneficial swap costs and a growing Australian market for Green bonds, priced at 42bp over asset swaps and will go towards climate-friendly projects under the ADB’s regular operations. “We have committed to issue at least one Green bond each year,” said Pierre van Peteghem, treasurer. “Strategy 2030 calls for three-quarters of our operations to tackle issues related to climate change within the next decade. Definitely that has implications for the size of our Green bond programme.” “You can expect more, because there will be more operations that are eligible.” To see the digital version of this roundtable, please click here To purchase printed copies or a PDF of this report, please email gloria.balbastro@tr.com

More Indian companies are heading overseas in search of funding after the country’s central bank relaxed its long-standing restrictions on offshore borrowing. The Reserve Bank of India issued new rules on external commercial borrowing (ECB) in January, lowering minimum maturity requirements and scrapping previous sector-specific limits. Bankers are expecting more Indian companies to issue offshore debt after a number of state-owned issuers moved quickly to take advantage of the new rules. “We’re seeing a lot more conversations taking place with companies following the revised ECB rules,” said Gaurav Pradhan, co-head of India investment banking and capital markets at Credit Suisse. “The pipeline includes companies from sectors such as renewables, metals & mining and non-banking financial companies.” State-owned oil refiner Bharat Petroleum Corporation received a strong response in January to its US$500m three-year bond offering, allowing it to price the deal comfortably inside initial guidance. This was the first deal after the RBI rule change, which allowed most companies to raise debt at tenors of three years compared with the previous five-year minimum. Shriram Transport Finance, rated BB+ by S&P and Fitch, sold 3.5-year bonds in February, and bankers are predicting more deals, particularly from lower-rated companies. “The companies in the Single B and Double B range stand to benefit the most with the revised ECB norms, as investors and lenders are more confident of taking a three-year view on high-yield credits,” said Shantanu Sahai, co-head of debt capital markets at Nomura. Avinash Thakur, head of Asia Pacific debt origination at Barclays, echoed these sentiments. “The minimum average maturity for all overseas borrowings at three years is helpful because there is good investor demand for shorter tenors and pricing tends to be better,” he said. BEYOND BANK LOANS The RBI’s revised ECB framework introduces a more standardised approach, with one set of rules for all foreign currency borrowings and one for rupee-denominated ECBs. That replaces a regime that set different rules for different categories, or tracks, of issuance. In addition to setting the minimum average maturity for all overseas borrowings at three years, the central bank also said that all eligible borrowers can raise up to US$750m from ECBs in a given financial year, replacing the previous sector-specific limits. The all-in cost ceiling under the new ECB rules is unchanged at a spread of 450bp over the relevant benchmark rate. The more streamlined approach comes as regulators aim to ensure that that the offshore liquidity tap is open for Indian companies to help take the pressure off the domestic market. Starting April 1, large corporate borrowers now have to meet at least a quarter of their annual funding requirements through bonds. Last year, a series of defaults by infrastructure financing company IL&FS triggered a liquidity crunch. In addition, analysts say the country’s power brokers have been seeking to prop up the rupee in the run-up to this year’s election. Other countries, most notably Indonesia, have previously encouraged state-owned issuers to raise dollar bonds to arrest the decline of their currencies. Some market observers were sceptical though about whether the easing of the ECB rules would be enough to encourage more inflows. “The government may be trying to open up capital markets and attract inflows, but revising the ECB framework alone is unlikely to be a big trigger,” said Jonny Chen, portfolio manager at NN Investment Partners. To see the digital version of this roundtable, please click here To purchase printed copies or a PDF of this report, please email gloria.balbastro@tr.com

As world leaders gather on the outskirts of Beijing for the second Belt and Road summit in late April, they could be forgiven for wondering what to make of the flagship initiative a little bit over five years since it was first unveiled by Chinese President Xi Jinping. Washington and Brussels have become increasingly sceptical over the geopolitical implications of the Belt and Road initiative, with the US leading resistance to what it sees as debt-trap diplomacy from an emerging economic superpower. Some of the largest recipients of Belt and Road funding to date, such as Malaysia, have cancelled or have sought to renegotiate projects awarded to Chinese firms because of concerns about unsustainable debt loads, Beijing’s growing political influence and restless local populations. At the same time, however, more western governments have pledge their support for the scheme in the hope of securing Chinese funding for much-needed infrastructure investment, including most recently – and perhaps most notably – Italy. Rather than a threat to the initiative, market participants see renewed discussions around debt sustainability and risk pricing as a positive development that could open up more commercial opportunities for non-Chinese firms. “I think the BRI is currently undergoing a transition,” said Beibei Li, global head of Belt and Road at Citigroup. “During the first phase, the Chinese banks provided the bulk of the lending for the BRI, whether it was corporate loans or project financing, but they are now seeking to cooperate with international banks more because the funding requirements are so huge.” CHINESE BANKS Assessing the impact of the Belt and Road initiative is made even more difficult by the fact that the scheme is so vague. One banker remarked that after closing the financing for a power project in South Asia, he was surprised to see an advertisement in the Financial Times from one of the other lenders, trumpeting the deal as evidence of its BRI credentials. “This was the first time anyone had told me I was working on a BRI project,” he said. Conceived initially as an effort to reinvigorate the ancient Silk Road trading route and develop a maritime equivalent, the scheme has since expanded beyond its geographic core of Eurasia and the Middle East to include Africa, Australasia and Latin America. Chinese authorities are also increasingly keen to talk up other, less capital-intensive sectors aside from public infrastructure, including technology, real estate, finance, tourism and manufacturing. Unsurprisingly, data are hard to come by. The government does not publish any official figures and a lot of the funding to date has consisted of bilateral loans involving Chinese policy banks, meaning that estimates for overall investment volumes often vary significantly. Looking just at loans for infrastructure projects in the 130 countries that are either located along the Belt and Road or have signed cooperation agreements with China, according to the Chinese government’s official Belt and Road website, Chinese banks massively dominate the league tables. Bank of China, Agricultural Bank of China and China Development Bank took three out of the top five positions last year for overall volumes, according to Refinitiv data. According to research from ICBC Standard Bank and Oxford Economics, Chinese state-owned institutions have accounted for around 80% of the funding for the roughly US$750bn in BRI projects the two organisations track. Even there, however, there are signs of a slowdown, as China has tightened rules on overseas investments to rein in risks to the financial sector. The struggles of some recipient countries to repay debts on BRI projects have also forced Chinese banks to recalibrate their appetite for risk, opening up opportunities for international banks. “Looking at the BRI transactions we’ve been working on over the past year, I would say predominantly they’ve still been financed by Chinese lenders, particularly the

New World Bank President David Malpass said he would not alter the lender’s commitment to fight climate change, but pledged to step up its anti-poverty mission and to evolve the bank’s relationship with China. Malpass, who started at the Bank on April 9, was nominated by US President Donald Trump. Some development professionals feared that he would pursue Trump’s “America First” agenda at the bank by resuming financing for coal power projects and pressuring China. But Malpass told reporters that he will pursue the World Bank’s climate change goals, including its previous decision to withdraw from coal power funding. He called climate change a “key problem” facing many of the world’s developing countries. “The board and the governors have established a policy on that. I don’t expect a change in that policy,” Malpass said. A long-time finance executive, economist and government development official, Malpass most recently served as the US Treasury’s undersecretary for international affairs. He helped negotiate a US$13bn capital increase for the World Bank last year. That refunding included requirements that the bank shift lending away from middle-income countries, including China. Malpass at the time was highly critical of China’s continued borrowing from the World Bank and of its Belt and Road initiative. But he said on taking office that new lending to Chinese projects was already declining and the relationship would shift towards one of increased contributions to the bank and sharing of expertise. “That means an evolution where they are much less of a borrower, and they have more to offer in terms of their participation in capital increases, their participation in IDA, where China has been ramping up its contributions,” he said, referring to the International Development Association, the World Bank’s fund for the poorest countries. He said he would work with China to raise the standards of its development projects, with more debt transparency and open procurement standards. His view on China contrasted with that of US Treasury Secretary Steven Mnuchin, who told lawmakers that Malpass’s presence at the World Bank would help the US compete with China’s Belt and Road initiative. Asked at a House Financial Services Committee hearing on April 9 what the US could do to “push back” on China’s growing presence in international development, Mnuchin replied, “I think the single best thing is that David Malpass, who was my undersecretary, is now head of the World Bank.” The World Bank, combined with a new US development agency created by Congress last year, “can be a serious competitor to their Belt and Road,” Mnuchin added. Malpass said he saw no need for a restructuring of the World Bank’s operations, but he would seek to make lending more effective at lifting people out of poverty. To see the digital version of this roundtable, please click here To purchase printed copies or a PDF of this report, please email gloria.balbastro@tr.com

When the World Bank set out to raise money for an ambitious international immunisation programme in 2008, the Japanese capital market was the obvious choice. The combination of a Triple A rating and a worthy cause was an instant hit with retail investors, kicking off a funding programme that went on to raise over US$2bn for the International Finance Facility for Immunisation in a variety of currencies. Since then, Japan has developed into a major market for social finance, where investors tie funding to a specific cause or theme. The Asian Development Bank turned to Japan to sell ‘water bonds’ in 2010, as did Latin American development bank CAF on several occasions. More recent thematic deals have included ‘gender bonds’, with a NZ$130m (¥10bn) ADB deal placed entirely with Dai-ichi Life Insurance in November 2017. Corporations have also tapped into this growing investment pool: Starbucks’ ¥85bn Sustainability bonds in 2017 were also the US coffee giant’s first bond sale outside of North America. While the social theme has expanded rapidly, green finance has been surprisingly slow to catch on. Japan is home to the world’s second-biggest biggest bond market, but ranks only 10th for total Green bond issuance, according to the Climate Bonds Initiative. Green bond sales in 2018 reached US$4.1bn, against US$34.2bn for the US and US$31.0bn for China, the two biggest markets. Chaoni Huang, executive director for green and sustainable solutions for Asia Pacific at Natixis, notes that ESG – environmental, social and governance – strategies are already popular among Japanese investors, but most have so far focused on the social and governance elements. “Japanese investors started looking at ESG much earlier, and so far it has been an investor-driven approach,” she said. “Action around the environment has been less urgent for Japan than for China because the problems are less visible.” There are signs that the “E” of ESG is getting more attention, as both issuers and investors see the benefits from green finance. The Government Pension Investment Fund, the world’s biggest pension fund with around ¥151trn (US$1.4trn) under management, signed up to the UN Principles for Responsible Investment in 2015 and has embedded ESG into its investment strategy since 2017. In September, GPIF said it would allocate ¥1.2trn (US$10bn) of passive investments to two equity indices that give a higher weighting to carbon-efficient companies and those that report their carbon footprint, in an effort to encourage corporate disclosure and safeguard its long-term returns. Sachie Ii, head of the sustainable finance office at Mizuho Securities, sees the trend spreading from the equity to the bond market. “Japan has been behind as a country in the development of issuing Green bonds but this has accelerated since the second half of 2017. At first Green bonds were issued mainly by government agencies and the financial sector, but in 2018 we saw bonds issued by J-REITs, leasing companies and other operating companies,” she said. “Many investors are already thinking about it and are ready to invest, and issuers began studying Green bonds much more last year.” Policy goals Japan’s energy policy is driving momentum. The government’s commitments under the 2016 Paris agreement include a 26% reduction in greenhouse gas emissions from 2013 to 2030, which will require enormous investments in energy efficiency and renewable power. To help mobilise funding, the Ministry of the Environment published Green bond guidelines in 2017 and followed up that initiative in 2018 with a subsidy programme to help companies pay for certification and verification costs. Aya Nagata, deputy director for environmental finance at Japan’s Ministry of the Environment, believes Green bonds can be an effective way of encouraging private sector investment to support global Sustainable Development Goals (SDGs) and limit global temperature increases to less than 2 degrees Celsius from pre-industrial leve

Sustainable finance is taking root in Asia’s bank loan market as lenders step up their focus on environmental and social investments and industry associations introduce additional protocols to standardise market practices. The Asia Pacific Loan Market Association and two global bodies launched a new framework in March tied to borrowers’ sustainability performance, following up on the introduction of green loan standards last year. The Sustainability Linked Loan Principles (SLLPs) were developed in conjunction with financial institutions that are active in issuing loans where interest margins are tied to certain sustainability targets. “Unlike Green loans, SLLPs don’t require the loan proceeds to finance Green projects. However, SLLPs encourage borrowers to become holistically ‘greener’ by measuring and reporting sustainability linked targets on an ongoing basis,” said Andrew Ashman, head of loan syndicate for Asia Pacific at Barclays. “These loans will usually offer a reduction in margin if certain pre-defined sustainability targets are met.” Singapore-headquartered agribusiness Olam International has been an early adopter, completing Asia’s first sustainability-linked loan in March 2018 and following up with an innovative US$350m three-year “Digital loan” a year later, a global first that links pricing to the borrower’s progress on a digital maturity score, to be monitored by Boston Consulting. Both deals are forms of positive incentive loans, which reward borrowers that achieve pre-arranged targets. Frasers Property, another Singapore-based company, sealed its third Green loan in April, raising A$600m (US$429m) from a five-year facility that is also its first Green loan in Australian dollars. Frasers closed Singapore’s first Green loan in September 2018, a S$1.2bn (US$880m) five-year deal that was also the first syndicated secured Green loan from South-East Asia since the Green Loan Principles were established in March 2018. Asian borrowers ranging from airports to railroads and commodity trading firms to real estate companies have tapped the Green loan market. “Green loans will be a big theme in 2019,” said Ashman. “There is significant interest from both borrowers and lenders for the product.” Barclays was the sole Green coordinator on Frasers Property’s A$600m Green loan, which attracted 12 banks in general syndication, including Chinese and Taiwanese lenders. There is currently no regulatory requirement to lend to Green financings and no incremental pool of liquidity among lenders earmarked for Green loans, in contrast to the investor base for Green bonds. As more banks set their own sustainability targets, however, demand is expected to increase. “The development of this market could accelerate if lenders were offered capital relief or funding cost benefits on their Green Lending activities,” said Ashman. To see the digital version of this roundtable, please click here To purchase printed copies or a PDF of this report, please email gloria.balbastro@tr.com