SSAs take GSS bonds to the next stage

Supranational, sovereign and agency (SSA) issuers were among the global pioneers of the green, social and sustainability (GSS) bond market. As the sector prepares for its next quantum leap, some of the Kangaroo market’s most prominent GSS issuers (see chart) talk to KangaNews about their programmes and what comes next.

PARTICIPANTS

Lars Ainsley Senior Manager, New Issues KFW BANKENGRUPPE
Marcin Bill Senior Financial Officer INTERNATIONAL FINANCE CORPORATION
Andrea Dore Head of Funding WORLD BANK
Laura Fan Head of Funding INTER-AMERICAN DEVELOPMENT BANK

Willem Littel Senior Manager, Capital Markets and Investor Relations BNG BANK
Evan Morgan Vice President - International Funding KOMMUNALBANKEN NORWAY
Aldo Romani Head of Sustainability Funding EUROPEAN INVESTMENT BANK

MODERATOR

Chris Rich Staff Writer KANGANEWS

PROGRAMME EVOLUTION

Rich The GSS market has become more codified over the years through the adoption of various principles and standards, now including the EU taxonomy. How have your programmes evolved alongside these market developments?

DORE Supranational issuers like World Bank were pioneers in the early days of the green-bond market. Alongside our green-bond issuance – together with other multilateral development banks – we played an instrumental role in defining market best practice for transparency and reporting.

This was by engaging with investors on the process of green-bond issuance and reporting, as well as being a founding member of the executive committee of the green-bond principles (GBP), coordinated by the International Capital Markets Association (ICMA). We initiated harmonised impact reporting and still contribute to the evolution of green-bond impact reporting.

ROMANI We view the development of the GSS bond market – starting with our own programme – as both a trigger and an instrument of an incremental process that brings clarity to GSS finance. This clarity is a prerequisite for the much-needed transition to a low-carbon and sustainable economy.

A few milestones have already been reached along the way, providing guidance on issuance process, reporting and verification. These include the GBPs, the international financial-institution framework for green-bond impact reporting harmonisation and the EU green-bond standards (GBS).

The EU taxonomy is a crucial step forward and establishes an important reference for concrete cooperation among policymakers, project specialists, market practitioners and civil society grappling with the question of what should qualify as green or sustainable.

For the bank of the EU, this particular initiative is very relevant and a dedicated sustainability funding team has been created within European Investment Bank (EIB)’s capital-markets department to adapt our funding to these structural developments.

Having shaped the very first green bond in 2007, I am heading this team. It is directly responsible for issuance of climate-awareness bonds (CABs) and sustainability-awareness bonds (SABs) in all currencies, ensuring continuity as the framework evolves. Our first initiative has been to revise use-of-proceeds language to allow for the gradual alignment of CAB and SAB eligibility criteria with the EU taxonomy as it takes shape.

“As in other markets, the success of green bonds is drawing Australian investors’ attention beyond the traditional financial and risk considerations to include the investment’s purpose and ESG considerations.”

“The Australian dollar market was the first non-European market in which we issued a CAB with new use-of-proceeds criteria linked to the EU taxonomy. This shows how important the Kangaroo market has become for EIB’s GSS funding, and it would not have been possible without investors’ engagement.”

MORGAN Since we issued our first public green bond in 2013, the development in the market, including size and of course codification and reporting, has been tremendous.

Kommunalbanken Norway (KBN) has been proactive, updating our original 2013 green-bond framework in June 2016 to meet the developing market standards.

We are also currently reviewing the framework in line with the release of the EU taxonomy. Our eligible-project categories have not changed dramatically over the years. But the eligibility criteria for each category have evolved in line with the technological frontiers.

In addition, our process for project evaluation and selection is more stringent. Also, of course, the focus on quality of impact reporting has increased.

Rich How has the process of developing the EU taxonomy and the report’s release informed the development of issuers’ green-bond programmes?

AINSLEY KfW Bankengruppe (KfW) actively contributed to the working groups on the EU taxonomy and EU GBS. While the final details of the taxonomy are still in the discussion phase, we strive to fulfill the criteria of a future EU GBS.

ROMANI EIB has been part of the European Commission (EC)’s technical expert group (TEG) on sustainable finance, directly contributing to the EU taxonomy and EU GBS work streams.

Being the bank of the EU, EIB intends to align its activities with the EU taxonomy as it evolves over time. This applies to loans and bonds. On the funding side, we have already reflected this in our CAB and SAB use-of-proceeds documentation.

We are now working closely with our project experts on the infrastructure needed to establish a reliable link between EIB’s sustainable lending and funding. Project-finance activities need to be mapped, selected, marked, allocated, monitored and reported to the capital-market audience according to their contribution to the sustainability objectives set by the EU.

LITTEL The TEG reports are a starting point for a common taxonomy in order to facilitate and stimulate green lending in Europe. Of course, this will have an effect on the further development of our programme but also, and not less important, legislation and regulation will have an impact on new lending.

A large part of public spending is nowadays already either social or sustainable – and this part will grow.

“We had domestic and international investor participation in our Kangaroo EYE-bond from accounts that had never before bought an IADB bond.”

MORGAN It remains to be seen how deep an influence the EU taxonomy and the EU GBS will have on the market, so we are not currently throwing everything old overboard. But we assume some investors will be curious about how our green-bond programme fits into the definitions established through the EU sustainable-finance package.

We aim for a smooth transition. In the first round, we will assess how well our current criteria match the criteria of the taxonomy and what is needed to make our framework ‘EU compliant’.

We have scheduled an update of our eligibility criteria and our green-bond framework for later this year, where clearly we will bear the current version of the taxonomy as well as the EU GBS in mind.

BILL The EU taxonomy brings harmonisation and standardisation to what is still a very compartmentalised market. We are long way from achieving uniformity of definitions and standards. But this is certainly a move in the right direction and Europe is clearly leading this effort.

“Despite the great growth the green-bond market has experienced it still constitutes only a fraction of the financing needs which would help the global transition to a low-carbon economy. In our view there is room for innovative initiatives like a transition-bond market.”

SSAs' global GSS programme updates and plans

Supranational, sovereign and agency (SSA) issuers’ green, social and sustainability (GSS) bond programmes are not static objects. Some of the market’s biggest players update KangaNews on global and issuer-level developments.

RICH Can you update on SSAs’ GSS programmes – specifically how large they are and what types of labelled bonds you issue?

FAN Inter-American Development Bank (IADB) has a social-bond programme called EYE – for education, youth and employment – which had US$1.5 billion outstanding as of July 2019.

The EYE-bond programme focuses on the lifecycle approach to building human capital from early childhood care and education through formal primary and secondary education, as well as programmes that facilitate labour-market placement by improving the transition from school to work through vocational training.

Read the full story

Rich Do you expect the EU taxonomy to provide the basis for a common global language for green bonds?

BILL Further development of the green-bond market requires standardisation. At the same time, it still has a lot of room to grow and one needs to be cautious not to suffocate development with requirements that are too strict.

LITTEL A common global language has been in the making for some time already. The ICMA GBPs are the best example of this but there are more initiatives. The EU taxonomy is in this respect a logical and valuable addition to market development and will eventually evolve into a common language.

ROMANI As long ago as 2016, the G20 Green Finance Synthesis report identified lack of clarity as a major obstacle in green finance. It encouraged the development of internationally comparable indicators to unlock cross-border capital flows.

We believe comparability in GSS finance may be achieved if the individual approaches to sustainability, while reflecting local challenges and priorities, are aligned in their classification structure or architecture – in other words, their core objectives, activities and technical screening parameters.

Different significance thresholds may still be adopted as technical-screening criteria in the context of different, though converging, paths. This is what we understand to be common language in green finance.

DORE The EU taxonomy is an important classification tool to help investors and companies make informed investment decisions on climate-related economic activities. We see it as a useful instrument for investors to identify what can be considered environmentally applicable. But in its current form its applicability is mostly restricted to Europe and developed economies.

Rich Is the move towards a common language being driven more by issuers or investors?

MORGAN I don’t think it will be driven by either issuers or investors alone but rather in combination. The European market is already quite developed with issuers and investors collaborating closely since the inception of green bonds. I don’t see this changing.

What is changing, though, is that the TEG process initiated by the EC facilitated the opinions of NGOs, think tanks and regulators to be incorporated into the development of the green-bond market. This may add some complexity, as these actors do not necessarily have the same pragmatic approach as market actors do. This makes it even more important that issuers and investors join the conversation even if they are outside the relatively small TEG – as we are.

“In the years to come GSS bonds will have to be labelled as such to bring sustainability issues to the fore. Over time ESG bonds should become the norm rather than the exception.”

THE KANGAROO MARKET

Rich What have been the main developments in the Australian dollar market for GSS bonds?

AINSLEY When we issued our first green bond in Australian dollars the market was in its infancy. Since then, issuance volume for GSS bonds in Australia has reached new heights and numerous issuers have ‘joined the band’. The sustainable-finance roadmap for Australia and New Zealand paves the way for continued development of what is still a relatively nascent market segment.

DORE As in other markets, the success of green bonds is drawing Australian investors’ attention beyond traditional financial and risk considerations to include the investment’s purpose and environmental, social and governance (ESG) considerations.

GSS supply from supranationals has been complemented by issuance from state treasuries, domestic and international banks and corporates. This is providing more issuer diversity to the market.

BILL The Kangaroo market has seen a great deal of development in its issuance and investors. There are several active, high-quality ESG funds in Australia. Their presence incentivises issuers to supply thematic bonds on a regular basis.

MORGAN KBN didn’t issue its first green bond in Australian dollars until August 2018. It must be said that, after the initial SSA Australian dollar green bonds back in 2014 and 2015, the SSA market saw relatively limited activity until last year when issuance really picked up.

The main development we have noticed is that investor focus and engagement in the sustainability space has really taken off. More and more Australian investors are now also looking at ESG factors as part of their overall investment strategies.

BILL We see incremental demand for labelled products in virtually all the markets in which we are active. Demand continues to outgrow supply and this is certainly also the case in Australia. GSS bonds reflect issuers’ efforts to broaden the cloud of supply as well as to promote sustainability overall.

MORGAN KBN’s experience is exactly the same. The green bond we issued in August 2018 was at the time our largest book and remains KBN’s largest print in Australian dollars. The green format, and therefore the incremental demand we saw, was a major factor in the success of the trade.

In addition to seeing some specific green-focused accounts in the book, the ticket sizes from many of our regular investors reflected a green focus. It is also worth noting that more than 60 per cent of this trade went to Australian investors. This domestic engagement was particularly pleasing to see.

FAN This was also our experience with our inaugural Kangaroo EYE [education, youth and employment] bond. Domestic investors comprised 50 per cent of the geographical distribution. There was also greater participation from asset managers as they took 50 per cent of the transaction, followed by central banks at 30 per cent. We had domestic and international investor participation in our Kangaroo EYE bond from accounts that had never before bought an Inter-American Development Bank bond.

ROMANI The Australian dollar market was the first non- European market in which we issued a CAB with new use-of-proceeds criteria linked to the EU taxonomy. This shows how important the Kangaroo market has become for EIB’s GSS funding, and it would not have been possible without investors’ engagement.

The domestic bid appears stronger for CABs than our regular Kangaroos. Reflecting the same trend, GSS-focused interest out of Japan has also been key to our CAB placements, in particular in the longer end of the curve. Overall, our interaction with the investor base in Kangaroo GSS bonds has been very positive.

Green Capex is not enough

While green, social and sustainability (GSS)-labelled bonds are providing assurance to the market, capex projects alone are not enough for a two-degree world. Amy West, head of sustainable finance at TD Securities in New York, discusses market growth.

Supranational, sovereign and agency (SSA) issuers have been at the forefront of financing sustainability-linked technologies and projects since the start of the market, including being pioneering issuers of GSS bonds.

But if the committed two-degree limit above pre-industrial levels laid out in the Paris Agreement on Climate change is to be fulfilled markets will have to keep evolving to a broader approach towards environmental impact, West says.

IF AN ISSUER COMES TO MARKET WITH A GSS BOND, INVESTORS INTUITIVELY LOOK AT WHAT ELSE THE COMPANY HAS DONE IN THE ESG SPACE. IT IS NOT A SURPRISE THAT MANY OF THE WORLD’S LARGEST INVESTORS LOOK AT ESG BEYOND LABELLED GSS BONDS.
AMY WEST TD SECURITIES

Read the full story

GSS EVOLUTION

Rich There is ongoing debate globally about whether labelled bonds are doing as much as can be done to redirect capital to fund the transition to a low-carbon economy. Do SSAs have a role to play in developing things like transition bonds in the same way as they have done with GSS bonds?

LITTEL It depends on their core business models but I see development institutions and public-sector institutions playing a key role in the further development of the market.

AINSLEY Sustainability has always been an important part of KfW’s DNA – and that of other SSA issuers as well. Our role is to be engaged in global initiatives, continue the dialogue with market participants and incentivise others to join our efforts towards a low-carbon world. GSS bonds and transition bonds can only be one tool to reach this goal.

ROMANI Clarification of the status quo of sustainability is an essential condition for steering change effectively. This means what contributes substantially, what is compatible ad interim and what is not compatible.

The report of the EC’s TEG has, for example, retained the principle that “transition activities” – those that contribute to a transition to the EU’s goal of a zero net-emissions economy in 2050 but are not yet operating at that level – are part of the transformation effort and therefore deserve to be mapped via GSS issuance.

DORE As with green bonds, supranationals will continue to play a key role in building sustainable capital markets. For the sustainable capital market to grow, it needs labelled and unlabelled, purpose-driven fixed-income instruments that allow investors to connect with the purpose of the projects and programmes their money is supporting without taking project risk.

BILL Despite the great growth the green-bond market has experienced it still constitutes only a fraction of the financing needs which would help the global transition to a low-carbon economy. In our view there is room for innovative initiatives like a transition-bond market, which could allow new issuers to benefit from the increase in overall demand for thematic bonds.

“It remains to be seen how deep an influence the EU taxonomy and the EU GBS will have on the market, so we are not currently throwing everything old overboard.”

Rich Do you think the market will evolve towards a more broad-based understanding of issuers’ environmental impact – perhaps in such a way that specifically labelled bond issuance is no longer required? Or will highlighting particular projects in the way GSS bonds do always have a value?

DORE The GSS bond market is essentially about purpose and transparency. There is growing focus on ESG investment factors and how these labelled bonds fit with ESG strategies and sustainable investing. Labels are a useful first step in this direction.

What we are working towards is broader transparency and increasing information and data so investors have better information for decision-making. With improved data and technology, investors can extend their focus on risk management to take climate and social risks into account – or purposeful investing to include a wider range of investments.

Labels are helpful. But at the end of the day what matters is that sustainable activities are financed, not how bonds are labelled.

FAN Eventually, the market could evolve from the purchase of GSS labelled bonds to a more holistic view of issuers. Rating agencies are working on incorporating ESG issues into their credit-rating models. As this aspect develops, investors can more accurately evaluate an issuer’s commitment to ESG factors. The rating agencies could also to some extent standardise a methodology which would allow investors better to compare issuers across all ESG factors.

An important consideration is to understand the purpose of the institution and how that institution achieves its objectives. It could be sufficient for investors if an institution is transparent and publishes information on all its lending projects rather than just highlighting a select amount.

In future, investors could focus more on the issuer itself. If the issuer’s mission supports ESG and provides transparent reporting and evaluation for its lending projects, technically any bond from that issuer could be considered as fulfilling the socially-responsible-investment requirement.

AINSLEY In the years to come GSS bonds will have to be labelled as such to bring sustainability issues to the fore. Over time ESG bonds should become the norm rather than the exception.

“A common global language has been in the making for some time already. The ICMA GBPs are the best example of this but there are more initiatives. The EU taxonomy is in this respect a logical and valuable addition to market development.”

ROMANI Labelled bond issuance is instrumental to holistic understanding and the ratio of GSS issuance to total issuance is bound to become a core instrument of that understanding in society.

For EIB, GSS bonds have to provide a clear and easily understandable link between finance and the real economy – sustainable funding and sustainable lending. The impact reporting associated with green bonds – requiring the collection of reliable and comparable information on projects’ contribution to core sustainability objectives – is a crucial component of accountability for the use of funds. A realistic and constructive dialogue with capital markets can develop on this basis, providing a powerful incentive for strategic change.

MORGAN I think the market has already begun a transition beyond labelled issuance. We have seen this in the move some issuers have made from purely green frameworks to more broad-based sustainability frameworks.

This has occurred as issuers are looking at how to develop their asset bases and, at the same time, as the focus on general ESG principles has increased in the market. Also, issuers increasingly see the need to relate their GSS frameworks to their broader strategies on sustainability and climate risks.

The value of labelled issuance and the ability of investors to measure the impact of their investments and to compare supply from different issuers will continue to be an important factor in future. I believe the move towards this holistic view, and perhaps a situation where labelled issuance is no longer required, is some time off.

BILL We think the market is evolving towards the more holistic approach. At the same time, many investors express the need for transparency and standardisation. As demand grows and the method of evaluating projects and issuers improves, we are convinced the market will find a way of pricing in both quality of issuers’ overall environmental impact and the impact of a specific project. •