The route to the future

As part of a rare and brief visit to Australia in December 2019, Marilyn Ceci, managing director and head of green bonds at J.P. Morgan in New York, met with KangaNews. Ceci does not predict that use-of-proceeds sustainable bonds will give way to general-corporate-purposes issuance with an environmental, social and governance (ESG) overlay. She views the urgency of the low-carbon-economy transition to be such that all well-considered, meaningful and deliberate steps on the sustainability path are critical.

What is your view on the concept of transition bonds? Do you think they are an important step in the evolution of the sustainable bond market?

The transition to a low-carbon economy requires a multifaceted approach. If we just issue green bonds for wind farms, we are not taking into account the overall transition the economy needs to keep global warming to 1.5 degrees by 2030 based off pre-industrial levels.

I am certainly in favour of transition bonds as one of the co-authors of the Green Bond Principles (GBP), as administered by the International Capital Market Association (ICMA). We initially focused on creating voluntary process guidelines, or best-practice guidelines, to provide flexibility to a variety of issuers to enable them to communicate their sustainability narratives.

As the green-bond market has evolved over the years, carbon-intensive industries have largely avoided getting involved – maybe out of fear of reputational risk. One naturally wants a positive outcome.

The few we have seen come to market have not really been welcomed by the press or by some investors. Thus you can understand why there is an interest in providing a different label for bonds issued in carbon-intensive industries, so that no company is calling itself something the broader market – and in many cases the press – doesn't necessarily agree with.

Are investors largely coming along for the ride around transition bonds?

Yes. In June 2019, AXA Investment Managers (AXA IM) published transition-bond guidelines. European Bank for Reconstruction and Development (EBRD) has also done some impressive work on this, and EBRD recently issued a transition bond.

We must also understand and appreciate that investors are not one homogenous group – some have differing views. AXA IM has made its view public and clear. One of the things the GBP executive committee is working on is the recently created Climate Transition Finance Working Group.

The working group will look at some of the barriers to entry to the green-bond market for some issuers, and whether it makes sense to create guidelines on best practice to help issuers with their transition narrative.

“It is extremely important for issuers to make clear they are labelling their bonds as linked to sustainability considerations, and that this is why they are going to follow the guidelines they select. Investors are smart and make their own decisions regarding complexity.”

How can the market ensure credibility for transition bonds?

Guidelines are helpful. If you think about what we have done with the GBP, I think issuance really picked up in January 2014. Guidelines provide comfort and when one is in alignment with guidelines, the risks associated with claims go down.

We have made some changes to the GBP over the years, such as the enhancement of principle two – which is the process for evaluation and selection. We ask issuers to communicate very clearly how the eligible categories for their green bonds fit into their overall climate or green strategies.

Market users are quite excited about the prospect of transition bonds for a carbon-intensive economy like Australia. What do you think needs to happen for this concept to gain traction?

Australia is not the only carbon-intensive economy on the transition path. I like to think about climate change as a type of ladder. We have to appreciate that every step up the ladder is important and that different countries are on different rungs. This is one of the reasons I think the GBPs have been as successful as they have.

Transitioning to natural gas from coal, which doesn't quite meet the full objective of transitioning to a low-carbon economy, can save tonnes of CO2 each year and can be very meaningful. To go directly to renewables from coal may not be a viable option for all.

Transition bonds will provide an opportunity to create a pathway for industries to participate meaningfully – and I think this is the important point. Some Canadian carbon-intensive industries have been circling around the transition bond for a very long time, and there has been general concern from an institutional standpoint about jumping into this space before it is fully vetted.

I cannot say this will be the outcome of the working group – it has only just begun. First, we will discuss and evaluate transition bonds with issuers, investors and underwriters. However, once the working group has had the chance to put the work in, I'm sure we will take this concept to the new Advisory Council, an addition to the GBP in 2019, and ask for further input from other stakeholders – which include both members and observers of the GBP.

One argument against encouraging the development of transition bonds is the idea that there are too many labels in the sustainable-bond market. At the ICMA annual conference in Frankfurt in 2019, there was a call for simplicity. How important are labels, and what are their disadvantages?

The idea around labels is helpful, not confusing. The idea of the label is to support transparency and disclosure.

I personally don't have a concern with labelled bonds. We have blue bonds which, to me, are a subset of green bonds. If an issuer wants to provide an additional label, who are we to say they cannot use it?

It is extremely important for issuers to make clear they are labelling their bonds as linked to sustainability considerations, and that this is why they are going to follow the guidelines they select. Investors are smart and make their own decisions regarding complexity. It is when you put a label on something and don't clarify it that problems can occur. But this is true for anything.

It is also fair to say the market will continue to evolve over time, from United Nations Sustainable Development Goal (SDG)-linked bonds, sustainability-linked revolving loan facilities and green loans to sustainability bonds, transition bonds and other types of issuance and labels.

“Sustainability-linked instruments are complementary to green bonds and hence don't really find their way into green-bond funds. This is a crucial point: we do not have to make a choice between one and the other.”


Looking at sustainable-bond-market transition, do you agree with the idea that the market is evolving from the focus on use-of-proceeds bonds towards the concept of integrated whole-of business ESG analysis? It seems that investors are moving in this direction, while rating agencies are also starting to integrate ESG risk assessment into credit ratings.

Starting with the financial rating agencies, we have seen that they are all gearing up to make the most of this opportunity. They have extensive teams and a broad capital base to support expansion into the ESG ratings space. I understand why they view this as an opportunity.

However, it is also worth bearing in mind that if there is a material ESG risk it will already be included in a financial rating. It is important to remember that rating agencies have always included material ESG risks in their regular ratings and, in this regard, nothing has changed.

The implementation of ESG factors is becoming broader and more integrated across many investors. Obviously, this has been led by Europe, but many key US investors, such as BlackRock and TIAA CREF, have been investing in green-bond-type assets since before labels were invented.

The broad approach to mainstreaming has happened more quickly in Europe, led largely by insurance companies and pension funds that have been pushing for this – and of course asset managers that want to manage those funds' money. It is moving mainstream more quickly in the US as well of late. It is broadening out, whereas it used to be pocketed.

Historically, some asset owners feared giving up returns by taking ESG into the investment process. However, ESG integration strategies have evolved over time and the conversion process also continues to evolve. In fact, increasingly, the attitudes of many investors have changed to think that high ESG ratings for companies are an indication of forward-thinking management and can be associated with potential outperformance.

We like to encourage issuers to communicate how eligible project categories feed into their sustainability narratives and commitments. We have also seen other broad commitments to sustainability, not just the ESG score – through SDG-linked bonds for general corporate purposes or a coupon step-up if issuers don't meet objectives. This exciting development is complementary to the green-bond market.

The Global Sustainable Investment Review, which is published every other year and aggregates global investment, consistently mentions the growth of investors that take ESG considerations into their processes. The latest measure is US$30.7 trillion globally.

Green bonds provided for the market, at its inception, the concept of positive as opposed to negative screening. The green, social and sustainability (GSS) bond market is up 50 per cent compared with 2018, which is pretty impressive. The sustainability bond label, which is used for green and social projects, is growing and is up 234 per cent in 2019. Third-party certified procurement or sustainable sourcing is both green and social, so use of the sustainability bond label is a better fit. I expect significant growth in sustainability bonds in 2020.

It sounds like you don't believe there will be transition from themed bonds to ESG integration.

The growth of both is relevant and important. I don't think they are the same, but they have a tremendous number of links. I don't think the green-bond market is ending. Many asset managers have been building franchises around these instruments and they are very invested in market development.

One often hears retail investors complain that they struggle to get into the green-bond market because it is an institutional-investor space. But demand from retail investors is growing. Asset managers have increasingly created green-bond funds that allow these investors access and this will continue.

The number of investors taking ESG considerations into their overall investment processes is expanding and will continue to do so. However, ESG integration is much broader than green bonds. It is important not to be overly simplistic as we think about this because there are many different facets. Just because you integrate ESG factors into your investment process does not mean you have a green-bond fund or a separate mandate to buy green bonds.

Do you see any risk around green assets being ringfenced for green bonds, leaving vanilla bond investors with the secondary assets?

If you look at the evolution of frameworks over the years, you will see that a significant commitment to sustainability over the long term has developed, specifically from the perspective of exactly what issuers are going to include as eligible categories into their overall narratives.

If you are talking about a carbon-intensive issuer, it is true that it could engage in renewable projects but lack an overall sustainability narrative. Likewise, if an issuer has one or two solar projects and issues a green bond but provides no background on its overall commitment or sustainability plan, of course this will be a challenge for the market.

It is clear that some green bonds are structured better than others. However, for issuers that follow the GBPs carefully, and in particular principle two – which covers how a green-bond issuer should "clearly communicate" its "process for project evaluation and selection" – there are guidelines on how to avoid badly structured bonds.

Should more jurisdictions make nonfinancial disclosures or impact reporting compulsory?

The Task Force on Climate-related Financial Disclosures was a great step forward for disclosure and this push is continuing. I welcome and encourage continued improvements in nonfinancial disclosures.

Europe has led in this area. If we look at free markets, we know how much investors value these climate disclosures. Stakeholders will communicate their needs to issuers, and issuers should follow the needs of their investors.

The GBP are voluntary and have progressed quite a way without regulatory engagement. We have a long way to go and many hands will be needed to transition to a low-carbon economy – so we welcome mechanisms to achieve this.

What do you see as the big themes for the sustainable-bond market in 2020?

The sustainability-bond label will continue to see strong growth and we will likely see more interest from capex-light issuers. This will include, among use-of-proceeds deals, sustainable procurement as the supply chain is relevant and an important element of corporate sustainability strategy.

The sustainability-linked bond product will also continue to grow in popularity. But sustainability-linked instruments are complementary to green bonds and hence don't really find their way into green-bond funds. This is a crucial point: we do not have to make a choice between one and the other. A variety of instruments are available now and this will continue to grow.

I'd like to see continued uptake of GSS instruments by investors in this region of the world, and by this I mean Asia as well as Australia. I think this is vital. Propelling this forward will be the asset owners demanding change.