Global green-bond market prepares for leap to mainstream

Scaling up and broadening supply through globally harmonised issuance standards will be a key goal for the international green-bond industry in the coming years, according to market participants at the leading international forum for the sector. Asia’s significance as a source and target of issuance is only set to grow.

On 14 June, more than 800 green- and social-bond market participants from around the world met in Hong Kong for the International Capital Market Association (ICMA)’s 2018 green and social bond principles annual general meeting and conference – the first time this event has been held in Asia. KangaNews is the only media company to be an observer of the green, social and sustainability bond principles and was on hand to report the event.

The AGM also saw the release of the latest iteration of ICMA’s green bond principles and social bond principles, with updates focused on enhancing transparency for example around the use of external reviews.

Market progress

Conference speakers highlighted the pace of growth experienced by the green-bond market in particular. The main agenda item was how to build on this growth to make the asset class truly mainstream, and thus achieve its objective of martialling capital markets for climate-related change. Time is of the essence.

“The next 12 months will be critical for scaling up the market, and therefore sustainable finance, for years to come. This growth will be important, not least in addressing the huge demand for green investments,” said HSBC’s group chief executive, John Flint.

Ashley Schulten, managing director and head of responsible investment, global fixed income, BlackRock, commented: “I think we have achieved the vision we set for ourselves 4-5 years ago, of developing a global standard and a market of scale. The vision for the next 4-5 years has to be diversity at scale – to build a global aggregate index equivalent in green bonds. To do so we need more: more asset-backed securities, more sovereign issuance, more high yield and more from emerging markets.”

According to Climate Bonds Initiative (CBI) data, there was nearly US$900 billion of outstanding “climate-aligned bonds” on issue by mid-2017, from more than 1,100 issuers. The consensus at the ICMA event was that this represents a good start but that growth potential remains largely untapped.

For instance, Eila Kreivi, director and head of capital markets at European Investment Bank and chair of ICMA's green-bond principles executive committee, compared green-bond market maturity to “somewhere between a toddler and an adolescent” while adding that it is further progressed now than might have been expected half a decade ago.

The next 12 months will be critical for scaling up the market, and therefore sustainable finance, for years to come. This growth will be important, not least in addressing the huge demand for green investments.

JOHN FLINT HSBC

There appears to be no doubt about the power of green and social bonds to affect change. Conference speakers took on naysayers who see the sector as window dressing or a PR exercise, with a common theme being the wider behavioural change that issuance generally entails – at least within fully bought-in issuers.

Kreivi said: “Cynics often say that green bonds are funding things that would be funded anyway. This is true – but it misses the point that green bonds are more about starting processes within organisations that have a wider impact. As an issuer, there is no point planting a rose in front of your house if the inside is a mess – because investors will inevitably ask about the whole house, not just the rose.”

Stephanie Sfakianos, head of sustainable capital markets at BNP Paribas, added: “There is no doubt in my mind that BNP Paribas behaves differently as an organisation having issued a green bond and committed to doing so again in future. We are now actively encouraged, and incentivised, to fund green projects – the bank’s house is being put in order and the way we operate is changing.”

Harmonisation goal

The ICMA principles form a baseline for most global green-bond issuance. But a major discussion point at the event – and one that sparked differing views – is the extent to which further clarity on standards could help unlock the market’s vast potential. In particular, speakers debated the extent to which global harmonisation is a worthwhile and achievable target.

Moves are already afoot to introduce international standards. The European Commission (EC) is working on a green-bond “taxonomy”, while China has produced a Green Bond Endorsed Project Catalogue. The ASEAN Capital Markets Forum also published, in 2017, its own green-bond standards as a voluntary guideline for issuers in South-East Asia.

As an issuer, there is no point planting a rose in front of your house if the inside is a mess – because investors will inevitably ask about the whole house, not just the rose.

EILA KREIVI EUROPEAN INVESTMENT BANK

Most conference speakers believe standards – within regions, and potentially between them – should enhance issuance opportunities especially for private-sector borrowers.

Kreivi explained: “It might be thought that prescriptive rules would deter private-sector issuers. But they actually make it easier for corporate issuers to come to market secure in the knowledge that they are doing things right.”

The main purpose of standards is to maximise the alignment between issuance and purpose. Natixis’s global head of green and sustainable finance, Orith Azoulay, said: “Once the green-bond principles were in place, we needed a common language to facilitate greater granularity in the market. This is where the concept of a taxonomy came in. What the EU is trying to do is to define green standards in terms of policy objectives.”

The experience of ASEAN countries is illustrative in this respect. Eugene Wong, managing director, corporate finance and investments at Malaysia’s Securities Commission, explained that the region has a multi-trillion dollar infrastructure investment task in the next decade and a half as it seeks to mitigate air pollution and historically high flooding affecting a population of 640 million and growing.

“If we are going to put the right infrastructure in place, now is the time to do it,” Wong said. “The challenge is that we are dealing with 10 countries with differing ideas about what is green.”

In the case of the ASEAN standards, the decision was to go for a high bar. Wong continued: “We went for no fossil fuels at all even though we knew this would reduce issuance potential. It’s hard to move from light to dark green – and dark green is what we want. There are plenty of other ways to do ‘good but not perfect’ things outside the green-bond standards.”

This hints at some of the challenges involved in harmonising standards between jurisdictions – because the ASEAN conclusion is not universal. Yao Wang, director general of the International Institute of Green Finance at China’s Central University of Finance and Economics and deputy secretary general of the Green Finance Committee at the China Society for Finance and Banking, explained why China has settled on somewhat less restrictive green-bond standards.

Even though China is the world’s biggest investor in renewables, Wang said, “clean use of coal” has been confirmed as a catalogue item in China. Coal provides 70 per cent of China’s energy and Wang argued that making it cleaner is a legitimate priority.

Harmonisation limits

“There are different understandings of ‘green’ across jurisdictions and even within regions, and therefore different definitions,” Wang said. “To increase understanding and awareness it is important to understand the underlying ‘green logic’ of a specific jurisdiction.”

The heart of the debate going on within the green-bond sector is how far to go with harmonised standards. Some speakers at the ICMA event think a drive for harmonisation above all could be counterproductive.

European Bank for Reconstruction and Development’s deputy treasurer and head of funding, Isabelle Laurent, commented: “I am a great believer in transparency, disclosure of assets and impact reporting – putting information out is very important. But I have some concern about taxonomies. It is possible to end up looking at everything through a single lens and see things only in a positive light from one perspective, thus missing what might be more negative social connotations, for instance.”

The example cited by Robert was earlier attempts to move to diesel from petrol for automotive fuel. While diesel was widely believed to be a cleaner fuel from a carbon-emissions perspective, it is has more negative pollution and public-health consequences.

“There will be different priorities across geographies, and what we need to be doing is looking at projects from a multidimensional aspect to ensure above all that they do no harm,” Robert continued. “It may be hard to tweak a global standard to suit local needs and priorities, and thus it might be better instead to help market users with impact reporting and project assessment.”

I have some concern about taxonomies. It is possible to end up looking at everything through a single lens and see things only in a positive light from one perspective, thus missing what might be more negative social connotations, for instance.

ISABELLE LAURENT EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT

However, other market users maintain that harmonised standards should, if designed right, still allow for variation in preferences between jurisdictions.

“Classification should highlight the fact that it is possible to have different objectives while still being labelled ‘green’,” argued EIB’s deputy head of funding, euro, Aldo Romani. “Standards should be a reference that allows market actors to follow their own preferences, and more clarity does not have to equal one size fits all.”

Sean Kidney, chief executive of the CBI, meanwhile pointed out that the process towards regional standards at least may be too far advanced to stop. His view is that provided standards meet the goals of producing scale, simplicity, low transaction costs and global liquidity in the green-bond market they should be encouraged.

Kidney said: “We have a final, solid commitment from the EC that there will be a regulated taxonomy in Europe. China will have a catalogue – this is also settled. The only questions are the extent to which European and Chinese standards are harmonised and how well the taxonomies match the goals of the market.”

There is one glaring omission to this progressive outlook, though. “The elephant in the room – or rather not in the room – is the question of where the US is,” Azoulay acknowledged. “We are missing this voice in the harmonisation exercise, and its absence is a big challenge. The US financial industry loves standards to adhere to, and if it had some for green bonds the US market would surely pick up.”

Encouraging issuance

While views on how to achieve it differ, green-bond market participants at the ICMA event strongly agreed that encouraging further issuance – especially from the private sector – should be the main goal of the industry. Some believe that uncertainty is staying the hand of corporate issuers in particular.

“Our perception is that corporate borrowers tend to be standing aside because they believe there is going to be a lot of further regulation in the space – and they don’t like the uncertainty this implies,” revealed Sfakianos at BNP Paribas.

Kreivi, meanwhile, argued that the asset class needs a greater number of “enlightened and informed” issuers. In this context, she applauded the decision of the government of the Hong Kong Special Administrative Region to commit to issuing green bonds and noted that under the terms of this commitment Hong Kong could become the largest sovereign green-bond issuer to date.

Paul Chan Mo-po, Hong Kong’s financial secretary, told the ICMA conference: “I am pleased to say that Hong Kong will soon join the ‘green wave’ by issuing green bonds to a ceiling of approximately US$13 billion equivalent. We will do so under global best practice and advise others to do the same.”

Hong Kong’s commitment to green bonds is not just as an issuer. It also wants to become a hub for issuance by third parties, which it demonstrated via financial and logistical support for the ICMA conference. Mo-po said Hong Kong “will come to be as well known for green finance” as it is in other financial markets. He added: “We see green as the new gold – not just for the economy but also for our common future.”

I am pleased to say that Hong Kong will soon join the ‘green wave’ by issuing green bonds to a ceiling of approximately US$13 billion equivalent. We will do so under global best practice and advise others to do the same.

PAUL CHAN MO-PO GOVERNMENT OF HONG KONG SPECIAL ADMINISTRATIVE REGION

In the long term, Sfakianos believes the ongoing build-up of investment assets managed with environmental, social and governance mandates means issuers will inevitably be drawn to the green-bond market.

She commented: “The green-bond market will become more valuable to issuers as we get out of the bull market. As things stand, it might be the difference between a five-times oversubscribed book and a 10-times one, which doesn’t really matter. But as liquidity retreats the demand for green bonds is starting to resonate with corporate issuers.”

BlackRock’s Schulten used supply dynamics to return to the need for robust and comparable standards. She said: “I am not worried about supply – there is certainly no shortage of issuers wanting to discuss their programmes with us. I would rather see a better market than a bigger one, by which I mean clear evidence of environmental benefits and with price tension. We never want to be in the position of having to defend an investment to our clients.”