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New investors, not volume, the target of World Bank’s latest sustainability bond

Accessing private investors and adding scale to tangible impact investing motivated World Bank to bring its new sustainable growth bond. The issuer and its lead say the deal presented a unique opportunity to engage new investors on the UN sustainable development goals (SDGs) and World Bank’s bond issuance.

The five-year deal has a reduced minimum investment amount, of A$100,000 (US$72,500) compared with the A$500,000 minimum for a typical World Bank public market bond, and is targeted exclusively at Westpac Private Bank’s wholesale clients.

It has an indicative nominal coupon of 1 per cent but also features an additional return at maturity, based on the performance of the Solactive SDG World MV Index. The index, which was developed by Solactive, Vigeo Eiris and BNP Paribas and, includes 30 companies which dedicate at least 20 per cent of their activities to sustainable products or are recognised industry leaders for their contribution to the SDGs.

If the index outperforms the nominal coupon of the bond over its five-year duration, investors will be paid the difference at the maturity of the bond.

 “There is a lot of interest in investment to achieve the SDGs, including from the private investment sector. But it is often difficult for these investors to access products directly. This product should be very appealing to investors that want exposure to equities which score highly on environmental, social and governance principles in a principal protected format.”

Private investor focus

World Bank was the first green-bond issuer in the Australian market, in 2014, and recently priced its second green bond – a A$300 million, seven-year deal – on 16 November. The sustainability-themed space has seen steady growth in Australia with more than A$5 billion of bonds priced to date in 2018, and domestic and international high-grade issuers continue to dominate supply.

Private investors are typically not catered for in these transactions. George Toubia, Sydney-based chief investment director, private wealth at Westpac Private Bank, tells KangaNews: “Our clients are increasingly active in the area of sustainability and positive impact, but there has until now been limited opportunity for private investors to participate in differentiated initiatives supporting these global social and environmental priorities.”

Westpac wanted to facilitate private capital to create real impact through a credible institution, Toubia adds. This led to the acceleration of discussions with World Bank around this programme.

The programme from which the bonds will be issued – SDGs Everyone – is not itself new. Andrea Dore, head of funding at World Bank in Washington D.C., says similar bonds under the programme have been successfully rolled out with multiple tranches in Europe since the beginning of 2017.

Akinchan Jain, senior financial officer at World Bank in Washington, confirms that the Australian deal follows a precedent from other markets. “There is a lot of interest in investment to achieve the SDGs, including from the private investment sector,” he explains. “But it is often difficult for these investors to access products directly. This product should be very appealing to investors that want exposure to equities which score highly on environmental, social and governance [ESG] principles in a principal protected format.”

Yoram Layani, Hong Kong-based head of institutional sales, Asia at BNP Paribas, says feedback from private-banking and retail investors in the jurisdictions where the World Bank programme has been implemented has been positive. He explains that products like green bonds represent “a drop in the ocean” of the total fixed-income market, particularly for retail investors, so investors with an interest in the sector are typically eager to participate when offered access.

But demand is likely not to stretch to the institutional sector. While the potential for extra yield combined with World Bank credit may be an appealing prospect for many investors, James Hayes, Sydney-based head of global markets Australia at BNP Paribas, says mandate restrictions could make it challenging for institutional fixed-income investors to allocate to a fixed-income product tied to equity performance.

“Our clients are increasingly active in the area of sustainability and positive impact, but there has until now been limited opportunity for private investors to participate in differentiated initiatives supporting these global social and environmental priorities.”

GEORGE TOUBIA WESTPAC PRIVATE BANK
Positive screen

The deal structure was developed globally by BNP Paribas and World Bank, with a first implementation and rollout in 2015. BNP Paribas has also worked with European Investment Bank to issue with a similar structure before again working with World Bank in 2017.

Layani says banks have a role to play in attracting private capital to address the SDGs. He adds that BNP Paribas’s intention with the programme is to place impact as a “third axis” for investors alongside risk and return.

“Investors are increasingly concerned with ensuring the money they invest is being used to facilitate positive outcomes, financially and for society. The license to operate for a lot of institutions now involves going the extra mile by showing their commitment to addressing the SDGs, which provide language for action,” says Layani.

Through the World Bank programme, Layani says more than 150 investors globally have been able to raise more than €1.3 billion (US$1.5 billion). The funds go into a pool World Bank uses to fund development projects around the world.

Issuing bonds with a potential upside return linked to an index has been part of World Bank’s issuance armoury for even longer, though – nearly five years. Jain says the initial transactions were linked to ethical and carbon indices which had a focus on excluding industries that do not meet certain ESG standards.

The issuer’s focus, however, is now shifting to positive rather than negative screening. “This [Australian] bond has a more positive screening focus. The index the potential return is linked to actively picks companies that score highly in addressing the SDGs rather than just excluding certain sectors,” says Jain.

“Investors are increasingly concerned with ensuring the money they invest is being used to facilitate positive outcomes, financially and for society. The license to operate for a lot of institutions now involves going the extra mile by showing their commitment to addressing the SDGs, which provide language for action."

YORAM LAYANI BNP PARIBAS
Potential scale

Dore cautions against volume expectations for the first Australian transaction off this programme, acknowledging that it will not match the type of scale World Bank typically raises in public markets.

“It is important not to place too much weight on volume: it is more about the messaging and awareness it raises regarding the SDGs,” she comments. “Given it is for private investors, if the transaction raises the targeted A$5 million it will have been bought by a lot of investors that usually do not have access to World Bank bonds.”

Despite the relatively small scale compared to a regular World Bank capital markets transaction, the deal’s participants are confident that the structure represents a method to bring more tangible impact into the ESG investment space.

“This is certainly a way to bring credibility and scale to tangible impact investing. We want to establish the awareness of the credibility and positive impact created through the opportunity and broaden our coverage, so we can service all the interested clients,” says Toubia.

Meanwhile, Layani says the structure of the deal is replicable across markets and for other issuers. BNP Paribas itself has issued a total of US$100 million off a similar structure in 2018. Furthermore, Hayes says BNP Paribas has further plans in the space for the Australian market, which will likely evolve in the new year.

The World Bank deal is expected to close at the end of November, according to Toubia.

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