Finding a new balance

Rates are rising and markets unsettled. Speaking at ANZ and KangaNews’s annual global issuer and investor roundtable in London on 22 June, participants discussed the forces that are shaping funding in the new environment.

PARTICIPANTS
  • Marcin Bill Head of Funding, Asia Pacific INTERNATIONAL FINANCE CORPORATION
  • Jon Day Global Bond Manager NEWTON INVESTMENT MANAGEMENT
  • Andrea Dore Lead Financial Officer and Head of Funding WORLD BANK
  • Stefan Goebel Treasurer RENTENBANK
  • Peter Green Head of Senior Funding and Covered Bonds LLOYDS BANK
  • Kaylene Gulich Chief Executive WESTERN AUSTRALIAN TREASURY CORPORATION
  • Jens Hellerup Head of Funding and Investor Relations NORDIC INVESTMENT BANK
  • Anna Rudgard Fixed Income ESG Research Analyst BROWN ADVISORY
  • Anthony Ruschpler Senior Treasury Specialist ASIAN DEVELOPMENT BANK
  • Andre Severino Head of Global Fixed Income NIKKO ASSET MANAGEMENT
  • Petra Wehlert Head of Capital Markets KFW BANKENGRUPPE
ANZ PARTICIPANTS
  • Harald Eikeland Director, Debt Syndicate
  • Alex Gowing Director, DCM and Syndicate
  • Paul Snowden Head of Client Solutions
  • Katharine Tapley Head of Sustainable Finance
MODERATOR
  • Samantha Swiss Chief Executive KANGANEWS
STATE OF PLAY

Gowing We are all aware of the rise in market volatility and disruption this year. How challenging have funding markets been since the disruption started in Q1?

WEHLERT We were quite well prepared as we started Q1 with relatively high pre-funding. The market turned in April but our funding was well-diversified, including noncore markets such as the Australian dollar and sterling. The disruption reflects a return to normality, but one that has happened much faster than expected. Therefore, issuers and investors have to cope with high volatility.

It is good to see Australian dollar rates at attractive levels, and the US dollar and euro markets have moved in the same direction. We are faced with a situation where some investors are working out where markets will settle and at what level they want to invest again.

We funded duration early in the year, which was good since much of the focus now is on the shorter end of the curve. This is not surprising.

In a situation like this it is best to have access to multiple markets. The euro is the heart of our funding and we have raised most of our funds in euros – about 60 per cent in the year to date. We have also tapped the US dollar market with two large benchmark transactions and are considering a third.

The market has to find a new balance and perhaps get used to a longer-lasting higher volatility in general. The euro and US dollar markets were one-directional for a long time, so clearly rising rates have caused uncertainty in the current environment of inflation being historically high.

We have a funding target of €80-85 billion [US$84.4-89.7 billion] this year with about 70 per cent completed, so we are well advanced. Conditions have to come back to normal without QE and it will be interesting to see how investors position and prepare themselves.

SEVERINO The key difference in the current situation is that this is not a credit crisis. It is a mark-to-market issue from the sharp rise in rates, and from this perspective it has been an extraordinary period and very meaningful for fixed-income investors.

Market volatility has created opportunities for professional investors with active management skills, but it has been painful for most. Investors have been waiting for stability in rates and looking for the right time to take advantage of some of these large moves.

We do not have to talk about negative rates anymore and fixed income is looking very attractive. However, the conversation is now focusing on recession. Central banks responded late because of the thesis that inflation is transitory but it is now clear that this was not the case.

There has been a lot of repricing already. If we look at the headwinds from energy prices and the front-end moves – such as mortgage rates doubling in the US – we see there has been a lot of fiscal and monetary tightening. This will take time to feed through.

The window has not closed on avoiding a recession and – if it does happen – it is at least another year away. But it is difficult to forecast. 

DAY If we had this conversation six weeks to two months ago, I would have said do not touch bonds at all. Inflation pressure was building and central banks were very behind the curve. But things have changed. We are currently buying triple-A-rated bonds at the same yield or higher than high-yield corporate bonds were offering a year ago. This demonstrates how quickly the market has moved.

If one is able not to worry about day-to-day performance there is some decent value out there. Bonds are not an asset to avoid anymore. In some markets, we can buy a two- or three-year bond with yield of 3-4 per cent. This is a decent carry. It might not be great if inflation stays high but it is a good carry compared with where we have been.

Rising rates will affect countries differently. For example, in the US most borrowers hold fixed-rate mortgages, so they will not be hit by rising rates immediately. However, in Australia – where most home loans are variable – every RBA [Reserve Bank of Australia] rate rise cuts into disposable income immediately.

I am focusing on countries with more short-term mortgage markets because their rate hikes will have a more rapid impact on consumer spending, confidence and consumption. These markets are more likely to over-account for interest rate rises. Many markets will offer attractive value, but there will be some that we avoid.

ISSUANCE DYNAMICS

Gowing How have market conditions affected funding strategy this year, especially market selection and the parts of the curve issuers are targeting?

BILL The Australian and New Zealand markets have shifted toward the front end of the curve and there have been successful trades after a three-month hiatus. But pricing still needs some recalibration. Most of our funding has been on the back of reverse enquiries for the last two years.

Reverse enquiries are starting to come back again, but we will probably pursue a syndicated transaction at some stage to address the rising interest-rate environment.

Most of our Australian activity will focus on the front end of the curve, given our currently limited appetite for duration. New Zealand will be a similar story, however there is potentially more of a yield curve to be built up in Kauri.

Investors are feeling cautious about rising interest rates and this is driving attention toward floating-rate notes [FRNs]. We are seeing this demand across our other markets as well as in the government space – for example in Canada with the establishment of the new FRN CMBs [Canada Mortgage Bonds]. We have also seen FRN activity in Australia, but not from the SSA [supranational, sovereign and agency] universe. It could be an alternative going forward.

Basis dynamics will likely be challenging, because BBSW has a credit component whereas some other benchmarks are risk-free rates. This will affect the level of the basis and is something to be mindful of.

“If we had this conversation six weeks to two months ago, I would have said do not touch bonds at all. But things have changed. We are currently buying triple-A-rated bonds at the same yield or higher than high-yield corporate bonds were offering a year ago.”

Taking the SLL route

As a growing investor cohort scrutinises the menu of green- and social-themed credit, issuers are exploring whether the sustainability-linked loans on their books could be assets that satisfy demand on the funding side. For lenders, having skin in the game allows for greater transparency and involvement.

SWISS Can sustainability-linked loans [SLLs] be suitable underlying assets for labelled funding?

HELLERUP Yes, but there are issues to work out. For example, if we take SLLs and put them into a pool and then issue a bond, should we call it an SLB [sustainability-linked bond]? How would investors check that we reached the targets? They would need to see every loan agreement.

Perhaps we can pool SLLs and call it a theme bond, where the proceeds go into SLLs. Nordic Investment Bank has had very good dialogue with Nordic and Baltic corporates about their transition strategy and we have been active in SLLs. We have discussed with investors how to use them in our funding mix.

TAPLEY ANZ has a very large portfolio of SLLs and I like this format because it involves having skin in the game. It becomes very circular because we are incentivising the borrower to do more, and consequently they are accelerating their efforts. It has an incremental effect on their activity.

RUDGARD SLBs are a great philosophical idea but from our perspective there are still many questions. Take the 25 basis point coupon step-up for missing a target. For a large issuer this can be a meaningless amount, so how is it driving increased transition? Also, as the KPI selection is all done at company level, how are investors able to compare across issuers?

I read a research paper recently that identified some callable securities where the call date was set before the coupon step-up, so the borrower could accept the KPI benefit from the initial premium and then call it before even getting the penalty.

We have a preference for use-of-proceeds structures with transparency and reporting elements that show where funding is going. Even so, from a philosophical standpoint, structures that get issuers to meet sustainability targets are a positive development.

DAY Independent verification of green bonds is a big issue and has been since the market started, because everyone has their own rules.

WEHLERT When we started our green-bond programme, nobody was interested in issuers’ sustainability metrics. Now, investors are looking not only at labelled bonds but at an issuer’s overall ESG [environmental, social and governance] ratings. The move toward delivering transparency has developed naturally through green-bond issuance. Perhaps at some point labelled bonds will no longer be necessary.

If green bonds are too regulated with the EU green-bond standard, this market segment might even shrink in future. Potentially, it could become a more niche, structured bond market that delivers the products investors want.

GOEBEL The long-term average of the euro in our funding has been about 35-40 per cent. QE activities from the European Central Bank [ECB] artificially distorted this in the recent period. In the year to date the euro stands at about 70 per cent of our annual funding. With the ECB finally ending its purchases and probably unwinding its positions soon, we expect the trend of slightly widening spreads in the Eurozone to continue.

Spreads have behaved quite well and we do not expect this to change, but even a marginal widening of credit spreads in Europe would make a number of currencies a more attractive alternative for funding than we have seen in the last four or five years. The share of euros will go down in next year’s borrowing programme and the share of other currencies will increase. From our perspective, this is a healthy development.

Gowing Rentenbank’s recent Kauri deal was a good example of this.

GOEBEL Indeed, and it underpins the value of diversification. The Kauri transaction happened on a day on which euro 10-year swap yields increased by 20 basis points. They went up another 20 basis points the next day then fell 20 basis points the following day. In short, there was complete turmoil in the Eurozone. Still, we got a very nice transaction away with seven-year duration, which is what we needed to match assets and liabilities.

“We expect the trend of slightly widening spreads in the Eurozone to continue. Spreads have behaved quite well and we do not expect this to change, but even a marginal widening of credit spreads in Europe would make a number of currencies a more attractive alternative.”

Swiss As a financial institution issuer, how have events this year affected the funding strategy at Lloyds Bank?

GREEN This year we have a slightly higher funding task than in 2021, but by no means back to peak volume. Of the six trades we have done since January, three have been in noncore markets – Swiss francs, Australian dollars and yen – in addition to US dollars and sterling. It has been useful this year, given market volatility, to have this diversification option.

During periods when the backdrop has been somewhat more stable, longer-dated bonds have been in demand. We have seen reasonable demand for 10-year US dollar paper, for example – although we have not issued it.

The most reassuring thing this year is that markets have functioned well. Markets have been pragmatic: issuers and investors alike have accepted that, to get trades done, sensible concessions need to be paid. Issuers have been rewarded when they have brought trades that have looked sensible in the context of the market. Market moves have been fast-paced but we have seen a trend over the last few years that markets reprice risk quickly – so issuance activity has been pretty continuous.

“The most reassuring thing this year is that markets have functioned well. Issuers and investors alike have accepted that, to get trades done, sensible concessions need to be paid. Issuers have been rewarded when they have brought trades that have looked sensible in the context of the market.”

AUSTRALIAN DOLLAR DEMAND

Eikeland The Australian and New Zealand dollar markets have not been insulated from volatility in other regions. The Australian dollar-yen pair has gone from strength to strength and off the back of this we have seen some profit-taking from certain Japanese accounts. Has this affected funding risks domestically and offshore?

GULICH We witnessed some selling from Japan but more in the SSA space than semi-governments. Notwithstanding the volatility we have been discussing, the semi-government market had largely met the funding plan for the quarter ahead of time, so access to funds has not been an issue.

The type of market access has changed. There have been more reverse enquiries and fewer syndications. Tenor has also been shorter and the FRN format has proved popular with investors and issuers, so treasury corporations have adopted a flexible approach to funding. With less offshore investment coming in, capacity has been met by onshore accounts – but, in saying this, fixed-rate issuance slowed in the back end of the last quarter with heightened volatility coming to the forefront.

Investors prefer to stay close to home now, and this will be the challenge for the next quarter. Now that funding programmes are set, this is something treasury corporations will keep a close eye on.

RUSCHPLER These Japanese outflows have increased in significance and may remain as the yen continues to test new lows. In the past, Japanese investors played a central role in longer-end issuance – the 10-15-year part of the curve. Without this interest, these tenors are becoming more challenging. We did a 10-year earlier this year as part of a dual-tranche Kangaroo deal and it was a well-placed transaction. But in previous years this part of the curve might have seen a larger bid from Japanese accounts.

We continue to see interest from Japan on a reverse-enquiry basis, and we managed to print a 10-year water bond private placement in Australian dollars, for good size, in May.

Labelled issuance helps and a social theme attracts Japanese investors – as do higher outright yield and spread to government bonds. There continues to be a bid for Australian dollars out of Japan, but clearly with the yen continuing to test new lows it is understandable that investors would take profit.

"The type of market access has changed. There have been more reverse enquiries and fewer syndications. Tenor has also been shorter and the FRN format has proved popular with investors and issuers, so treasury corporations have adopted a flexible approach to funding.”

Eikeland Is diminished demand from Japan here to stay?

RUSCHPLER Looking at where rates are going in the rest of the world, the outlook does not look rosy. However, Japanese interest is cyclical. The outright level of Australian dollar rates is still an attraction.

Compare ACGB [Australian Commonwealth government bond] spreads with other options. If Japanese investors have Australian dollar assets to invest, we might see them come in – but it will be on a reverse enquiry basis.

Swiss Lloyds issued a Kangaroo deal in early June. Was there any difference in demand from its previous outings in this market?

GREEN The one dynamic that was a little unexpected was that demand for the FRN was pretty light. On previous outings into the Kangaroo market we have either been fairly balanced between fixed and floating or the FRN is where most investor demand has been. It was interesting at a time when rate volatility has been high to find investors are seeing value in the fixed-rate market.

Eikeland Over recent times we have seen the Australian dollar appreciate versus the yen whereas it has depreciated versus other core currencies. What is the impact on Australian dollar demand?

SEVERINO On Japanese flows, retail has always been very in tune with currency rates so profit taking is probably the right interpretation. There is no major structural shift in demand for Australia from Japanese investors – it remains an attractive market. I do not get a sense of consensus among Japanese investors. Some are taking profit while others are very concerned that there is a long way to go with yen weakness.

From a global perspective, highly rated SSAs in Australian dollars are very attractive given the yield. The US dollar has been overwhelmingly strong over this period but market participants expect it will slow. The RBA is becoming more and more hawkish, so Australia looks attractive for global investors.

DAY We hedge most of our holdings so the currency is not something we worry about unless we choose to take the FX volatility. On Australian bonds, there probably has been a bit of a herd instinct from international investors as spreads have widened. A lot of international investors are not familiar with Australia – if they think it is a market that is underperforming they choose to leave it alone until things stabilise.

Back to my comments on divergence, some countries can take interest rate rises and some countries cannot. Australia cannot, unless it wants to generate a recession – which may be the case if it wants to bring inflation down. This means long-term yields are far too high.

I think everyone has been burned in bonds this year and investors will not take risks. But any market has risk attached to it and it is amplified in Australia, especially with a central bank that has been inconsistent.

The RBA is finally getting it right on rates. It has resolved to 50 basis point increases over the next few months. Despite rates going up, this will give the market more confidence that the central bank is on top of inflation.

“Momentum drives second day bids and the book size. Naturally, in volatile conditions we want to reduce the amount of time we are in the market. It is difficult when investors hold back their interest and wait until the second day for momentum. It is a circular argument.”

ANTHONY RUSCHPLER ASIAN DEVELOPMENT BANK

EXECUTION MATTERS

Eikeland The RBA has become more hawkish but Australia’s cash rate still lags the rest of the world. Has the comparatively unreliable central bank in Australia affected SSAs’ access to the Kangaroo market?

RUSCHPLER We could – there is nothing stopping us from doing this – but it is a question of whether there is enough time for investors to look at the transaction and put in orders, especially given time zone differences. The reality is domestic investors generally look at the overnight updates and come in on day two.

We executed a Swiss franc transaction recently that was only supposed to be open for one hour but was extended because investors kept piling in. Of course, that market is a domestic bid entirely.

EIKELAND This is what we are grappling with in Australia. Investors like to see how the book and the overall market develops overnight. This can be challenging.

GOWING It will be interesting to see if this develops over the course of the year given dependence on reverse enquiry gives more credence to a shorter execution window.

DORE I am not advocating intraday trades as a rule but we should be flexible and, particularly in volatile markets, we can assess if it makes more sense to execute intraday based on factors including the time zone dispersion of key investors.

DORE High volatility affects the timing of market access, but volatility is relative. For instance, in April we thought volatility was quite bad and were advised against doing a 10-year trade. Looking back, it was a perfect window. We executed a successful US$4 billion 10-year bond.

The high level of volatility will continue to be a key consideration when we are looking at issuance windows, but 35this is the new world that is likely to be here for a while. We must be nimble. For instance, in certain markets there may be times at which doing intraday transactions may make more sense than the normal two-day execution, particularly in markets where we must depend on a swap to hedge FX risk.

BILL In the event of limited or absent demand from the US, an Australian dollar deal can price intraday because European investors have a chance to look at it toward the end of that period. We need to look at intraday deals more – we have been doing more of them in the US and some other markets during volatile periods. 

GREEN Globally, issuance windows are more constrained than we would normally expect as issuers are avoiding central bank meetings. Issuers need to approach the market in a prudent way to minimise the opportunity for volatility.

Specifically on the Australian dollar market, the issuance window has already shortened. The last time we did a trade – in 2019 – we were in the market for three days, whereas this year it was two. Shortening the window as much as possible is ideal. But the time zone will always be a constraining factor, especially if we want to appeal to a fairly broad audience – to capture Asia and give Europe the opportunity to take a look.

Having a two-day issuance window works – unless we run into a pocket of volatility on the second day. Domestic accounts get two bites of the cherry: they get to see the trade on day one but don’t have to commit until day two.

EIKELAND The execution window has truncated a little. Quite a few deals have launched in the European time zone and priced in the Australian time zone.

SNOWDEN As a syndicate manager, it is better to launch in Europe and price in Australia than launch in Australia and price very late in Europe.

EIKELAND Yes, especially with liquidity diminishing outside the Australian time zone. From an execution point of view, we definitely want to price in the Australian time zone.

GOWING For financial institution issuers in the Australian market, we have seen domestic investors increasingly hold back their interest until the second day of a deal process. It is hard to argue with this given the market backdrop, and it is a dynamic playing out everywhere.

RUSCHPLER It would be good for this to change in Australia because momentum drives second day bids and the book size. Naturally, in volatile conditions we want to reduce the amount of time we are in the market. It is difficult when investors hold back their interest and wait until the second day for momentum. It is a circular argument. 

“There is no major structural shift in demand for Australia from Japanese investors – it remains an attractive market. I do not get a sense of consensus among Japanese investors. Some are taking profit while others are very concerned that there is a long way to go with yen weakness.”

Swiss Would it be possible to tell investors the deal is going to be executed inside one trading day so there is no point in holding bids back until tomorrow?

GOEBEL We can agree that it is not a good idea to change the marketing process out of the blue. But if we flag that we will execute a transaction in a different manner and explain there is not something strange behind it – that it is a matter of practicality – investors will adjust quickly.

WEHLERT Every market has its own character. For example, in euros we never go with IPTs [initial price thoughts] because investors don’t see the necessity to make an order the day before. We open books in the morning and after 90 minutes, or at the latest by noon, we have collected enough orders to close the book. There is regular communication during the bookbuild period, which is very short.

It is different in the US dollar market. We go out with our mandate, start the IOI [indication of interest] process and provide IPTs in the evening – after which the book fills up quite quickly. Investors expect a decent book update of at least US$2-3 billion in the European morning, when we have a traditional ‘go, no-go’ call.

What is changing now? If marketing periods are long, investors tend to wait to give their order. In volatile times issuers and investors do not want to be exposed too much, therefore quicker actions and decisions are crucial. I agree that communication is key: we need to talk about why we are making the decisions we do.

DAY Two things I need to know are pricing and issue size. I do not want to get involved in a US$500 million issue as liquidity can be a problem; US$2-3 billion is a very different matter. When it comes to timing, I prefer to give my support early rather than late. If the issuer sees investors early, hopefully it will recognise that these buyers are longer-term holders and reward them with a good allocation.

WEHLERT Issuers can influence investor behaviour via allocations. In our green programme, we incentivise investors to have a sustainable approach in their business strategy with bonus allocations. We also want to reward early orders and buy-and-hold investors.

SSAs wait in the wings

Supranational, sovereign and agency (SSA) borrowers are assessing the Australian and New Zealand markets, looking for opportunities to diversify risk and align themselves with environmental, social and governance (ESG) frameworks.

EIKELAND Are we likely to see World Bank issuing in the Australian or New Zealand markets any time soon?

DORE Yes. The Australian and New Zealand markets remain very important for World Bank and, while we have not issued in either this calendar year, World Bank issued similar volume in the fiscal year ending 30 June to the prior fiscal year – about A$2.6 billion (US$1.8 billion) and NZ$1.2 billion (US$758.1 million). Also, in April World Bank executed a significant Australian dollar trade – A$516 million – with a maturity of eight years. It was not in Kangaroo format – it was an EMTN placed with Japanese investors.

Most of the demand for Australian dollars this year has been concentrated in the short end of the curve at a time when World Bank has been focusing on extending the maturity profile of its liability portfolios. The average maturity of World Bank borrowings this fiscal year is the highest it has ever been – about nine years for International Bank for Reconstruction and Development and 13 years for International Development Association [IDA]. 

We are working on the Australia and New Zealand bond documentation for IDA with the hope of bringing it to the Australian and New Zealand market

JENS HELLERUP

It seems the New Zealand dollar market will likely be more positive for us. On top of the pullback from Japanese investors, bank balance sheets are not really an investor base for us in Australia. It is almost the opposite case in New Zealand.

JENS HELLERUP NORDIC INVESTMENT BANK
SUSTAINABILITY LEADERSHIP

Tapley There has been huge acceleration in sustainable financing in loan and bond format. Meanwhile, some structural economic issues are developing regionally and globally that are changing how we look at policy and funding issues. What are investors seeing in this regard, and has COVID-19 had any impact on investment approach?

RUDGARD We have a sustainable mandate and our clients are expecting performance and impact from whatever we are investing in – whether it is labelled or vanilla issuance. COVID-19 did not change this, but it did bring out some interesting opportunities. We saw a big increase in social-bond issuance and we also saw opportunities to support the recovery, particularly in Europe.

I have heard market participants describe labelled bonds as a marketing exercise, which in some cases can be true. However, we see a lot of benefits from the reporting structures, the transparency and the look-through to the underlying projects we are funding.

There is another interesting dynamic at play in the sense that when an issuer uses a label we must always look beyond it to understand what is really being funded. Our ESG [environmental, social and governance] assessment is always conducted at the issuer level. In the case of use-of-proceeds (UOP) issuance, we apply a second level of analysis to assess the credibility of the underlying projects and how they relate to an issuer’s sustainability strategy.  

DAY We look at entities as a whole, not individual labelled bonds. I am a bit cynical about green bonds from governments, because a government’s main role is to be there for the social good, reduce inequalities and make society better. This is their job, so what additionality is a labelled bond bringing?

Having said this, there are sustainable governments and less sustainable governments, and it is a much bigger hurdle to get over to be a sustainable entity than it is to fund a green project. Using an extreme example, an oil company could be developing a wind farm project and issue a green bond to fund it, but 95 per cent of its business produces oil in politically unstable parts of the world. It is a much bigger task for a whole entity to be sustainable than issuing just an individual green bond. 

“The high level of volatility will continue to be a key consideration when we are looking at issuance windows, but this is the new world that is likely to be here for a while. We must be nimble. For instance, in certain markets there may be times at which doing intraday transactions may make more sense.”

ANDREA DORE WORLD BANK

Tapley What are WATC [Western Australian Treasury Corporation]’s intentions for this market?

GULICH WATC has not had a large funding programme in the last couple of years so we have put our effort into building communication on what our government does. Around eight months ago we published an information pack that details our policy and programme projects that deliver and achieve progress against the UN SDGs [Sustainable Development Goals]. We are planning an annual update.

This information pack and the included KPIs will support investor understanding of what the entire WATC programme delivers. At the same time, we are aware some investors will require more explicit links to UOP. In this sense, beyond marketing, a green bond is about transparency and clarity on the UOP. 

We are in the process of completing a sustainability framework that will be aligned with international standards and identifying an appropriate pool of assets that would support labelled issuance. I acknowledge that WATC has been behind some peers in this space, but we are going to land in a good place with information for investors about our whole programme, as well as those looking for a green or sustainable format.

“Issuers can influence investor behaviour via allocations. In our green programme, we incentivise investors to have a sustainable approach in their business strategy with bonus allocations. We also want to reward early orders and buy-and-hold investors.”

Tapley This goes to the point John Day made – it is the borrower, not the transaction, that makes this market credible. Is World Bank still seeing value in labelled transactions?

DORE I do not think labelled issuance will disappear, because some investors – particularly in Japan – are looking for labelled bonds. We issue with a label if we finance projects in the specific area.

It is a matter of highlighting what we are doing, being transparent and having a framework to support it. This means providing investors with information on the impact of their funds. Some investors that once bought just green bonds are now buying other sustainable development labelled bonds. Investors are looking at the institution and the mandate. They are looking at all elements of ESG, not just the ‘E’ or the ‘G’.

RUDGARD From an investor standpoint, the specific label – whether green or sustainability – is not hugely meaningful for us. Our analysis always starts at issuer level. If it issues a labelled bond this can be helpful to see but it is by no means a sole reason to invest. Similarly, there are lots of issuers we see without labelled bonds that we identify as having a positive social or environmental outcome.   

“We anticipate it will become a regulatory requirement that we must be able to report on the projects we are funding and that we designate as having a positive environmental or social outcome.

Swiss When Japanese investors look at labelled issuance, do they only consider World Bank green bonds issued under the framework?

DORE They are considering all of World Bank sustainable development bonds, which includes World Bank green bonds. We issue labelled bonds under our sustainable development bond framework, where the bank highlights specific themes of interest to investors. We provide investors with project examples that World Bank finances under each specific theme – for example gender, food security or clean water.

RUSCHPLER The way we structure green bonds versus theme bonds is slightly different. We created these programmes to accommodate certain investor bases. Green bonds were set up for a specific ESG investor base that wanted the framework, while theme bonds were tailored to Japanese investors.

We have leveraged our theme bond programme for public issuance and have completed recent deals in the Australian and New Zealand dollar markets using some of our available themes. We find labelled issuance reduces execution risk and gives our transactions extra momentum. The programme highlights specific areas, such as gender and health, which resonate well with investors.

RUDGARD Our clients are asking for this as well. We anticipate it will become a regulatory requirement that we must be able to report on the projects we are funding and that we designate as having a positive environmental or social outcome.

DORE We began publishing an impact report focused on green a few years ago. We have broadened the scope of the report to cover World Bank’s entire balance sheet. We recognised that it is important not only to focus on green but on World Bank’s full development mandate.

“There will be a transition phase in which greenwashing becomes more prevalent, and in our mind this transition will last quite a while. It feels like we are steps away from seeing scandals in this space, especially as there is more price incentive to print labelled bonds because demand is so much greater than supply.”

Swiss International Finance Corporation has issued labelled bonds and is exploring a whole-of-issuer approach. What is the strategy?

BILL Over the years we have strived to amalgamate sustainability themes. We may, for example, do a social bond featuring health care or COVID-19 remediation, or a green bond featuring blue projects. At the same time, we are focusing on a theme that does not necessarily provide linkage for each project because this is the biggest reporting dilemma, and it prevents us from issuing everything for a sustainability purpose. To some degree we fund for liquidity needs and this does not get passed on to specific projects.

The other issue is pricing. We had an interesting discussion with some Scandinavian dealers about how in Sweden they see a disparity as wide as 5 basis points between ESG-labelled and vanilla bonds. There is the expectation that vanilla bonds are penalised. With investors demanding transparency, the question becomes how much of a premium they are willing to pay.

There will be a transition phase in which greenwashing becomes more prevalent, and in our mind this transition will last quite a while. It feels like we are steps away from seeing scandals in this space, especially as there is more price incentive to print labelled bonds because demand is so much greater than supply.

Over the course of the pandemic, we saw a shift to social from green as demand grew for working capital and short-dated funding, and the buy side was less keen to invest in longer infrastructure or green projects.

RUSCHPLER The way we structure green bonds versus theme bonds is slightly different. We created these programmes to accommodate certain investor bases. Green bonds were set up for a specific ESG investor base that wanted the framework, while theme bonds were tailored to Japanese investors.

We have leveraged our theme bond programme for public issuance and have completed recent deals in the Australian and New Zealand dollar markets using some of our available themes. We find labelled issuance reduces execution risk and gives our transactions extra momentum. The programme highlights specific areas, such as gender and health, which resonate well with investors.

GOEBEL There is already a lot of product-related regulation going on, as evidenced by the European green-bond standard, for example. If we have perfect overall corporate disclosure, why do we need separate product-related disclosures as well? Maybe we are on the way to transitioning away from labelled product simply because the overall disclosure obligations on companies are deeper and give more clarity to educated investors about the nature of a corporation.

I could see long-term value if investors were putting their own skin in the game – but I only see this happening in sustainability-linked product. With green bonds, investors get a free lunch if they purchase flat to the normal curve. They still have the label, but they are not really paying up for it and there is no risk involved.

With sustainability-linked bonds, investors are willing to accept lower credit spreads to support speeding up transition. This can reward corporations that go the extra mile. At the same time, issuers take the risk that they will pay up if they do not deliver on ambitious targets. This is a product where I see a long-term future.

WEHLERT We will continue to deliver green bonds as long as we have the assets. However, it may be that in 10 years we find reshaped capital markets. We will all know more about issuers and an ESG rating could potentially be another formal part of the funding process.

BILL Climate change will become more and more relevant as time goes on and investors may want the green theme more than any other. We could argue that ESG and sustainability in various shapes and forms have been popularised and therefore evaluation of issuers as a whole will pick up. But green is still green in a world of global warming, so in my mind the UOP product will have its place in the foreseeable future.

WEHLERT A green product is something specific but I am a bit more sceptical about the market development of social bonds. The green market could develop into its own segment, including a greenium, but I do not see this happening with any of the social themes.

DORE Green bonds will continue to play a role but in a more limited context. However, the education process and the transparency that comes with green bonds will continue to be extremely valuable. We are not just focused on green issues because we are issuing a green bond – we are looking at green issues regardless of the type of projects or financial instruments. It is about the greening of the whole economy.