DORE Several factors lined up in 2023 that we hope will do so again in 2024. In the first six months of the year, there were six trades of more than A$1 billion (US$650.4 million). I believe this is the largest number trades of this size in any year. We have issued almost A$3.5 billion in the Kangaroo market this year – our most in a single year.

Whether this trend continues will depend on market conditions, absolute yield and spread levels. There are two types of investors: those that are interested in absolute yield and those that are interested in spread versus sovereign. We would need to attract both to repeat the 2023 volume.

We don’t know what will happen to spreads between now and January. We do, however, believe yield will remain high into the new year. This should be helpful, especially to investors focused on absolute yield levels. It has been a while since we have seen yield at the 5 per cent level, where it is now.

January is also when many official institutions do their asset allocations. As the official sector becomes larger, we expect to see more demand from these buyers as they rebalance their portfolios at the start of the year.

KETTING In the first six months of 2023, we saw a rally in swap spreads that increased the relative value and attractiveness of offshore issuers compared with Australian semi-government bonds. We try to be flexible as we are there for the long run. But we also rely on the basis swap, especially as we run a euro book and our clients are only allowed to borrow funds in euros.

MORRISON A big part of bringing investors into our Kangaroo deals specifically has been our commitment to be consistent and programmatic in this market. We make commitments to investors in each jurisdiction. For example, in 2023 we committed C$7 billion (US$5.1 billion) to the Canadian dollar market and we committed to benchmarks in US dollars, one of sterling or euros and one in Australian dollars.

Our commitment to be programmatic in Australian dollars has helped the success of our deals this year. But I also agree that a number of factors lined up this year to make the market appealing to investors and issuers. I am hopeful that these conditions continue to line up but we will remain programmatic in this market in any event.

FAN When we first started issuing Kangaroos, back in 2001, Australian bank treasuries drove much of the demand. At that time, SSA [supranational, sovereign and agency] issuers were repo eligible with no haircut. Due to regulatory changes, this investor base is no longer active.

Over the years, the investor base has continued to evolve. Nowadays, we are seeing strong and fairly consistent central bank and official institution interest. Another development this year is interest from offshore bank treasuries located in Asia – either Asian banks or branches of European banks.

KETTING Our distribution has been broad this year. There are always a couple of central banks and official institution accounts participating in size in the SSA space and in BNG Bank bonds. This participation is clearly driven by an overall view of Australian dollars, but also because we deliver attractive spreads relative to government and semi-government bonds in Australia.

MONTEIRO The offshore distribution of our bonds has increased in relation to our previous fiscal year. This includes a pickup in domestic demand as well as offshore accounts seeking Australian dollar exposure. We have taken advantage of this because it was also accompanied by a cross-currency basis swap advantage from a US dollar-based issuance standpoint.

Central banks and official institutions have been particularly active, providing more than 50 per cent of demand, followed by asset managers and commercial banks.

WEHLERT On the investor side, one number I always monitor is the split between domestic and international investors. This year, domestic investor participation has been 35 per cent, whereas in 2022 it was only 20 per cent. Seeing the domestic share increase is a healthy development.

I agree that it has been eye-catching to have more investors from bank treasuries in the Asian region. We have seen this in other markets, such as euros, but some of these names have participated in Australian dollars first, then moved into euros. These investors out of Asia have been quite reliable and they also buy bigger tickets, which puts us in a position to do larger volume.

MONTEIRO The vast majority of demand this year has come from Asia. Japanese investors were less active at the beginning of our fiscal year, which was the second half of 2022. Yen weakness coupled with an unfavourable cross-currency basis swap led Japanese investors to take a more passive stance.

This changed early in calendar 2023, which coincided with the yen strengthening on the back of the change of rhetoric on yield control by the Bank of Japan. This resulted in pockets of demand for longer-tenor issuance re-emerging.

DORE Demand from Japan has been affected by the huge depreciation in the yen. I visited some Japanese investors at the beginning of 2023 and many of them expressed concern about the significant increase in hedging costs and how this has affected their ability to invest in non-yen products.

Earlier this year, we did more than A$1 billion in 10 years. There was some Japanese demand but most of the bonds were placed with non-Japanese accounts. There has been increase in buying from Japan, albeit not in the size of previous years.

LOFSTEDT We started to see net inflows across Australian dollar debt products from Japanese investors this year while 2022 saw outflows. FX hedged levels remain less attractive than previous years but they are still attractive among developed market options for the Japanese investor base.

Kangaroo SSAs provide a pick-up to 10-year JGBs [Japanese government bonds] on an FX hedged basis, while ACGBs [Australian Commonwealth government bonds] and semi-governments currently sit below JGBs.

For outright buyers, we have seen a general theme of adding when the Australian dollar drops below ¥93. While interest from Japanese investors has not been as high as previous years, they have been present and supporting the market.

KETTING Almost all SSA issuers in Australian dollars do not keep the local currency exposure – including ourselves. Depending on market dynamics and the basis swap, there can be times where there is more leeway to offer some concession. Today, all-in levels remain attractive compared with core euro and US dollar curves.

Diversification across currencies, investors and geography is very important to us. Since we don’t have any retail clients with deposits, we depend on the international capital and money markets to make sure we can deliver favourable funding to our clients in the Dutch public sector. We diversify issuance to maintain flexibility and to optimise the cost of our funding.

FAN Inter-American Development Bank (IADB) has a borrowing programme of around US$17 billion and technically we could borrow everything in US dollars. But we want to diversify our sources of funding and investor base.

We typically issue 10-30 per cent in currencies other than US dollars. If we issue a large US dollar benchmark transaction, its is unlikely we will issue in the same market soon thereafter. We will focus on other strategic markets, such as Australian, Canadian or New Zealand dollars and sterling.

When we do this, we take a number of factors into consideration including maturity, volume, size, investor demand and after-swap pricing relative to US dollars. Price is a factor but it is too simplistic to say it is our sole consideration.

BRUSAS NIB [Nordic Investment Bank] has been committed to the Australian and New Zealand dollar markets for a long time, and we appreciate the diversification we get with these currencies. It is very important to be visible and to issue fairly frequently in order that, if and when we need to access these markets, we have a footprint in them and investors know us.

There is a balance between getting diversification and not paying too much for it. As we need to swap these currencies into euros, the basis swap needs to be on our side so pricing is in line with other public markets.

In general, the larger noncore markets, such as sterling, are in line with our euro funding costs. Sometimes there is a small price advantage and sometimes we end up paying a few basis points for diversification and for being visible in a given market.

This year has been a bit disappointing when comes to Australian dollars – I would even say a little frustrating – because we can see that our peers are issuing frequently. For us, at least, accessing this market can’t come at any cost: it needs to be in line with our other funding.

We have also found it somewhat challenging to find the right new-issue level lately. Reference is often made to where our outstanding bonds are marked in Yieldbroker, which we don’t always feel reflects the correct level.

KREIVI I agree that the Kangaroo market offers good diversification and I would say Australian dollars are a medium-sized currency in a good year. European Investment Bank (EIB) doesn’t mind paying a couple of basis points sometimes to get diversification or to issue in maturities that are tough to get elsewhere. But I agree with Angela that there is a limit to how much we want to pay to access a market. Pricing needs to stay not too far away from the main markets.

I remember a time when Australian investors would say they didn’t want SSAs to come to their market just to find cheap funding, and this is fair enough. But it should also work the other way – so issuers are not paying up too much.

MORRISON We are cognisant of cross-market relativity versus our other global curves, in an effort to minimise cannibalisation of our investor base. In practice, we might issue an Australian dollar deal wide of Canadian or US dollars should the transaction be deemed accretive to our overall commitment and strategy in the market.

I echo Angela’s comments regarding Yieldbroker. The difficulties with this platform make it hard to precisely quantify a new-issue premium. This aside, we are very focused on providing appropriate new-issue premia across all five currencies in our programme, that reflect our size aspirations and our ability to return to a market. Though they tend to be more significant in less favourable market conditions, these premia don’t disappear when market conditions are favourable.

As a fund, we are investors first and foremost, and we approach markets with an investor as well as an issuer lens. New-issue premia have been important for us in growing our programme and investor base. As a younger borrower, we view this trade-off as an investment. In the last two years, we have grown our investor base globally to just more than 800 investors from roughly 650.

We also target large initial tranches – of around A$1 billion in size – as opposed to tapping bonds up from smaller initial volume, because we believe distribution breadth and a focus on large benchmarks fosters greater liquidity from day one. This requires a slightly larger new-issue premium. At their core, we view these premia as an investment and they have improved our cost of funds by bringing new investors into the programme, increasing our deal size and certainty, and supporting secondary trading liquidity.

LOFSTEDT We expect Australian banks to have elevated offshore issuance going forward, as a result of the term funding facility (TFF) roll-off. The major banks still have roughly A$70 billion of the TFF to refinance in 2024, which is larger than the 2023 maturity tranches.

The major banks generally had annual funding tasks of A$20 billion each in the years prior to the TFF but this has now jumped to around A$30-35 billion. They have done more issuance locally, and in record size, but offshore issuance will remain elevated.

KETTING Banks are not the only factor driving cross-currency dynamics but they do have an impact. However, local banks tend to fund at the front end – in 3-5 year maturities – so the impact can be less apparent on SSAs, which mainly look at longer duration in Australian dollars.

KREIVI We noticed during the European sovereign crisis, when we were having a bit of a bumpy ride in Australia, that the thing that still interested investors was green bonds. It was when we issued Climate Awareness Bonds (CABs) that Australian investors came in and bought in large amounts. This was a little surprising because they were not interested in our conventional bonds at the time. They clearly saw a difference and value-add from CABs – even though the risk is essentially the same as with any EIB bond and pricing is the same for both types of bonds.

From this experience, we know Australian investors like labelled product. They have always asked plenty of questions and wanted details on our labelled bonds. Against this background, it is not surprising that more than 70 per cent of EIB’s issuance in the Kangaroo market this year has been in labelled format.

We have two products. We have green bonds – the CABs. The other, Sustainability Awareness Bonds (SABs), comprise a mix of social and green assets, excluding climate. These bonds are linked to the generation of suitable assets and this influences how much we can issue. The amount of new loans can go up or down from one year to another but, overall, this kind of lending has been increasing for EIB over the last few years because we decided to exit funding fossil fuels and we have increased our targets to climate and environmental lending. This has been reflected in our funding – not only in Australian dollars but across all currencies. We have done larger issues of CABs and SABs in the recent past as well.

These bonds are a very important part of our product mix and it is not just that they sell more easily. We also use them as a communication tool. We are the EU climate bank and, as such, we view it as our role to explain where we are coming from and what EU regulation means for us, for investors and for the market in general.

This communication aspect goes across all markets. But I think it is particularly powerful and valuable in Australia because we are so far away from each other and Australians probably don’t follow European regulatory developments that closely.

With regard to labelled bonds versus whole-of-issuer credentials, I don’t think investors view issuers as ‘partly not sustainable’ unless they label everything as such. But they like the information provided with labelled bonds.

In fact, the more information an issuer provides to investors, the more they ask for. A few years ago, I was talking to an investor in New York about SABs financing water projects in Africa, telling them how many people got fresh drinking water for the first time. They said ‘that’s great – do you have any statistics on the income breakdown of those people?’

The value of labelled bonds is the information shared with others, the transparency and the discussions – even challenging ones in which investors say particular criteria are not quite strict enough. Not issuing labelled bonds means missing out on this very interesting and intense dialogue.

WEHLERT KfW Bankengruppe is working on group-wide impact reporting. This is a long-term project that will enable us to deliver what investors are asking for: more information, including on impact. It is also much easier to steer an institution if it knows what impact its loan programmes have.

Eila mentioned the US. I went there recently because I wanted to see how investors are thinking about labelled bonds after reading so many headlines about what is happening from an ESG [environmental, social and governance] perspective. I wanted to get direct feedback from investors.

Everybody knows the story is about transition in the coming years. US investors said they know the direction of sustainable finance, they want to have confidence that nothing is going wrong and they want to have clear commitments. Right now, they still prefer labelled bonds because these give more certainty.

This is one reason why we have expanded our green-bond framework for next year. We are already reporting our contributions to the UN Sustainable Development Goals (SDGs) with respect to our new commitments. In a few years, we will hopefully be able to report the impact of every single bond to our investors.

MORRISON Investors tell us they are very interested in top­-of-house sustainability practices. Anecdotally, investors seem more interested in this conversation than the specific nuances of our green-bond framework. On this basis, we recently released a video of a fireside chat with our chief sustainability officer, responding to some of the more detailed questions investors have on how we integrate sustainability risk factors into our investment policies. Feedback on this has been quite positive.

Receptivity to our labelled issuance has diverged between markets over the last couple of years. This is part of the reason why we have committed to Australian dollars being one of the core markets we will issue green bonds into. Domestic investors in Australia are among the most focused on sustainability risks and our conversations with these investors are among the most sophisticated we encounter.

Our green-bond programme comprises about 10 per cent of our outstandings. We don’t target this number specifically
– it depends on what the asset teams buy, which ebbs and flows year-to-year. However, our approach to sustainability risk factors, including our green-bond programme, is a significant part of our issuance and our communication strategy. It brings investors into our programme.

This is for our conventional as well as our green transactions. Our green-bond transactions have, as one would expect, a higher proportion of what one might classify as green investors. But they have historically been very successful transactions that attract conventional investors as well. Investors that did the work to have our name approved because they were interested in buying the green product sometimes end up participating in the conventional issuance as well.
 
BRUSAS Usually green bonds represent around 10 per cent of our annual funding volume. The constraint on doing more is the limited amount of eligible assets, especially if an issuer has strict criteria under its framework.

We have therefore mainly focused on issuing green bonds in euros and the Nordic currencies. We usually issue one €500 million (US$544.1 million) green bond per year plus some benchmark-sized bonds in the Nordic currencies. This makes sense because most of the projects we are funding are in the Nordic and Baltic regions. Last year, we had a larger funding programme, which resulted in €1 billion of green-bond issuance.

I agree that investors still want labelled bonds – they are a very desirable product. We would also benefit from having a green label in Kangaroo bond issuance. The green bonds are an excellent communication tool.

Even so, it is also true that investors require issuers to communicate their overall sustainability strategy. Issuer and instruments need to be sustainable.

Though we do a thorough ESG assessment of all customers and all loans we are financing, we have not considered financing all our loans with sustainable bonds. Instead, we have chosen to identify the projects where we see a substantial good impact on the environment and finance them with green bonds, while the rest of our projects are financed with conventional bonds.

Reporting on the impact of everything we do is important. This is why our annual report comprises the financial result and the impact of all our activities. We don’t just report on the impact of projects financed by green bonds. This is one way of communicating that we are not just concerned with green bonds and the projects we are financing with them, but that sustainability relates to everything we do.

We are also in the process of updating our green-bond framework. It is not going wider, but we are gradually aligning ourselves more with the EU taxonomy. We have reported on taxonomy alignment in our impact report for the last two years.

KETTING BNG Bank is designated as a promotional lender, which means we support the public policy objectives of the Dutch state on a not-for-profit basis and where a minimum of 90 per cent of the loans we grant need to be guaranteed directly or indirectly by the Dutch state. Everything we do can thus be seen as green, social or sustainable – which is reflected in our issuer sustainability ratings.

However, we also understand that investors require more data and impact reporting. With the SDGs coming into force in 2016, we reviewed our best-in-class framework and, in 2021 we published our ESG framework, linking the budgets of the Dutch municipalities and the expenditures of the Dutch housing associations with the 17 SDGs. We have issued transactions for both client groups, in various tenors and currencies including Australian dollars, off this framework.

In 2021, we raised just more than 30 per cent of our total annual funding in ESG format, which increased to 36 per cent last year. For 2023, we aim to do at least the same percentage share as last year, if not more, in labelled format. We have funded just more than €6 billion out of €15 billion equivalent in labelled bond format so far this year.

KOTAMRAJU Asian Development Bank (ADB)’s vision is to achieve a prosperous, inclusive, resilient and sustainable Asia Pacific while sustaining efforts to alleviate poverty. This suggests that all our issuance could also be described as ESG issuance.

However, we established our theme bond programme in 2010, in response to investor demand, and it has grown significantly over the years. Our green and blue bonds, and theme bonds such as gender, health, education and water have allowed us to highlight ADB’s initiatives in specific areas in line with our operational priorities.

If we weren’t issuing green, blue, gender or theme bonds, we would still be assisting our members in these areas. But there is significant interest from investors to attach a label to our issuance to highlight our work.

We provide reporting on our issuance on an annual basis and our project loan documentation is accessible online. ADB adheres to strict environmental and social safeguards that apply to its projects.

We have seen strong interest for our theme bonds across markets over the years and these have grown to be a significant part of our programme, especially in the Kangaroo and Kauri markets where we have green, gender, health and education bonds.

FAN Though the amount of labelled bonds increased this year, it may still not be enough to meet investor needs. We have only issued one sustainable development bond in the Australian and New Zealand public markets so far this year – a seven-year New Zealand dollar bond priced in January. We have two EYE [education, youth and employment] bonds outstanding in the Kangaroo market. One of these matures in 2024 and the other in 2026.

I believe focusing on the issuer rather than the label is a trend that should continue. IADB is a development bank and our mission is to improve lives in Latin America and the Caribbean by supporting efforts to reduce poverty and inequality in a sustainable, climate-friendly manner. Our lending is focused on achieving our mission and hence any bond we issue could be considered an ESG investment.

This said, some investors still want to buy labelled bonds and we will continue to issue them to meet the requirements of these investors. IADB is in the process of updating its sustainable development bond framework. This will be the first update since 2019, when we put the framework in place. The update is due in part to investor feedback we have received over the years.

One of the changes we anticipate making is to have one dedicated report rather than relying on multiple reports. At the moment, investors rely on three different IADB reports: our development effectiveness overview, corporate sustainability report and global reporting initiative. We expect EYE bond reporting will be a section within this standalone sustainable development bond report. We prefaced this action in our June 2023 EYE bond report.

MONTEIRO International Finance Corporation (IFC) issues thematic bonds under two labels – green and social – and these constitute about 25 per cent of annual issuance. In fiscal year 2023, we have issued almost US$2 billion of green bonds – the highest volume issued since the launch of our green-bond programme in 2010. We have issued more than US$1.1 billion of social bonds, our second-highest issuance volume since the launch of our social-bond programme in 2017.

We recently updated our green-bond framework to include new biodiversity, ocean and water categories, more robust climate adaptation selection processes and additional categories under climate mitigation. Since this framework is relatively new, we expect the initial pipeline of blue and biodiversity projects to be small. But we anticipate it will grow over time.

Similarly, for our social-bond programme, we want to bring in new lines of business to expand the universe of projects that can be eligible for social-bond financing in line with IFC’s strategic priorities such as gender and inclusion, food security and health, fragility, and digitalisation. At IFC, we strongly believe green and social bonds are critical to stimulating the supply and demand of funding needed to achieve the SDGs and other sustainability goals.

As investors have become more aware of the challenges we face as a planet, they are demanding sustainability be embedded in investments and, consequently, are stipulating parameters on what their capital finances. IFC recognises the importance of sustainability and has a comprehensive framework for integrating sustainability and ESG considerations into its investments and operations. We are also focusing on integrating ESG aspects into our treasury functions, through our thematic bond issuance.

DORE We have been engaging with investors on our holistic approach. Since World Bank’s purpose is focused on achieving positive impact with all our activities, we have decided to label all our bonds as Sustainable Development Bonds. This means all our bonds are so-called use-of-proceeds (UOP) bonds.

Our impact report explains to investors how all our bonds are supporting sustainable activities. Investors appreciate labelled bonds and they are a good place to start for all issuers. But we are hearing that investors are taking an ‘issuer approach’ and asking questions about how borrowers consider climate and social risks and opportunities in all their activities. This is the same across the globe, although there are differences in the level of detail and approach investors take.

In Europe, for example, investors are very focused on the disclosures they need to comply with regulation. Elsewhere, such as in Japan, investors are more interested in understanding how an issuer’s approach aligns with their overall expectations to support positive impact.

DORE Our mission statement was updated during our annual meetings in October. The idea of adding this new element is to make climate and other cross-border challenges front and centre.

The change to our mission statement will not affect our labelled bond strategy. We are still issuing some green bonds, but mostly on a reverse-enquiry basis rather than benchmark trades. At the same time, we are emphasising to investors that social goals are at the core of our mandate.

To achieve the social goals, we integrate climate into everything we do. This is why all our bond issuance is now labelled Sustainable Development Bonds as they support both green and social projects.

Swiss As a high-emitting economy, transition is particularly important in Australia. The instrument most likely to be used by hard­to-abate sectors was thought to be the sustainability-linked bond (SLB). But very little of this product has been issued in Australia and its use has waned globally. How will the method of financing transition evolve?

FAN I suspect transition bonds and SLBs have not taken off globally due in part to the lack of a clear definition of the concept of transition and regulatory guidance. For instance, is transition finance for hard-to-abate sectors focused on decarbonisation and is it more a path or process than a product?

For transition finance to move forward, there needs to be either a clear definition or regulatory guidance. Japan’s Ministry of Economy, Trade and Industry set forth a framework for transition finance to assist companies in labelling their bonds and loans in line with achieving decarbonisation as part of the government’s overall strategy.

In addition, ICMA [the International Capital Market Association] established the Sustainability Linked Bond Principles in June 2023. These should provide issuers with parameters for setting KPIs as well as providing guidance to investors.

BRUSAS In addition to our UOP loans, NIB is now also offering sustainability-linked loans (SLLs). These don’t finance a defined project but a client, supporting their overall climate and sustainable transition. In this way, we can support borrowers whose sustainability transition does not rely heavily on investment in fixed assets.

The key here is of course that such customers have a credible sustainability strategy, use relevant, core and material, forward-looking KPIs, and have ambitious enough sustainability performamce targets in place.

The executive committee of the ICMA Principles recently decided to form a taskforce to discuss a possible instrument to finance a portfolio of SLLs. Nordea has issued bonds financing a portfolio of SLLs and others – including NIB – are interested in exploring this more.

We are talking about a kind of UOP instrument that is not financing projects and where there is no coupon adjustment on the bond – so it is not an SLB, it is a completely new instrument. The market would benefit from harmonised guidelines on such instruments – and the plan is to do this in collaboration with the Loan Market Association. This would bring credibility and transparency.

KREIVI The vast bulk of green finance has been in fairly safe areas like renewable energy, electrified transport and energy efficiency. Transition is much harder because we don’t really have a definition of issues like what qualifies as sufficient transition. Does an oil company using solar power to drill count as a company in transition? Most people would say no, but some have asked this question.

We have to ask what an issuer needs to do in order to say it is in transition. The answer is usually companies that are not all the way green but are doing better. But how much better do they need to be? This problem with definition is the main reason why there was talk of transition financing five or six years ago, but it didn’t go very well. Everyone fled the field.

Many things are now happening on transition. Singapore and Japan are working on definitions and the EU is also coming out a little more openly about transition. The situation is evolving quite rapidly.

Once we have definitions about what companies need to do in order to be good enough to call themselves transitioning, we will see more participants dipping their toes in the water.

For me, the transition conversation is not about instruments. SLBs can be transition instruments if they are ambitious enough – but so can green bonds, if they are sufficiently ambitious. To me, the main difference between the two is capex versus non-capex. SLBs were greeted very warmly by companies that didn’t have capex. But they have also been used for things like packaging materials or board diversity. These are very worthy objectives but they are not about transition. In this sense, SLBs are a very flexible instrument – they are not necessarily about transition.