Mixed asset pools get mixed reception
The green bond was the first and has remained the largest component of the labelled bond suite. More recently, issuers have added social bonds and have blended green and social asset pools to support sustainability bonds – the latter becoming an important tool in the funding arsenal of global and local high-grade issuers.
KELLY It is better whenever a clear connection is made between green or labelled assets and the issuance that is taking place. As well as SAFA [South Australian Government Financing Authority] labelling its entire issuance programme, World Bank also labels its entire programme, outside the green bonds it issues, as Sustainable Development Bonds because of its remit and alignment to the UN Sustainable Development Goals.
“States can issue in benchmark size if they can capture a wider variety of assets, which is why they include and blend both asset types. But to have this wrapped up with social outcomes creates an issue for an investor that wants to fund environmental outcomes specifically.”
We understand why it makes sense for these issuers to apply a label. But what they are not doing is giving investors assurance that our investment is generating an outcome. There is a lack of connection to achieving financing of environmental solutions.
We would prefer more specific labels rather than the sustainability label. We prefer a green label or social label rather than the blending of the two. We would also prefer use-of-proceeds (UOP) language that reports on what issuers did two years before an issue and the year after, to demonstrate a link between the asset and its financing.
KELLY The states have mostly moved to issue under the sustainability label so they can catch environmental and social projects. Of course, the reason they do this is to issue benchmark-sized transactions.
This gets back to the liquidity question – no-one wants to create two or three curves by using two labels as well as generic issuance. States can issue in benchmark size if they can capture a wider variety of assets, which is why they include and blend both asset types. But to have this wrapped up with social outcomes creates an issue for an investor that wants to fund environmental outcomes specifically.
BISHAY A government sustainability bond can have UOP for general school expenses. From our perspective, however, funding an average school doesn’t support the underserved. If the bond is supporting an Indigenous community in rural Australia that doesn’t have a school until one is built, this is supporting the underserved. This is additionality – not the average Australian school.
BISHAY If this sort of UOP – as in only supporting the average person, not the underserved – is a significant part of the bond, we avoid it. But a small percentage is okay.
We care about the look-back period and we want bonds that are funding new projects as opposed to refinancing old ones, which is not additionality – it is just refinancing. Certain projects are okay, though: if a bond is to refinance a renewable project we are much more open to this than a 50-year-old train.
