More than just green bonds – the next leap
Henrik Raber Global Head, Capital Markets
3 Jan 2019
As of end November, the issuance level stood at just over US$164 billion, well placed to exceed last year’s aggregate issuance. European issuers have dominated yet again capturing over 50% market share, while Asia Pacific clocked just over 30%, with China, not surprisingly, accounting for about two-thirds of the region’s issuance.
To start with, the reference to green bonds now has become a lot broader: the market has started to distinguish between the various subsets of sustainable bond financing with a clear demarcation between green, Sustainable Development Goals (SDGs), sustainability and social bonds. Non-green only counterparts have increasingly become more topical and have increased their share to nearly 20% in 2018 as a percentage of total sustainable bond financing, from a practically non-existent base prior to 2016. Japanese investors, for example, are very focused on the social elements, where more innovative thematic bonds referencing social themes are quite the flavour of the day for the private placement market. In fact, most recently, the ASEAN Capital Markets Forum launched the Sustainability and Social Bond frameworks as the base standard for the 10 ASEAN nations – a move essentially to harmonise taxonomies in the region.
SDG bonds however, bring together both social and climate themes via focusing the use of proceeds onto 17 recognised SDGs of the United Nations (UN). The goals recognise that ending poverty must go hand-in-hand with strategies that build economic growth and addresses a range of social needs including education, health, social protection, and job opportunities, while tackling climate change and environmental protection. To put this in numbers the United Nations Conference on Trade and Development (UNCTAD) estimates that achieving the SDGs by 2030 will require US$3.9 trillion to be invested in developing countries each year. It also notes that with annual investment of only US$1.4 trillion, the annual investment gap is US$2.5 trillion.
SDG bonds, though still at a nascent stage, are getting increasingly topical as prominent issuers are looking internally to align their business models and develop SDG taxonomies modelled on a cluster of these goals. Companies are increasingly stepping up their efforts to communicate to the market which goals are primary or secondary given the nature of their businesses, and how they seek to re-orient themselves to achieving these targets. SDG bonds are hence a stamp of a tangible progress in this journey
The World Bank has been a prominent innovator in the SDG bond market, having already raised such financing in different markets, each targeted towards a separate set of SDG clusters. Most recently we placed the world’s first ever ‘blue bond’ for the Republic of Seychelles. This was on the back of a partial World Bank guarantee to support the marine economy of Seychelles. Despite the small size of US$15 million, it was fully placed with sustainable, responsible and impact investing (SRI) investors. At least US$12 million of the proceeds will be allocated for low-interest loans and grants to local fishermen communities, while the remainder will finance research on sustainable fisheries projects. The project was notable on many counts as it seeks to establish a framework for further issuances in this space; it combines public and private investment to mobilise resources for empowering local communities and businesses; it was fully placed into SRI portfolios and that it marks Seychelles’ return to the international capital markets after a hiatus of eight years.
As we approach 2019, it is clear that the overall year-on-year growth in this segment has tapered off a bit, partly given the challenging credit conditions this year and also taking into consideration the growth in previous years was meteoric, with markets almost doubling in size in each of the past twoyears. One lesser talked about reason is potentially the lack of market-driven incentives. This includes the contentious issue of blending regulatory frameworks with sustainable finance concepts, for example, by allowing for haircuts on risk-weight assets (RWAs) pertaining to such exposures, allowing for better repurchase agreement eligibility to make these bonds more liquid versus their conventional counterparts, and more. These have their set of challenges given sustainable financing has more of a best practices approach as opposed a legal or regulatory framework. This however is changing as most regulators globally are taking a more stringent view on taxonomies and providing rules to limit variations in interpretation. A notable example was that the European Commission (EU) presented three legislative proposals aimed at establishing an EU taxonomy for sustainable finance, improving environmental, social and governance (ESG) disclosure, and creating low-carbon benchmarks
Another area to look forward to would be the formulation of state-sponsored sustainability funds, particularly in Asian countries, to gold-plate standards for investments into sustainable bond products, allowing other investors in the region to follow suit.
Further, as more of a long-term strategic goal, as organisations re-align themselves to sustainability targets and become more transparent about these frameworks, we will hopefully see an overwhelming majority of fund raising in the green or sustainable format. This would allow the market could look to move to investments based on issuers’ specific ESG profiles as opposed to evaluating this on a bond by bond basis – a more holistic approach to sustainable financing.