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Thursday, 18 July 2019

IFR Asia ESG Financing Roundtable 2017: Part 2

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SARAH PERCY-DOVE, BLACKROCK: As an investor, I’d like to ask Terry: would you change a credit rating for the better if the green aspects were legally enforceable?

TERRY FANOUS, MOODY’S: Thank you Sarah! Well, to the extent that our ratings measure the willingness and ability of the issuer to meet its debt obligations, then my answer would have to be no, because that doesn’t alter the key criteria that we consider in assigning ratings. If the Green aspect was to become an event of default then we would treat it as any additional default clause, among the 15 or 20 other event of default provisions that you might have in a bond document.

SANDEEP BAGLA, TRUST GROUP: On the same issue I have another question. A Green bond can become less Green if the issuer is not committed. Can it become ‘more’ Green?

Suppose somebody has started a project, which is green but could be improved upon in terms of carbon footprint over time. Could there be any mechanism to show the performance of the issuer or the project?

Could there be an alternate rating matrix, which provides additional information, to help investors pick between say 10 different Green bonds?

TERRY FANOUS, MOODY’S: Our traditional credit rating system doesn’t touch on that, but we have rolled out recently the Green Bond Assessment product and it grades a company from one to five, a bit along the lines that Rahul was talking about. The Green Bond Assessment grade is really about assessing the framework that the issuer puts in place in terms of administering, managing, using the proceeds and ongoing reporting on green projects, and the quality of all these factors.

Now that product, which we rolled out in March, does not address the greenness of the project or whether the project becomes more green, in terms of tonnes of carbon reduction per US$1 of bonds invested, for example.

LOUIS PERROY, CLIMATE BONDS INITIATIVE: But Steve was talking about a regulatory framework, which, personally, I don’t think is very practical. If a bond was to cease being Green after a few years, would there be some kind of penalty?

SARAH PERCY-DOVE, BLACKROCK: You’d be downgraded.

LOUIS PERROY, CLIMATE BONDS INITIATIVE: You would be downgraded in some ways. If you are going against the regulation three years down the track, something must happen, right? I don’t know what this would be, but would this most likely mean a downgrade? It’s all very theoretical.

TERRY FANOUS, MOODY’S: In the traditional rating system, to the extent that that event does not constitute an event of default, then we may not downgrade the rating. Having said that, and I think Rahul touched on it, if the issuer doesn’t do what it has promised the market, then that raises serious questions about its corporate governance practices.

Corporate governance is one of the key factors that we consider when assigning a conventional credit rating. So that could have an impact indirectly on the rating of the issuer.

BENJAMIN LAMBERG, CREDIT AGRICOLE: Interesting point. There is no universally recognised green scale for Green Bonds, so it’s difficult to comment on who is moving up or down this scale. But practically, we have seen several issuers becoming more and more committed to this market as they moved from their inaugural issuance to regular deals. In a sense, their Green bonds do become greener.

On the other side, we have seen some issuers being less transparent than expected, and potentially being excluded from Green bond indices. You could consider their bonds practically became less green.

RAHUL SHETH, STANDARD CHARTERED: I think they were looking, but I don’t think it’s been implemented yet because the number is absolutely huge. The day it gets implemented, we’ll all hear about it.

IFR ASIA: While we’re talking about accountability, Kwee Lian, is there a role for exchanges to play in lifting transparency and reporting standards?

TNG KWEE LIAN, SGX: Certainly. SGX, in addition to being a market infrastructure provider, has a regulatory role as well. In developing the capital markets, we provide both infrastructure and regulatory frameworks. In Asia, you can see that more exchanges are raising awareness of ESG, and increasing their sustainability efforts.

At SGX we’ve actually led some recent initiatives on this front. We have launched the guidelines for sustainability reporting for listed companies this year, and made it mandatory for them to report their ESG practices from 2018 onwards. Even before this rule, it’s interesting to note that about 37% of some 580 companies that are listed on the SGX Mainboard already have some form of sustainability reporting, either in their annual reports or on a separate basis.

As already mentioned, the first wave would be spearheaded by companies that genuinely want to do some good for society and for the environment. Cost could be a secondary consideration as they look at the social impact made by their company.

If the regulators can further support the movement, I think the success rate will be higher. At SGX we also promote ESG awareness and educate investors through new products like sustainability indices, so when companies begin to report their ESG practices, they’ll be forerunners in this space.

IFR ASIA: I was going to ask about the indices actually. Is there any standard benchmark for Green bonds in Asia?

TNG KWEE LIAN, SGX: I think the standards are flexible at this stage because the market is developing. I believe the index market will further develop in response to more standardisation around certification in the Green bond space.

LOUIS PERROY, CLIMATE BONDS INITIATIVE: I’m not sure I agree with you. In India, for instance, they have verified and certified a number of their bonds. In Europe and in the US, to my knowledge there are a large number of so-called Green bonds that are not verified or certified. I’m not sure you can say that Asia is behind in that respect.

IFR ASIA: Yes. Standardising, obviously, is going to be difficult for an index, but otherwise how do you tell investors which securities would fit?

LOUIS PERROY, CLIMATE BONDS INITIATIVE: China has actually recently developed what they call the Climate Bond Index, which is a Green bond index. It’s top-down driven, in the sense that they do check what bonds come in. They have checked all the corporate bonds that fit into the adaptation, the climate resilience box. From what I understand, this index is purely driven by climate change criteria.

RAHUL SHETH, STANDARD CHARTERED: I think one important part of these indices is how well traded they are and whether an investor would be looking to them as a benchmark. That’s maybe a question for Sarah, because there’s a number of these indices now. Is alpha there going to become a key performance indicator for you at some stage?

SARAH PERCY-DOVE, BLACKROCK: Ultimately, it’s the end investor that makes that allocation decision. We’re seeing that pull factor across all of our investments, not just in fixed income.

Again, BlackRock as a firm is starting to talk a lot more about the longer-term outcomes of our investments. I think that talks more broadly to a mindset shift in the capital markets.

BENJAMIN LAMBERG, CREDIT AGRICOLE: There’s an interest from issuers, too. The Bank of China inaugural covered bond actually includes assets in the cover pool that have been picked according to the climate aligned-bond index you were mentioning.

IFR ASIA: Yes. It’s domestic Green bonds that they hold as collateral, isn’t it?

BENJAMIN LAMBERG, CREDIT AGRICOLE: Yes, in line with the CCDC Climate-aligned Bond Index.

IFR ASIA: So if you take domestic bonds in China and then you bring them into the international markets, will they fit international standards?

BENJAMIN LAMBERG, CREDIT AGRICOLE: On this specific one, the climate aligned bond index excludes clean coal projects, which are part of the PBOC Green Bond Project Catalogue. So if an international investor looks at this climate-aligned bond index there’s no problem.

SARAH PERCY-DOVE, BLACKROCK: Everyone would love standardisation. What is and what isn’t a Green bond? The reality is that this whole development is new. Investors and issuers are moving forward in good faith. Now there are going to be aspects that are grey around that, but that doesn’t mean the entire process loses credibility. The alternative is that you do nothing, and maintain the status quo, which is not actually fulfilling your requirements. We’re all going to have our own viewpoints, but it doesn’t mean you don’t move forward.

LOUIS PERROY, CLIMATE BONDS INITIATIVE: But at the same time you need to do things in a serious way. Personally, I think greenwashing is a serious danger. The day you have a real benefit to issuing Green bonds, suddenly everyone will want to be called green. Unless you put in place the right framework and investors understand it clearly, you could end up with some serious issues in the future.

SARAH PERCY-DOVE, BLACKROCK: You could, but I think it’s all about education. It’s about being knowledgeable and making sensible choices, depending on the issue at hand.

LOUIS PERROY, CLIMATE BONDS INITIATIVE: And this is why you need to put a framework in place. It’s about educating people at an early stage rather than trying to do it later on in the game.

BENJAMIN LAMBERG, CREDIT AGRICOLE: On the point that you made about reporting obligations, France was the first country to impose an obligation on institutional investors to disclose the climate impact of their investment portfolio. It’s not just on a best-efforts basis. It’s a real commitment that French investors need to follow.

IFR ASIA: I didn’t realise that. Obviously Green bonds are dominating this discussion and quite rightly so, but what about the more social aspects? The multilaterals did immunisation bonds in Japan years back, vaccination bonds, too, for Uridashi investors. More recently we’ve had water bonds. How developed is that market?

BENJAMIN LAMBERG, CREDIT AGRICOLE: My favourite topic! Let me first cover the Uridashi part. We mentioned that Green bonds started in Europe. Actually, to be more accurate Japanese securities houses have been very early adopters of Green and thematic bonds through the Uridashi market.

The African Development Bank has sold a few bonds to retail investors to finance education or water projects in Africa. It’s amazing. The thematic bond market in Japan is very well established.

What we’ve seen in the last two or three years is that it’s no longer just the retail market via Uridashi. You have now large Japanese institutions embracing every socially responsible investment theme.

You mentioned the social bond concept. There are a lot of microfinance bonds, which in addition of being sold to retail market are now bought by large insurance companies. We did one a few days ago for Banco del Estado de Chile, which was taken up by large Japanese insurance companies and on which the microfinance aspect was critical to the investment criteria. I’m not sure that Japanese investors would have looked at such a cross-border credit if it was not for the social bond element.

IFR ASIA: I know there’s been water bonds in the Japanese market. We’ve also seen women bonds this year.

BENJAMIN LAMBERG, CREDIT AGRICOLE: Yes. The ‘Banking on Women’ bond was a concept developed by the IFC a few years ago. It’s a microfinance concept, where the IFC was financing and empowering women entrepreneurs.

IFR ASIA: I understand there are moves to develop a set of principles, social bond guideless, along the lines of Green bond principles. What kind of impact do you expect there?

RAHUL SHETH, STANDARD CHARTERED: Yes, you’re right. It got going this year when they added a section on social bonds under the Green bond principles. Having said that, there are a couple of challenges here, and I’m sure the Climate Bonds Initiative would point out some. The first thing is how do you measure social performance? You could use the money to develop hospitals, schools, you could do immunisation bonds etc, etc.

Even in Green bonds, people are talking about greenwashing and standardising assets that count as green. When you come to social impact, it becomes even more blurry.

We’ve seen sustainability bonds from TSKB in Turkey, which is effectively Green plus social, where you had proceeds going to green purposes as well as social purposes, such as school and education and infrastructure building.

Maybe the point for the Climate Bonds Initiative is that the climate theme is something that is more measurable.

LOUIS PERROY, CLIMATE BONDS INITIATIVE: Obviously, bonds are here to raise money, right? What you do with that money is a wide universe. Once you’ve said how you will allocate the proceeds, how it will be checked, verified and so on takes a lot of work. So social bonds, why not? It’s very useful. Women’s bonds? Why not? It’s very useful. No doubt about it. But to actually implement it, that’s a different story.

It might work for a few, small bonds issued by IFC or someone with a proven way of doing things. But I think to generalise this concept for the whole international bond market might not be very practical, to be honest.

BENJAMIN LAMBERG, CREDIT AGRICOLE: On the social bond side, I agree it’s still a developing market segment. And note that Credit Agricole CIB is at the forefront of this development, as we are currently chairing the Social Bond Working Group, under the Green Bond Principles. But one thing I really like is that now we have investors looking to invest more in a specific area because of a specific social theme they want to get involved in. Five years ago I used to receive inquiries from investors looking to invest into a AAA credit bond paying a coupon of X%. Now I’m getting some investors asking us to source investment opportunity based on a green or social theme

LOUIS PERROY, CLIMATE BONDS INITIATIVE: I don’t dispute that. I’m not saying it’s useless to do this sort of thing. Definitely it’s useful, and that’s great. But I don’t think it’s going to blow up into something major in the market.

IFR ASIA: Before we get to some predictions for 2017, is there anything else we should be discussing here?

LOUIS PERROY, CLIMATE BONDS INITIATIVE: I’m quite interested to hear if people think there’s a risk of a bubble developing in this market. Are we likely, at some stage, to end up with more money chasing fewer assets?

SARAH PERCY-DOVE, BLACKROCK: My current thinking is that the supply side is so deep at the moment. If you just look at India and China and their requirements under the COP21 Paris agreement, some of the estimates are calling for US$2trn of investments in India and US$350bn per year for the next 20 years in China. That has to be a big source of supply.

Do I think, right now, that we can identify US$2trn of investor money? It seems unlikely, but we shouldn’t underestimate the pool of funds looking at ES&G for their investment decisions.

The reality is that in financial markets it’s hard to maintain a big imbalance without an artificial construct – a regulatory issue, or some sort of cross-border barrier. The reality is pricing will adjust and the investors will come if the supply is there at the pricing level that they’re looking for. There’s a natural balancing mechanism.

LOUIS PERROY, CLIMATE BONDS INITIATIVE: I was more talking about the other side of things. Will there be enough projects to mop up all this cash? I’m quite confident that the cash with the framework that has been put in place.

SARAH PERCY-DOVE, BLACKROCK: I think that touches on something I was also going to raise. Asia is very much a bank market. And what we don’t see in the Asian marketplace are banks with a high level of interest in ES&G and climate awareness as they invest their shareholders’ funds. I’d like to ask the bankers here in the room, are you seeing any shift in loan books across Asia? Most of the financing for these types of projects is going to come from the banking sector, not from the capital markets.

RAHUL SHETH, STANDARD CHARTERED: I think the way banks typically look at it is still quite binary. They do their due diligence on the environmental and social risks, and as long as it meets those criteria they will invest. That means the most polluting or hazardous industries might find it difficult to get as much funding. But it’s not necessary to be the greenest of the green to get funding from the bank market.

BENJAMIN LAMBERG, CREDIT AGRICOLE: Credit Agricole Group has just announced, on the back of the COP22 in Marrakesh, that we are stopping new financing for coal power projects. So, yes, it does have an impact.

One other topic we haven’t touched upon is the opening of the interbank bond market in China. I’m very bullish about that. Foreign investors now have direct access to this onshore market, and the local Chinese Green bond market is developing very fast. We now see some international investors looking to buy Green domestic assets in China, because they want renminbi exposure and because they have Green funds to deploy. If there are not enough Green bonds in the international market, these domestic bonds – as long as they fit international standards – are, for me, something to watch.

IFR ASIA: Back to the question about banks shifting into ES&G investments. How does that work in India, Sandeep? Have you seen banks there make a conscious effort?

SANDEEP BAGLA, TRUST GROUP: I wouldn’t call it a regulatory pull, but there is a big political push to take the energy sector towards green fuels. The Prime Minister has been talking about it, and has encouraged banks to finance more through Green bonds. At the same time, we’ve had a lot of reforms in the way the power distribution companies are structured. They had been performing poorly for quite some time, and that mess has now been cleared up a lot.

So now the projects are much more bankable. Companies like REC [Rural Electrification Corp] and PFC [Power Finance Corp], which are the finance companies in the power sector, have repaid a lot of their loans to power distribution companies and now they’re going to invest a lot more in renewable energy.

To answer Sarah’s question, I think there will be a lot of investable supply from India in this sector. A large part of financing will come from these dedicated institutions, and the banks are also keen, because the system itself has become much more robust.

IFR ASIA: I’ve read somewhere that a few banks have committed to a hard target for Green financings, say over the next five years. Is that new money or are they just moving things from one part of their book to another?

SANDEEP BAGLA, TRUST GROUP: I feel that it’s more about rebalancing right now, but it will move to the next stage pretty soon. At first banks identify sources of funds for existing portfolios of green exposures. Once that refinancing is over, you will see fresh money being channelized into Green bonds. I think it’s going to move forward very fast.

IFR ASIA: Thank you. Right, I’m going to ask you all for a couple of predictions for 2017. Where do you see the ESG market in Asia this time next year?

TERRY FANOUS, MOODY’S: I see more liquidity in the Green bond market, and more issuance. China will continue to underpin Green bonds, and we will probably see more development in standardisation and reporting. That will be really good for the Green bond market and for the ESG market as a whole.

SARAH PERCY-DOVE, BLACKROCK: We see that growth continuing quite rapidly. And I think one of the trends that is going to accelerate, is for big, jumbo issues out of the sovereign space. So sovereigns as Green bond issuers will move the market forward.

IFR ASIA: Here in Asia specifically?

SARAH PERCY-DOVE, BLACKROCK: Possibly. We’ve certainly seen it in Europe and in Africa, so there’s no reason why not. We’ve got huge investment requirements in the energy sector in two of the largest countries here. It would make a lot of sense.

TNG KWEE LIAN, SGX: I agree there will be more bond issuances and you’ll see more standardisation as the market develops. On top of that you probably will see more countries in the region, apart from China and India, embarking on Green bonds. Singapore is one of the countries that is keenly aware and following developments in this space and we think there are potential issuers looking at the market.

IFR ASIA: Will we see a Singapore Green bond within the next 12 months?

TNG KWEE LIAN, SGX: Of course!

BENJAMIN LAMBERG, CREDIT AGRICOLE: As said before, our market prediction is US$100bn for 2017. We foresee four themes. First, the emergence of Green sovereign bonds may be a turning point in this market, both in terms of global amounts and overall liquidity. Second, again, China will be dominant, but I’m convinced that the opening of the interbank bond market to international investors will help to align the standards in China toward those of international market. Third, we also need to see what will be the impact of the new paradigm on climate finance in general and Green bonds in particular.

My last point is that we are talking about more supply, but there are definitely more investors to come – not just in Asia, but also globally. I know some treasury managers of banks that have issued Green bonds, who are now looking to align their ALM functions and become SRI investors. We’ve probably spent 80% of our time so far helping issuers to understand the Green bond concept. Now we’re spending a fair amount of time with investors. So more investors are coming.

RAHUL SHETH, STANDARD CHARTERED: More issuances? Definitely. More regulation? Possibly. I think the most important aspect is, again, the investor base. To sustain this market we will need a captive investor base in Asia, and I think the only way that will develop is for governments to create a fund to invest in Green bonds or Green equity. A public fund, or a public-private enterprise. So instead of going to the Nordic countries, where the bulk of the Green investors are based, you would have a captive fund within your country, which can invest in Green products. If you already know that you’ve got a captive investor base in your home town then that will drive more issuance, and help create a more sustainable market.

LOUIS PERROY, CLIMATE BONDS INITIATIVE: Well, I think there’s only one way forward, which is the progressive greening of the world. How fast we go still remains a question. Bonds will play a very big part in that game, definitely. Last year was US$40bn, this year about US$80bn, so US$160bn next year?

In any case, we need a huge amount of Green bonds in 20, 30 years’ time, and we have to get there. We’ll have a ramp-up in other parts of the world and in Asia, too. China will continue to lead, and hopefully we will have a healthy standardisation in these markets.

SANDEEP BAGLA, TRUST GROUP: I think we are likely to see a discernible perception change between non-Green and Green bonds. It was mentioned that already spreads have become tighter for Green bonds. All things being equal, I think Green bonds will start trading at finer prices. I think certification will become an important issue. Investors will demand more stringent certification to ensure that the money which they’re investing for a certain purpose is going to the right places. I see those two factors gaining ground in 2017.

IFR ASIA: Ladies and gentlemen, thank you very much for your time.

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