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Saturday, 23 September 2017

IFR Asia Green Bonds Roundtable 2017: Part 2

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IFR ASIA: Let’s talk about the China experience a little bit. I just read an article from Sean Kidney, the head of the Climate Bonds Initiative, saying that over 93% of Chinese green bonds have received external reviews at issuance, which is much higher than the global average of around 73%. You could argue that China is leading the way here. Where do we see the Chinese market developing?

Ko-Wei Hsiung, HSBC: I’ve seen that article. When you talk about China, we do see a lot of encouragement from regulators requiring or asking the issuers to either get a second opinion on their bonds, or to disclose their information on a quarterly or, for the corporates, on a semi-annual or annual basis.

I think what we’re going to see going forward is a lot of harmonisation between the various markets. There’s actually one announcement from March this year that the PBoC and the EIB are going to work together on standardising green bonds in China and the rest of the world, so that’s where you can expect a lot of activity. You’re going to see the two markets coming together because China is working closely with the international guideline providers trying to harmonise the two markets.

IFR ASIA: There’s an argument that, at this point in China’s development, any incremental step to reduce emissions could qualify as a green bond. Clean coal might not be green in Scandinavia, but in China’s context, it makes more sense.

Vivian Tsang, Moody’s: I come from the infrastructure space in China, so I can comment a bit on the renewable sector. For China’s 13th five-year plan, the target is to increase clean energy by 260 gigawatts. Just to give you a frame of reference, the entire power sector in South Korea produces about 100GW, and China is looking to add more than twice that through clean energy alone. That’s a huge number, and there are huge opportunities in the renewable space, particularly in solar and also wind. Combining those two we’re looking at about 300GW by 2020, which is a very sizeable number.

We actually rated one solar company earlier this year. They didn’t issue a green bond per se, but there is definitely potential for them to do so because their solar farms qualify as green projects. I do a lot of opportunities in companies in China financing solar farms and wind farms.

IFR ASIA: From that explanation it sounds like there should be enough opportunities without looking even at clean coal or some of the more grey areas.

Vivian Tsang, Moody’s: Clean coal is really off the international menu, so I’m not sure if this will be even considered during the harmonisation of the two standards. Another issue with the Chinese standard is around the use of proceeds. In Europe the green bond principles require 95% of the proceeds to go towards a green project, but in China we’re at 50%, and the rest you could actually use to repay existing loans or for working capital. That is a bigger deviation from the global standards.

Katharine Tapley, ANZ: I think more broadly it’s important to recognise that we’re talking about transitioning to a lower carbon economy. To Mark’s point about an evolving market, I think there has to be a recognition that different countries are all at different phases of that transition. There’ll be some jurisdictions, for example, that have the ability to leapfrog the old poles and wires, coal-based energy transmission grid entirely. Then there are other jurisdictions where there is going to have to be some continued reliance on fossil fuel. There’s a real transition story here, and we have to let that transition play out as the market itself evolves.

IFR ASIA: I want to touch a little bit on some of the potential solutions for stimulating this market, and then we’ll take questions from the audience.

Mark, you mentioned Singapore is pushing very hard to promote green bonds. Wouldn’t it make more sense for regulators everywhere to eliminate withholding tax on green finance, or give a very clear financial incentive? Is that where you see this market going?

Mark Austen, ASIFMA: There are different ways of looking at incentives. I think in certain countries there probably is natural demand. Katharine talked about Australia already. But in other areas maybe there isn’t as much environmental awareness yet to actually generate that homegrown demand, so I think there are things that you can look at.

If we step back again and say sustainability is a social good, then it’s something that we should be stimulating as a society. Take a look at what the US has done in the municipal bond market, where they’ve taken the view that actually allowing municipalities to issue bonds to stimulate infrastructure investment is something which is good for society, so they’ve made that tax-exempt.

Looking from an environmental side, you could certainly take a view – and maybe this only applies in certain segments of green bond issuance – that this is something we should incentivise so therefore let’s make interest tax-exempt. Obviously, in Hong Kong this may not be as big of an issue but in other countries it could be significant. Withholding tax is something also that you could exempt for jurisdictions that apply it, but obviously that only applies to international investors and not to domestic investors.

Another area is giving this asset class some sort of preferential risk-weighting or capital treatment under Basel, again because this is a societal good and we want to give some sort of incentive actually for those to hold these bonds rather than treating them the same as other instruments. That’s something else that we could potentially look at as well.

IFR ASIA: John, do you think we need incentives here?

John Wade, Mizuho: Look, everybody wants the environment to be better. No one would do something against it. However, I’m not a fan of over-regulating anything because I think that always ends in disaster. An issuer needs to raise capital to do whatever business they’re doing. They need to do it responsibly, as they have a budget every year they need to reach. They will do something a little bit extra if it is in line with their overall goal, but that’s their goal at the end of the day. An investor needs to invest to get a return on somebody’s savings plan. If we overburden it, people will move away.

I do like some of the things we’re seeing. Singapore is making it easier, as Mark said. If I can talk to an issuer and say “Look, I can help you do a green bond or a social bond and you don’t have to pay for it”, then that conversation continues. If I tell them it’s going to cost US$100,000 extra, the conversation gets harder for me – though in fairness it depends on the size of the client. Giving incentives that are not overburdening or overly complicate is worth considering.

I did want to go back to one other thing. We talked about having puts, well that’s a great way for me to get kicked out of an issuer’s office. Issuers understand the change-of-control put; that’s fair. They understand what happens if they break a covenant. If we say we need a put option if you don’t obey some environmental rule that’s not very clear, that’s hard to swallow. I would be against putting that in.

IFR ASIA: Another developing area is indices. As that becomes more liquid, does that draw more investors into this market? Arthur, have you looked at green indices?

Arthur Lau, PineBridge: Yes. We have two ESG mandates, one in euros and one in US dollars. When we started the ESG mandate we did have some trouble finding the right index. I remember on one of the mandates, we actually used a conventional index instead of a green index because we just couldn’t agree.

To be honest, I’m a very naïve investor, so if the green bond offers me better returns, I will buy it all day long. We also truly believe that a company that is more environmentally friendly will sustain itself for much longer. That has actually reduced my credit risk exposure over time, so it is a good thing to do. We love to see companies doing that, but some of the infrastructure at the moment really does not help make these decisions easier.

The buyside is changing. Just two or three years ago, many of the requests for information that we received did not ask whether our company is ESG-compliant, but now every single RFI that we receive has that question. The investor universe has changed, and we are looking for the right mechanism to support this.

IFR ASIA: Katharine, based on the Australian experience, what sort of incentives or initiatives have worked to stimulate demand, or is it just a case of growing awareness?

Katharine Tapley, ANZ: I wish we had a government that would create some regulations to assist with our transition, to be perfectly honest. One factor has actually come from the investor side. The Clean Energy Finance Corporation has emerged as an investor in green bonds in Australia, and they can be credited for taking cornerstone investments in early issuances beyond the SSA sector. When National Australia Bank issued their first bond, the Clean Energy Finance Corporation was a cornerstone, and they continue to support issuance in the Australian market as a cornerstone or large ticket investor.

IFR ASIA: Are they price-sensitive?

Katharine Tapley, ANZ: No, they’re not price-sensitive, but they’re very sensitive to the underlying greenness of the bond. That’s one form of incentivisation in the Australian market.

I really applaud what MAS has done in Singapore. You’re not talking really, really large amounts of money, and I would like to see that kind of incentivisation going on in Australia. Although when you think of the overall costs of issuing a green bond and the benefits that are associated with it, the additional costs pale into insignificance in the end anyway.

IFR ASIA: Let’s see if we have any audience questions.

Audience: Thank you very much for this very stimulating discussion. I’m a professor from the University of Hong Kong. I have two thoughts. First, if green finance is benefitting the issuer, then shouldn’t the issuer share some of the benefits with the investors through higher yields, instead of asking for cheaper credit?

The second is, if we are talking about more credit, cheaper credit for the issuer, then would that have any adverse consequences down the road? My impression is that regulators in China are really active, especially in including green finance in the macro prudential assessment, and if banks are not participating, either issuing or allocating credit, they actually will get a penalty.

This leads me to think about the regulatory consequences, so I would like to hear the panellists’ reaction on should we really make it easier or harder for this market to grow. Thank you.

IFR ASIA: Thank you very much, a couple of good questions there. Let’s do these one by one. Shouldn’t issuers pay more? They’re getting to advertise themselves as green and socially responsible. Shouldn’t they pay for that privilege?

Arthur Lau, PineBridge: I remember when I started to invest in green bonds, I had the same thought: they should pay me more to incentivise me to participate, since we as investors are kind of subsidising their green projects. I think we have passed that stage now. We have seen many versions of green projects and green bonds, and we actually believe that a company that engages in this environmental activity is taking defensive measures against environmental risks or potential regulatory implications.

That’s especially true in China. When we see the environmental issues there, we like to see companies take pre-emptive measures, so that actually becomes a benefit to investors. I can’t speak on behalf of the whole buyside universe, but from what I understand we have passed that stage already.

Of course, I would love to share some of these incentives that governments offer to the issuer, then I can benefit somehow indirectly. But I think it’s very hard to have green bond issued at a premium to the conventional. I don’t think the investor circles will accept that at the moment.

IFR ASIA: Would any issuer ever pay more?

David Pang, MTR: I would say it is more market-driven. Pricing depends on supply and demand, so if you artificially make it more expensive, then the issuer will back off.

As I mentioned earlier, for new issuers, they already have many hurdles to overcome. First they have to get familiar with the framework and how it works. If you add an extra cost there, then you won’t see many issuers. In Hong Kong, issuers do not have a lot of tangible incentives for issuing green bonds, but as the market develops, sustainability will become very important to a company, and then the issuer would see the benefits. In that case, they probably won’t mind paying a premium, but at the moment I don’t think that would be the right thing to do.

John Wade, Mizuho: Both the gentlemen sitting next to me have a fiduciary duty: Arthur to his investors, David to his management and to the citizens of Hong Kong. Getting into the academic side of it, if there’s a benefit, where should that go? For someone like MTR to pay more that’s essentially a tax, so would people be willing to pay the tax on a higher fare? That’s a Pandora’s Box.

If the price is so cheap for an issuer, then investors will take their money out of green funds because they’re consistently returning 2% less than a fund that’s not green. I think letting the market find that equilibrium is probably the best way to do this.

I’m optimistic. I think people will do the right thing, and as I said before, most people believe green bond or social bonds are good.

Katharine Tapley, ANZ: To the extent there is an academic discussion around this, when you reflect on what’s going on globally, one of the key benefits of green bonds is that you get greater disclosure and greater engagement with the investor base. That really has to be seen as a positive as we are transitioning to a lower carbon economy.

Pricing aside, when you stand back and look at the bigger picture, that’s really one key benefit for all of society in the long term.

IFR ASIA: The second question there was on the risk of a build-up of cheap credit. Is there a danger of a green bond bubble developing?

Mark Austen, ASIFMA: I don’t really think that there’s a bubble forming at this stage. I mean it’s far from that, so I don’t think that should be a real concern for the regulatory community. You mentioned about macro prudential measures, and almost it reminds me of sectoral lending in India. Those things have been proven not to be that effective. In fact, if you really want to create a bubble that’s generally a good place to start, because people end up having to invest in a particular market.

To John’s point, that the market can’t really adjust to incentives so that demand can sometimes outstrip supply, I’m more inclined to say, if we’re going to do anything around incentives, it’s about easing the process, encouraging investors to get in but then letting the market set the equilibrium.

Audience: My question has to do with the different markets that we currently have for green bonds. We have one market in Asia very much driven by China, and then we have the European market which has been around for a while. Do you see a convergence between the ICMA green bond principles and the PBoC green finance principles? Clearly from an investor’s standpoint one of the difficulties is the lack of standardisation. Do you see that happening and what is the time horizon until we have a real global green bond market?

Mark Austen, ASIFMA: I think the short answer is yes. It’s very difficult to put a time limit on it. I think someone already mentioned the discussion between PBoC and the EIB on how they set the standards around the terminology, so I think that’s going to continue. As Katharine rightly pointed out, different markets are at different stages of development, so standardisation is not going to happen overnight.

I’m very convinced, just by talking to officials even outside of this market, that there’s a real commitment to cleaning up pollution in China, but it’s going to take them some time to do it. They’re in that transitional phase and I don’t think that they would do anything to risk that transition to bring them in line with international standards in the short-term.

If you look in the medium term, for sure that will happen, it will just take some time, and maybe international standards need to be flexible enough to take into consideration developed markets versus developing markets. This is something that Trump doesn’t necessarily support but I think that that may be something that needs to evolve as we go forward.

Ko-Wei Hsiung, HSBC: Mark’s right that the PBoC are already working together with the EIB trying to harmonise the two standards. From the HSBC perspective, we sit on the advisory council for the ICMA green bond principle working group. There’s a lot of interaction between ICMA and the local regulators, so that whenever they try to push out a new regulation or a new guideline, it conforms largely to what the international community is looking for.

For example, if you look at Japan, the Ministry of the Environment has just announced this year the new green bond guidelines which, again, largely conform to the international ICMA standards. You’re going to see more examples of regulators working together to come out with a more internationally recognised standard.

Audience: I’d like to hear from the panellists how green bonds or green financing can be an agent of change in more difficult sectors. An example might be palm oil. Obviously it has a very bad connotation, but is it possible that green finance can bring positive change to these industries?

Katharine Tapley, ANZ: Yes, I think so. It’s about the engagement piece. From my perspective, having been an issuer working with ANZ’s treasury team and now helping corporate clients do the same, the level of engagement that you get from investors just by walking into the room just takes the conversation to a different level – particularly when you can also involve sustainability people in that conversation.

Green finance is a change agent for greater engagement and better environmental practices.

Audience: I was wondering whether anyone has noticed any issues where companies are doing a better job of impact measurement once the green bonds are raised. I do appreciate Arthur’s concerns about how do you ensure where green funds are invested. Are there any standards in Asia or anywhere internationally for impact measurement?

Until that’s achieved, I think it’s going to be difficult to expect any premium or discount for green bonds versus regular bonds.

John Wade, Mizuho: It’s hard to quantify, but I’ll talk about a recent experience we had with an issuer. We did a green bond two weeks ago for an Indian issuer where we sold some of that into Japan. The impact there was that the investor might otherwise have only traded at a smaller size, and the fact that we were able to have further discussions on the green background really changed their investment size.

That’s an impact. I’m not going to give the size of that trade but it was enough that the issuer was happy to do some extra work for it. That kind of enlightenment is going on with other Japanese investors, and again, as Mizuho, we talk to a few quite regularly. We can measure how much more interest we get as a result.

Katharine Tapley, ANZ: The Climate Bonds Initiative has actually included guidance to issuers around impact reporting in the latest version of its standards. It’s voluntary, but it has created an expectation of impact reporting. Again, putting my ANZ issuer hat on, we are ourselves looking at how we can report on the impact of our own issuance. We haven’t found a standardised process but we’ve been engaging with investors across the spectrum – from really ethical funds through to global institutional investors, who either have specific mandates or are looking to green their mandates, through to more middle-market, smaller investors in the religious or education sectors, for example. That’s been very informative in terms of helping us come to some sort of middle ground where we are going to produce what we think is a relatively useful impact report.

Bear in mind this all comes back to what we’ve already discussed: this is an evolving market and the emergence of impact reporting is relatively new, so again, it’s about the market finding its feet.

IFR ASIA: If I’m not wrong, some of the multilaterals break it down in terms of carbon footprint saved, don’t they?

Katharine Tapley, ANZ: Yes. To be more specific, the sorts of things that we’re looking at are emissions saved, renewable megawatt hours created from the solar and wind farms in our portfolio – so that’s an obvious measure – and then morphing more into social impact such as jobs created, for example. That gives you a bit of a flavour of some of the metrics.

Audience: I have a question about establishing an international standard for green bonds. Don’t you think that the nature of the green bond itself is a challenge? For example, hydroelectric energy qualifies as green but you have to build a dam and that impacts the environment.

Another point is that a bond that qualifies as green now may not qualify as a green bond in 10 or 30 years, given the improvement in technology. It’s difficult to set a standard that is valid all over the world and for that timeframe.

John Wade, Mizuho: It’s a very good question. No one knows in five years what the standards will be or where we’ll be in this transition. You could draw a parallel to bank capital. You need to give a bank a set of rules to calculate their capital. If you change those rules in five years and say that some of the capital you’ve issued no longer counts, of course the issuer is not very happy. There are a few things that will happen. One is the issuer can take those bonds back if they lose the regulatory capital treatment, or they’ll be grandfathered under the new rules. I think the market will deal with that fairly.

It’s not a question I’ve had yet from a green issuer, but I’m sure I’m going to get it and now you’ve made me think about the answer! I think we’re mature enough to make sure we wouldn’t hurt an issuer or investor. If an investor bought into a green fund and you change the rules, then the fund shouldn’t be penalised because they were behaving properly at that point in time.

Arthur Lau, PineBridge: I’m sure there will be different standards, different templates for different industries. For example, when I look at a green bond, for me it’s relatively easier to understand a corporate issuing a green bond rather than a bank. A bank will claim that the proceeds will go towards green projects, so that means I am actually outsourcing the green approval process to banks, and individual banks may have different templates.

Personally, I do not expect there will be one set of rules for everyone. I think that is not practical at all.

Audience: I think when we look at green bonds we should look at the commercial angle and the ethical angle. Why would Chinese issuers like to issue green bonds? Because the approval process is quicker, and there are subsidies from the government. There’s a commercial angle. In the US, the tax concessions mean the government is looking at it from the ethical angle, for the good of the whole country.

For MTR, I wonder why you would issue this green bond. Is it from your ethical angle or just to raise your image? Also to HSBC, why would you invest in green bonds if you are not looking at the commercial angle? I would say both of you should solicit the Hong Kong regulators to give subsidies like tax concessions.

David Pang, MTR: The first consideration is that we would like to expand our investor base, because that will help us with our funding at any time. We see that green investment is growing, and we would like to establish a relationship with green bond investors.

The second consideration is that we believe a more sustainable business model will give us a competitive advantage in the longer term, when the world becomes more environmentally conscious and perhaps governments will have more onerous regulations.

The third area is that a green bond from a Hong Kong corporate will also help to develop Hong Kong as a green finance hub, which is an objective of the government. These are the considerations why we decided to issue a green bond.

Ko-Wei Hsiung, HSBC: I totally agree with all that. As a bank, sustainable financing is actually a big part of our strategy. No matter if you look at us issuing a green bond out of our European offices or supporting our clients in achieving their sustainable goals, it’s all built into our day-to-day jobs. As an institution, we really believe in MTR’s story, being a mass transit company with a very comprehensive process of analysing the amount of carbon saved. It’s a very good fit with the strategy of the bank.

There’s no argument that MTR had a very successful trade last year, being the first mass transit company to issue a green bond out of Asia. It fits the story of our two institutions perfectly.

IFR ASIA: Last question. I think Donald Trump has only been mentioned once on this panel so far today. Does the US withdrawing from the Paris climate agreement have a material impact on the potential of this market?

John Wade, Mizuho: Absolutely not. Speaking as an American who’s not a supporter of withdrawing from the climate accord, I think the feeling of most Americans is this doesn’t represent their thinking, and large cities do not want to pollute. We’re not insane, and we don’t think the Earth is flat. We do believe there is climate change and I think you can see from recent actions in California and in the markets that they do not support the view of our president.

Mark Austen, ASIFMA: You saw from the recent G20 meetings that 19 of the 20 agreed to continue. That says that US is pretty isolated on this. I think it has more to say about the US leadership on the global forum than it does about climate change.

Ko-Wei Hsiung, HSBC: If you talk about the US withdrawing, there are still 194 other signatories committed to the Paris agreement. The earliest the US can withdraw formally is 2020, so there’s still a long time before they remove themselves completely from that agreement.

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

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