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Saturday, 17 August 2019

IFR Asia Green Financing Roundtable 2018: Part 1

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IFR ASIA: Good afternoon, ladies and gentlemen, and welcome to the fourth annual IFR Asia Green Finance Roundtable. No doubt, you’ve heard plenty about Green bonds and loans over the last few years.

It’s an asset class that’s booming. It’s come from nothing, and now we’ve had the first sovereign Green bond from Indonesia. We’ve had the first corporate Green bond in Singapore from City Developments, who I’m glad to announce are on the panel, and we’ve had Green securitisations in Australia, China. We’ve had Japanese insurers showing a greater commitment to increasing the amount of Green assets on their balance sheets. So it’s definitely an asset class on the rise, and we’ve got a great panel here to talk to us today.

On my left, we’ve got Katharine Tapley, head of sustainable finance at ANZ, Anna-Marie Slot, practice group lead, high yield debt at Ashurst. Jonathan Drew, managing director, infrastructure and real estate group in the global banking and markets team at HSBC. Lim Whee Kong, head of treasury at City Developments and Sanaa Mehra, senior associate, Green and social bond origination at Citigroup.

So to get things started on a positive note, I’d like to ask Katharine, what are the opportunities for Green finance in Asia? Are there are any particular industries or countries or sectors that could drive issuance?

Katharine Tapley, ANZ: In Australia and New Zealand we’re seeing plenty of opportunity, and I think, probably much like other markets, the obvious sectors for Green bond issuance are commercial property, infrastructure and also renewable energy. So in our context, that means solar, wind, as well as geothermal and “run of river” hydro in New Zealand, noting that we are watching carefully how acceptance of hydro and criteria develop.

I think helpfully in both countries, we’re also seeing signs of regulatory support emerging. I think that’s going to be crucial and helpful for the future growth. So, for example, in New Zealand with the change in government to Prime Minister Jacinda Ardern, you’re seeing the government make very rapid moves towards things like a zero carbon act for New Zealand and the creation of a Green fund that’s going to put US$100bn into Green investments in New Zealand.

In Australia, there are some promising signs coming from some of our regulators. We’ve had APRA, who is the regulator for the financial services industry, making it very clear in statements to the industry that they see climate risk as a financial risk. We’ve most recently seen ASIC make comments around similar issues, including that they are reviewing the top 300 listed companies in Australia around their adherence to the Taskforce for Climate-related Financial Disclosure and in particular the use of scenario analysis to determine companies’ advancements towards dealing with climate change.

We’ve also had a senior barrister talk about Corporations Act breach of fiduciary duty by directors if they’re not taking into account climate risk.

So in summary, the opportunities for Green bonds are being generated through a combination of industry level action, as well as some regulatory signalling.

IFR ASIA: Jonathan, you’re based in Hong Kong. What’s the view like from Hong Kong?

Jonathan Drew, HSBC: Well, I think, Daniel, broadly to your question, in every country and for every sector there’s a huge need for what we might more broadly call sustainable financing, i.e. the need to bring finance to create assets that will decarbonise and depollute the entire economic activity that we currently undertake. Because I think when you look at the science of the Green part, the environmental part, I think we have to recognise that the timeframes in which we need to take very significant action are very urgent indeed.

So there isn’t, in my opinion, a market or a sector or, for us as a bank, a client who isn’t impacted by and who hasn’t got a very material role to play in this whole process of making our economic activity sustainable.

Obviously with respect to your question around Hong Kong specifically, then if you just look at who the actors and who the players are in the Hong Kong market, obviously you’ve got a big financial services sector. We’ve seen a lot of activity from commercial banks raising Green funding or raising sustainable bonds or broadening it to the Green plus social component in order to on-lend to their clients who are making exactly those eligible Green or eligible social projects.

I think now that’s why it’s particularly exciting that we’ve not only got the Green bond product, but we’ve also got the Green loan product. So commercial banks or banks generally with sort of one hand can be aggressively writing Green loans, and with the other hand they can be raising their Green and sustainable bonds to finance that lending activity. So clearly banks and the financial services industry in Hong Kong have a huge role to play and all the banks there are potential Green and sustainable capital issuers.

You’ve got an important transportation sector in Hong Kong. Hong Kong has through the MTR - a bit like Singapore - a very efficient mass transit system. And of course they have already very successfully raised capital in Green format multiple times, and that’s given them an opportunity to really talk about the business that they’re running.

Mass transit itself is fundamentally sustainable because it’s about moving people from A to B in a low carbon manner, taking them out of high carbon alternatives, whether it’s a car or a bus. But also investing in the operation of that system, so whether that’s, for example, major investment in managing their air conditioning bill through screen doors or more advanced technologies which again I think you have in the MTR system here.

Such as regenerative power, so that when trains are coming into a station, the kinetic energy is converted into electrical energy and that can then be stored and then used to power other trains to pull out of the station in other parts of the system. So all of these investments are hugely important across the transportation sector.

Interestingly, MTR in terms of the power of raising a Green bond, they actually appeared last year in the Fortune 50 ‘Change the World’ list. And I know the CFO said to me, “Well, how did that happen?” You know, they provide very reliable service, so very low incidents of delays on the system, and a very affordable service in Hong Kong, obviously in part driven by their ability to bring revenues from the real estate business in to support the transport component.

But the CFO said to me, “But we always have done that.” What actually made the difference in 2017 was the fact that in 2016 they’d raised a Green bond, so they got an extra mark for financial innovation.

I think that for those sort of corporates and other institutions who are thinking about issuance, that talks to again another of the huge benefits of looking at raising your capital in Green format because it really does bring a whole new level of attention to the type of business you’re engaged in, how you’re running that and why yours is a business for the future. You’re positioning yourself as a winner and not a loser as we go through this massive transition process.

So the transport sector, and of course, as you said in the outset and Katharine reiterated, the real estate sector again as well. Hong Kong is a big city, a massive built environment, and a huge investment is required in that built environment to decarbonise it.

IFR ASIA: And Sanaa, you’re based in London. Perhaps Europe is a little more advanced than Asia when it comes to Green finance, so where do you see the opportunities for us here?

Sanaa Mehra, Citigroup: Experts estimate that we need something like $50trn of investment in sustainable infrastructure by 2050 to reach a two-degree world. The majority of this investment needs to be done in emerging markets. So there are huge opportunities for Green Finance across Asia, particularly in the larger economies of China, India, and Indonesia, where we saw the first Asian sovereign Green bond.

In terms of industry, to reach a two-degree world by 2050 is not just about renewable energy, but about every industry. Every sector has a role to play in the transition to a sustainable way of operating, and what’s holding the market and certain industries back from green issuance at the moment is the lack of definitions for what counts as an eligible Green asset across different sectors of the economy. For example we need to see Green Taxonomies for shipping, for aviation, for the consumer business, etc.

And I think what the Green bond market has done so far is to put these issues at the front of mind for many of the key stakeholders, and there are numerous technical working groups looking at different industries & thinking about how Green Finance can apply across different industries. What’s the most sustainable way of operating in my industry? Industry experts are now working with the scientific community and once we have more definitions across different industries, which will help this market flourish with greater diversification of issuers, not just in Asia but globally.

So I think we’re headed in the right direction in terms of industry. In the longer term, the majority of issuance has to come from emerging market countries, given the tremendous infrastructure needs.

IFR ASIA: Now I’d like to turn to Whee Kong because you’re the first and so far only corporate issuer of Green bonds in Singapore. So how difficult and time-consuming was the process of bringing that deal to market?

Lim Whee Kong, City Developments: Well, I guess all you are quite aware CDL is the leading Green developer in Singapore. We started our Green journey in 1995, led by the late Mr Kwek Leng Joo, the deputy chairman.

In view of this Green DNA, I think when the Green bond was first being introduced by some banks, I think including HSBC here, we thought that, yes, clearly we could embrace this concept of Green bonds because we had started our Green journey much earlier. It made it much easier for us to understand what are the Green Bond Principles and what they entail.

In fact, we took quite a short period of time. I mean, to our surprise actually, just basically from the time we wanted to start seriously looking at the green bond to the time we came up with the Green Bond Principles to the time that we got a second opinion provider and plus KPMG as assurer for the pre- and post-issuance, that took almost in all only about two months. I think the bankers here could probably vouch, that’s quite a short period of time.

But we found difficulty on the investors’ side because at that time when we were looking at it in 2016, I think not many SRI investors were keen in Sing dollar denominated bonds. So clearly when we look at that situation then, even though MAS and SGX were promoting Green bonds, we were realistic that maybe we couldn’t get the SRI investors interested in our Green bonds.

So we had to settle with just the Sing dollar investors, and to make them understand. We actually used our CDL properties, the secured MTN programme to issue the Green bonds. So based on our funding needs at that time, we did a two-year bond at 1.98%.

So on the investors’ side, I remain not quite convinced that the SRI investors are keen on Sing dollar. I’ve got to emphasise this applies to a Sing dollar issue.

IFR ASIA: Anna-Marie, how much time and effort would you say goes into the debut Green issue, and does it get easier and less onerous after the first issue? And where are the bottle-necks?

Anna-Marie Slot, Ashurst: I think it is an extra wrinkle to an offering process. It probably shouldn’t actually add that much extra to the process.

A debut issuer always has to contend with getting used to the idea of doing a bond which is of itself a little bit more complicated than doing a bank loan because you do have to go through a diligence process. You have to put together an offering memorandum. I think in fact doing a Green bond at the same time for a debut issuer is just sort of another wrinkle on the way and shouldn’t really be seen as a detriment to them, because at that time they’re actually dealing with the whole process as an initial process.

You have to collect all the contracts. You know, it’s Asia. Everybody is chronically understaffed so you have to find the contracts. You have to find the signed contracts. All the lawyers are asking you crazy questions like, “Can we have the contracts in the originals and all the addendums on them?”

So all that description and all of that diligence when combined with the Green aspect, I don’t think the Green adds a lot. I think issuers get scared that it will, but it doesn’t really in my experience. I mean, we’ve done a number of debut issuers in in fact the sub-investment grade space who are also taking advantage of the Green, because they’re all renewables companies.

As long as you’ve got the right teams helping you put together the bond, it shouldn’t be a game stopper for any issuer because the banks know what they’re doing. They’ve got- you know, the second opinion people, like KPMG, does a really good job, as well as all the accounting firms. You have companies like Sustainalytics and other companies like that who are used to coming in and evaluating eligible projects.

Now actually I think it’s quite a nice period. When we sat on panels years ago, it was kind of a question of, what does Green mean? What do we mean by green? I think now with the Green Bond Principles, with Green Loan Principles, with the ASEAN announcements around the principles, which are all quite similar, it gives issuers more certainty about what we’re talking about when we say Green, and then you can point them to things and that actually makes the process a lot easier, having those out there.

Jonathan Drew, HSBC: Daniel, if I might just add, to sort of reinforce Anna-Marie’s point - Sanaa mentioned the Republic of Indonesia transaction, which was the first Green sovereign this year. In terms of complexity of putting or structuring a Green bond, in other words building a framework, looking at use of proceeds, and getting an external review, sovereigns are pretty much as complex as it can get because you’re dealing with all sorts of issues, including restrictions around procurement processes.

But the Republic of Indonesia, they effectively Greened their transaction in line with their standard transaction timetable. So from the RFP process, which was a standard RFP, they really just bolted the Green on.

We know it was a huge scramble to work with them to support them to develop that framework to assess the use of proceeds, particularly around areas such as pillars two and three, which gets into the sort of internal mechanics of government process on how they review and assess and how they track proceeds through their internal accounting system. But the message is it was all done within the same standard timeframe, so however complex it can be, it can be done. So it’s really no excuse for an issuer to say it’s too difficult or too time-consuming.

IFR ASIA: Katharine, are we getting closer to Green finance providing a cost saving for issuers? If we’re not, are there any other tangible or intangible benefits that make it worth doing?

Katharine Tapley, ANZ: There are data points that seem to show that there are cost-saving benefits, but we’re not fully there yet. My view, is that if you’re in this market merely for a price benefit, it’s probably the wrong market to be in. It’s the intangible benefits that tend to generate the value for issuers, and that will probably drive better pricing in the longer term.

So what I’m talking about here is the so-called halo effect of issuing Green or Sustainability bonds – for example aligning to an issuer’s strategy around corporate social responsibility. A second example is bringing an issuer’s business closer to the fixed income investor group and giving them the opportunity to engage in a way that has largely been the domain of equity investors

A third example is greater staff engagement – a corporate pride in accessing the responsible investment markets to fund responsible activity - we’ve seen that in our own issuances, and clients will repeatedly say this to us as well

These benefits have to be taken into account alongside pricing. And to be really clear - there is no pricing disadvantage. Fundamentally these bonds will price on an issuer’s curve, tending towards the lower end of indicative launch ranges on launch, sometimes underneath. They certainly will mark in the secondary curve almost immediately tighter as well.

I’m not sure that we may ever get to a point where Green bonds will issue more cheaply for borrowers. My personal view is that those who are not issuing Green bonds or who need to fund activity that’s not associated with transitioning to a low-carbon world will eventually encounter problems with accessing capital and they’ll be paying more for it.

IFR ASIA: And is that how you see it, Jonathan? That maybe the pricing benefit isn’t in the actual Green financing, but that polluting companies are going to have to pay more for their financing?

Jonathan Drew, HSBC: Yes, I think that’s absolutely right. I completely agree with Katharine’s comments. And I know if you compare an issue as Green versus the non-Green - let’s leave aside the on-shore China market for the moment - in the rest of the world, you can see very small differences in terms of better pricing for the Green versus the non-Green, but it’s small.

So because you’ve got this sort of huge, as it were, aspirational demand to buy Green paper, very much for the points you made at the beginning Daniel, because so much institutional money is day-by-day more and more embedding ESG criteria into their investment approach and portfolio management structures. So there’s a big demand for them, but it’s still fundamentally an assessment of credit risk. You will see investors coming in, perhaps with slightly bigger ticket sizes and they might be slightly more aggressive on the pricing.

So in primary, you can see transactions either closed slightly below perhaps the issuer’s target price range. Or, again as Katharine alluded to, you might see the issuer achieving their target price but then being able to upsize their transaction because of that quantum of demand.

But I think in the medium term, we will start to see a very significant shift in capital moving away from companies that haven’t got their sustainability act together, if I can put it that way, to companies who are addressing these issues, who are fronting up to this and who are leaders. Because these are in the very near term going to become real financial impacts, whether it’s stranded assets or whether it’s fines and penalties as you alluded to.

So I think probably at the moment we’re going to see some very significant shifts in the valuation of financial assets as people suddenly start or as people increasingly start to realise exactly what is going on and exactly what needs to happen. The Green bond is a great label for investors to say, well, you’ve got a pretty good opportunity of improved alpha and improved beta if you follow this label. It’s not the end of the story, but it’s a pretty good indicator I’d suggest.

IFR ASIA: And what would you say to that, Sanaa, in terms of benefits for issuers?

Sanaa Mehra, Citigroup: Well, I completely agree with Katharine and Jonathan. I’d reiterate there’s a very modest pricing advantage at the moment, and it’s purely driven by the demand and supply dynamics. In Europe, where the growth of investor demand for these products is tremendous we do see a pricing tension in primary order books, resulting in Green bonds pricing with a lower new issue concession or at the tighter range of pricing.

It’s not a question about, does a Green bond of the same issuer price tighter than non-Green? But it’s a question about future market access, and an issuer with a coherent sustainable strategy will achieve better market access over time and a better pricing over their entire funding curve than a company that is lagging in terms of its strategy for the transition to a low carbon economy.

If you look at the Green loan market, we’re already seeing a marginal pricing advantage. We’ve seen green loans that are linked to a company’s ESG score, where if their company’s ESG score goes up, the margin on the loan will decrease and vice versa. Banks are already recognising that ESG considerations are an increasingly important component of credit analysis.

There is a pricing advantage in the loan market, and I think it will soon translate into the bond market as credit rating companies such as Moody’s and S&P more explicitly take into account ESG risks in their published credit ratings.

IFR ASIA: Okay. Whee Kong, as the issuer on the panel, Were there cost benefits, and if there weren’t then was the process worth it for the reputational boost and the marketing benefits?

Lim Whee Kong, City Developments: I can only speak from CDL’s experience, from issuing the first green bond. As the bankers have all here elaborated, clearly your profile increases, especially your Green profile. You get invited to many, many of these forums to speak of your Green journey, the launch of the Green bond journey, etc.

From day one already, all the banks we spoke with really emphasised the point that you’re not going to get any pricing advantage if you do the Green bond, so that we register.

Clearly, there’s a lot of preparatory work. You have to collect and verify your ESG data. I speak from the first Green bond, about Republic Plaza. You had to show proof of the savings, in dollar terms, in water, electricity, etc. All this has to be verified by KPMG, in this case, the assurer.

We have started collecting all this data many, many years ago, Republic Plaza was awarded the BCA Platinum Green Mark in 2012. We have been collecting data to show proof that for every enhancement, every improvement that we make to the buildings, there are in turn savings in monetary terms. So I think that helped actually in getting our Green bonds launched pretty quickly, as I previously mentioned.

I’m looking at the moment at Green loans, but again I’m comparing the green loan versus the conventional loan, and the pricing again. There isn’t that pricing advantage. In fact, I may end up to pay more actually because again if you want to be the first to do certain things in the sustainability field, maybe you may have to pay a bit of so-called school fees.

So I certainly hope that day will come where we’re able to command some savings when we embark on a Green-linked loan or bond.

 

To see the digital version of this roundtable, please click here

To purchase printed copies or a PDF of this report, please email gloria.balbastro@tr.com

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