Tuesday, 18 June 2019

Sustainable bonds draw a crowd

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Socially responsible investment is catching on in Asia’s capital markets, opening new opportunities for global and local companies to broaden their funding sources.

Green bonds have caught on fast in China and India, where public and private sector financiers have responded to government initiatives to tackle pollution and climate change. As well as banks refinancing their climate-aligned assets – the main source of Green bonds globally – corporate issuers in China have sold Green bonds for environmentally friendly cars, buildings, renewable energy, water treatment and other assets.

The Green Bond Principles are firmly established as a guide to best practice, under the supervision of the International Capital Market Association. The ADB is a regular issuer, and the New Development Bank made its first bond issue, in renminbi, a Green Panda bond. Some Asian underwriters have begun to sign up to the standards, although the dominant investor base remains European.

The development of “Social bonds” has also gathered pace recently as more investors seek a label that they are putting their money to good use.

IFC in March issued a US$500m benchmark off a new social bond programme, replacing earlier thematic funding programmes targeted at supporting women and low-income communities.

Investors included the California State Teachers’ Retirement System, Calvert Research and Management, the Praxis Impact Bond Fund and Australian insurer QBE Group. Of the 40 buyers, 20% were first-time investors in IFC bonds.

“It is an excellent example of the blending of a very high-quality issuer, an appropriate return to the investor, and the overlay of additional social objectives being pursued,” said Gary Brader, group chief investment officer at QBE, which has committed to invest a portion of its customers’ premiums towards social or environmental benefits.

Sustainability In Japan

Japanese investors are becoming especially keen supporters.

Starbucks chose to structure its first international bond offering, also in March, as a Sustainability bond. The US coffee giant priced ¥85bn (US$736m) of seven-year global notes at 20bp over yen mid-swaps, again choosing Tokyo for its initial foray outside North America, just as it had done when it opened its first overseas coffee shop in the Ginza district of the Japanese capital in 1996.

The bonds were sold exclusively in Japan, with about 90% going to Tokyo-based institutions, including life insurers.

Starbucks says the bonds “will focus on enhancing its sustainability programmes around coffee supply chain management”. Some of the proceeds, for instance, will be used to purchase coffee from sustainable plantations.

Social bonds have long been popular with Japanese investors, but calls for a formal framework are growing. The IFC and others are working on adapting the Green Bond Principles to apply to Social bonds, although bankers acknowledge that it is harder to identify specific uses of proceeds for social investments. The most recent guidelines define social projects simply as “investments that directly aim to help address or mitigate a specific social issue and/or seek to achieve positive social outcomes”.

In Starbucks’ case, opinions from Sustainalytics, which helped to formulate the framework in alignment with the Green Bond Principles and the Social Bond Guidance 2016, were also added in the documents.

Japanese retail investors have been buying into social themes since at least 2008, when the International Finance Facility for Immunisation began selling Uridashi bonds in the country.

Daiwa Securities estimates that ¥1.2trn of SRI bonds have been sold in Japan since then.

“Many of the SRI bonds issued in Japan so far are for retail investors,” said Kenichi Kanda, managing director of international debt origination at Daiwa.

Daiwa arranged a February 2016 issue for Latin American development bank CAF that also targeted social investors.

“The first public yen SRI deal aiming at institutional investors was CAF’s water bonds,” said Kenichiro Kurataki, Daiwa’s debt syndication assistant manager. “The Samurai format and SRI is a good mix.”

India’s ICICI Bank added a social angle to its Pro-bond debut in December 2016, raising funds for social projects to support women. French power utility Electricite de France issued the first Green bonds in the Samurai market earlier this year, adding a Green label to two tranches of a ¥137bn (US$1.2bn) offering. The January issue also came at unusually long tenors, with 12 and 15 years on the Green portion.

“(The EdF deal) was an innovative deal capturing the trend in the market which has never been even thought of before”, said Noriaki Nomura, debt capital market managing director at Mitsubishi UFJ Morgan Stanley. “We have been making efforts to broaden the scope, both region-wise and sector-wise, and as a result we have supplied not only high-quality global yen bonds but also ESG bonds”.

Akihiro Igarashi, syndicate department executive director at Nomura, says Japanese investors are not limited to the yen market alone.

“Issuers of such bonds tend to be quasi-governments, ADB in Asia for example,” he said. “But pricing does not work in yen, so they actually issue in US dollar, Australian dollar and New Zealand dollar, and do attract Japanese insurers”.

There are doubts, however, whether the format brings in additional resources. Main investors of ESG bonds are still life insurers.

“Such ESG flavour will indeed help investors look at a trade, but it is mainly life insurers,” said Kaneyoshi Muramatsu, head of international yen syndicate at Mizuho Securities.

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