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Inside magazine issue 12 | Part 03 - From a corporate perspective So far, the supply of green bonds is not matching the massive demand, and green bonds tend to be largely oversubscribed. Nevertheless, Bank of America Merrill Lynch has pointed to the fact that the green bonds listed in its index have proven to have a lower credit risk rating and that returns on these bonds show less volatility as compared to their non-green counterparts. 24 The OECD 25 lists a number of possible investor incentives. In addition to the fact that green bond investments fulfil ESG (Economic and Social Governance) requirements and mandates, the “green” label holds bond issuers to more stringent transparency standards in relation to their use-of-proceeds reporting compared to regular vanilla bonds, and this allows investors to better assess their risk. Another incentive the OECD cites is portfolio diversification: particularly for investors whose portfolio includes a strong focus on carbon-intensive investments, green bonds offer an opportunity to hedge against risk. Ulrik Ross, Global Head of Public Sector and Sustainable Finance at HSBC, suggests we think of the green investor class as comprising different sub-classes characterized by different “shades of green.” First, there are the “dark green” investors, which tend to be churches, charity foundations, private banks or asset managers serving clients who are strongly committed to socially responsible investing. Ross notes that this group has always placed sustainability at the heart of its investment strategy, but that doing so has been facilitated by the green bond market. A second group of investors have delved into the sustainable investment space more recently, and will use green bonds to complement their existing investments, as a strategy for diversifying their portfolios in ways that meet their stakeholders’ wishes regarding investing in environmentally responsible causes. Finally, we can find what Ross refers to as an “opportunistic investor group”: a group that will invest based on the credit history of the institution or company, regardless of its green credentials. 26 Whichever grade of green they occupy, an interesting trend for a growing number of investors to think differently about their investments—that is, to value sustainability and long-term performance as well as, and perhaps more than, short-term financial gains—has been observed. 27 Moreover, Deloitte’s 2016 survey of millennials 28 shows that this generation of future leaders and investors care about companies’ triple bottom line and defines success in terms of both profit and purpose. Whatever is driving it, investor appetite is most definitely growing. Indeed, so far, the supply of green bonds is not matching the massive demand, and green bonds tend to be largely oversubscribed. What’s more, investor appetite is set to expand from institutional investors and pension funds to the whole spectrum of investors including retail, especially if public authorities create appropriate incentives for the asset class. Although the sector is currently not offering higher returns than non-green bonds of the same grade (green bonds currently price flat on issuance with the issuer’s other debt), they are expected to yield higher returns in a long-term cycle. Also, as the spectrum of investors grows, the market will become more liquid, improving performance on the secondary market (for the time being green bonds trade at a premium on the secondary market up to 20 basis points tighter than conventional bonds, due to high investor demand on supply). As the market goes mainstream, we expect that financial innovation will bring about product diversification so as to potentially match all risk profiles and investment policies, from green ABS products secured 104
Inside magazine issue 12 | Part 03 - From a corporate perspective by long-lived assets, to green covered bonds and green inflation-linked products, to name but a few. These innovations will generate an appetite for green bonds across a wider range of investors with diverse profiles, needs and incentives. Policy propellants When it comes to shaping, directing and ultimately activating issuer and investor incentives, the right policy landscape is key. In this respect, the COP21 Paris agreement reached in December 2015 was broadly (though by no means universally) seen as marking an historic shift. 29 Its ambitious targets will see pressure mount to implement enabling policies seeking to unlock private sector finance for low-carbon projects. This could be a boon for the green bond market and comes on the back of a policy environment which has, in the last few years, become increasingly favorable to such innovative financial instruments. The EU, for example, has been pushing to move from a grants-based approach—where projects are directly funded by the EU itself without relying on, or generating, additional investment from elsewhere—to an approach where, in collaboration with bilateral and multilateral development banks and local public and private sector players, grants are applied in ways that attract and activate private sector investment in the green space to amplify results. Between the years 2014 and 2020, the EU has committed to investing €2 billion of grants that are expected to generate €50 billion in investments. The EU has also committed to generating a supply of private finance for funding renewable energy projects via an electrification financing initiative called ElectriFI, for which it will invest €270 million. 30 Emerging markets are not wasting any time either. As the Global Climate Initiative notes, last year saw the introduction of a range of policy commitments including inaugural bonds and a green bond framework in China (Goldwind and Agricultural Bank of China) and India (including the likes of Yes Bank, CLP, Export-Import Bank of India, and IDBI). 31 105
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Inside magazine issue 12 | Contents
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Inside magazine issue 12 | Foreword
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Page 54 and 55: Inside magazine issue 12 | Part 02
Page 144 and 145: Inside magazine issue 12 | Contacts
Page 146: Our expert authors, who are brimmin
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