Roundtable: Going green with bonds

Australian issuers are at the front of the pack when it comes to green bonds. They are only just getting started.

Roundtable: Going green with bonds
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Australian funding officials are increasingly trying to get a better understanding of the green bond market, weighing up relative pricing against conventional debt issuance and figuring out how much investors really care about the product. FinanceAsia and Westpac Institutional Bank sat down with some of the leading experts in the market to find out — and to get a sense of just how big this market could become.


Pablo Berrutti, head of responsible investment Asia-Pacific, CFSGAM

Mark Goddard, head of DCM and syndicate, Westpac Institutional Bank   

Bill Hartnett, head of sustainability, Local Government Super

Richard Lovell, executive director, Clean Energy Finance Corporation

Maria Milis, director, institutional credit sales, Westpac Institutional Bank

James Pearson, manager, responsible investments, QBE   

Richard Salmon, associate director, group treasury, Westpac

Ian Woods, head of ESG investment research, AMP Capital            


Cherie Marriott, FinanceAsia

Since the first Australian green bond was issued by the World Bank in April 2014, deal volume has surpassed A$2 billion. Have you been pleased with the development of the market?

Bill Hartnett (left): At Local Government Super we bought our first green bonds four years ago and now we have total holdings of about A$90 million. Overall we have been happy with the way the market has evolved, particularly in relation to the development of a framework of standards to support the market. All the deals so far have been institutional grade assets with the right guarantees, ratings, coupons and yields to attract investors. Investing in low carbon assets isn’t an easy process. There is greater scrutiny of the assets by investment boards and multiple additional hurdles to jump, so you want to ensure the decision-making process is well thought-out.

Richard Lovell: In many respects, the green bond market has developed in the same way and encountered the same issues as the Australian bond market as a whole. The vanilla bond market is somewhat constrained to investment-grade issuers and green bonds have clustered in this area too, for the moment.

Pablo Berrutti (right): At First State Investments we have been pleased with the primary market deals to date. They have been well structured and well priced. There is still a problem with liquidity in the secondary market. Many asset owners are sitting on their bonds and not trading them, so we are not receiving the liquidity premium in the secondary market that we would expect. This is holding back some investors.

There was a rush of deals at the end of 2104 and then issuance slowed in 2015. Any explanation for this lull?

Hartnett: We were a bit concerned about the slowdown because we wanted to have more deals to choose from and see a curve develop. We realise the market can only grow in line with the availably of green assets to finance, but we want issuers to be maintain their focus on green bonds and help the market to grow exponentially. 2016 already looks better with deals for Flexigroup, Westpac and TCV all coming in the first half.

Mark Goddard (left): The green bond market doesn’t act in isolation from the broader Australian bond market and during 2015 borrowers were holding back from issuing all types of instruments. There was heightened execution risk and investors were going to the deepest pools of liquidity, which are often offshore. That said, green bond volumes have grown from under A$1 billion at the end of 2014 to over A$2 billion now, so the pace has picked up.

All deals thus far have involved refinancing existing assets rather than funding new green investments, is this an issue for investors?

Lovell: We always consider whether any deal is simply a refinancing or whether there is new activity being facilitated by the funding raised. It is an important issue for us, but we also understand that in order to develop an ecosystem for this asset class we have to start somewhere. It makes sense for the first issuers to be seasoned borrowers such as financial institutions and semi-government issuers. Ultimately, however, we would like to see a fully evolved market where these bonds are used to fund assets right across the risk spectrum. There is a dire need for funding for all types of assets that meet the green bond criteria.

Richard Salmon (right): When the treasury team at Westpac sat down to put together the bank’s first green bond we had plenty of discussions about whether investors would be happy buying a refinanced asset and whether we could actually classify it as a green bond since there is no recourse to the underlying assets – the risk is all with Westpac as a group. But the overwhelming response we got from speaking to investors was that they wanted investment-grade names like Westpac to issue and support the evolution of the market. This was a first step for us. Hopefully down the track the market can also look at issuing securitised assets as green bonds as well.

Goddard: It was not surprising that the first deal to come to market was from a supranational with a deal from the World Bank. It provided investors with a local pricing point for an issuer that already had green bonds in other currencies. Following that, the next logical issuers were the Australian domestic banks whose curves are the reference for the broader credit market in the domestic Australian dollar market. The next wave – the semi-government issuers – has now started and we’d expect to see corporates look at it after that.

Maria Milis (left): My guess is the green bond market will develop much like the corporate bond market in Australia. It will start with the big benchmark investment-grade issuers and then move towards smaller deals, possibly private placements or structured deals that are sub-investment grade.

How important is it for issuers to seek third-party verification of their bonds and Climate Bond certification?

Lovell: We have the luxury of being a specialist in the field with strong internal due diligence capabilities, so we have flexibility to invest in bonds that are non-certified. However, most institutional investors want the assets they are buying to be certified and monitored on a semi-annual or annual basis. They also want them included in the green bond index.

Salmon: Globally the sub-set of fully certified green bonds is small. When we issued in the market we asked investors if they required certification and while many of them said not necessarily, the feedback was that it would make the decision process easier. As it was our inaugural issue, we went ahead with the process of seeking a Climate Bond label to support the bonds’ appeal to as broad an investment base as possible. We report on this certification semi-annually in line with the group’s clean tech reporting schedule.

James Pearson (right): We ideally want certification and verification on the deals we invest in because of the reputational risk that comes with saying we are a green investor we need to make sure the assets we buy are truly green. Often we use the certification to support our own internal assessment of a bond’s credentials. We also want to see regular monitoring and measuring of green credentials because what might be classified as a best-in-class green bond today may not be so in three years’ time.

Hartnett: We like our bond holdings to be certified but we don’t insist upon it because we want to see the market develop. We will consider any bond that can prove that at least it isn’t high carbon. However, we are pleased a certification process has been established and is improving. It may one day lead to bond issuers being required to make disclosures around the sustainability attributes of their non-green bonds.

Ian Woods (left): I agree with this. My hunch is that while issuers may not receive a premium for issuing green bonds there may come a time when non-green bonds are discounted because of the uncertain climate change risks they may carry.

Are deals being targeted at dedicated green bond investors only and, if so, what’s the idea behind such a directed distribution strategy?

Goddard: When we managed the transaction for the World Bank the focus was on allocating to investors with specific green bond mandates. The deal was limited in size to A$300 million and the World Bank wanted to build the foundations of a new market. Since then attitudes have been changing and it’s now broadly accepted that a green bond is defined by the assets, not the investors who buy it.

Salmon: When Westpac issued its bond it was our objective to appeal to both dedicated green bond investors as well as general fixed-income investors. In terms of allocation, we tried to place more with dedicated green bond investors because our aim was to expand the size of the whole market.

When will the market be ready to embrace green bonds issued to finance new no-carbon or low-carbon investments?

Hartnett: It’s hard to put a timeframe around this. When green bonds are used to finance new investments a whole new set of credit risks come into play. A lot needs to be done for the market to welcome these bonds and we’re not there yet.

Berrutti: Traditionally the use of bonds to fund new projects has been limited. Fixed-income investors haven’t yet become comfortable with the underlying risks in greenfield assets, such as renewable energy projects, so the question is whether green bonds can be structured to form part of these financing packages. We still don’t know whether investors will be ready to support non-investment grade credits or bonds that don’t have full recourse back to the borrower but are tied to the assets themselves.

Pearson: At QBE our internally managed credit book is focused specifically on investment-grade credits. We have some high-yield exposure but we use external managers for this. We are likely to be restricted to investing in investment-grade issuers that have a borrowing track record. This means we are unlikely to invest in a green bond from a sub-investment grade issuer where the risks are harder to quantify.

Hartnett: Our situation is different. We have the capacity to invest in high-yield, and we do so. We look at any opportunity that comes along but at the moment the closest thing we’ve been able to find in the lower-grade space is a social impact bond, and these look more like loans than bonds. Eventually we hope to see corporate issuers in the green bond space, with a credit rating and backed by a corporate guarantee.

Lovell (right): We receive enquiries from non-investment grade investors looking for green opportunities. They don’t tend to have the same risk constraints as the larger superannuation funds. But the demand for these investments vastly outstrips supply and to get lower grade issuers to come to market takes a lot of intermediation. One of the CEFC’s policy objectives is to develop programmes in several sectors – some of which may not exactly meet the climate bond standards – and then bring in other investors to partner in these deals. We have our own high standards regarding eligibility for clean energy projects and the types of activities we will finance. And of course, we are also always careful not to back a deal that has the potential to negatively impact perceptions of “green” branded bonds. Market faith in these areas is important and if it’s damaged it will take a long time to recover.

Salmon: I am not sure whether greenfield assets will ever have the type of risk profile to make the bond prices attractive to investors. Unlike some other offshore jurisdictions, the Aussie bond market has a very small high-yield component. I see green bonds as an opportunity to allocate more of bank balance sheets to existing green projects. Being able to fund existing assets like Westpac did with its bond in May is a good first step, although the credit risk infrastructure of a bank means it will probably be best placed to assess the credit risk of a greenfield asset.

Continued on page 2

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