IFR ASIA: So does that mean anybody can issue a green bond?
KT: It’s not quite that simple. Under the Green Bond Principles, you do need a green or definable asset base for a start, so that can present challenges. For us – as an arranger and certainly also as an issuer – it’s really important there is an agenda and a strategy around sustainability.
IFR ASIA: Nishimura san, I understand green bonds are a growing focus for you?
KN: Actually this is really my favourite subject. To see where we are going, we need to really understand the context of green bonds in developing and more developed countries.
Green bonds started in the developed markets in Europe and North America and have grown quite significantly, and their growth was market-driven because there are dedicated investors for green or socially responsible bonds. However, if you look at the development of green bonds in emerging Asia, the situation is different.
China now has become the second-largest green bond market globally within a few years but it was not created by a market-driven or bottom-up approach. Basically domestic bond investors don’t really differentiate between green bonds or normal conventional bonds. It was policy-driven, because regulators introduced guidelines and encouraged issuers to sell green bonds.
The challenge for developing countries is if you want to really grow the green bond market to a sustainable level, you need to create a domestic bond investor base which is really dedicated to investing in green bonds.
That means first of all it’s very important to raise awareness of why green bonds are important, and the impact of ESG on investment decisions. There may be some regulatory ways to incentivise investors to invest in the green bond. Otherwise it’s going to continue to be policy-driven, so it may not be really sustainable in the long term.
IFR ASIA: If there’s no dedicated investor base, what’s the advantage to an issuer from making your financing green?
KT: Typically with these transactions we tend to see more investors coming in and in much greater volume. So you are tapping into brand new money, as well as new funds within existing investors you didn’t previously have access to. That diversity and granularity has to be an advantage to a borrower and that’s a trend we’re seeing right across our region.
The other piece that often gets underestimated when a borrower goes into a transaction is the strengthening of the relationship with their investor base.
The key difference with the green bond market is a well-structured green or sustainability bond comes with a whole lot of transparency and reporting. That’s an advantage both to the issuer and the investor, because they get this dialogue that wasn’t otherwise there.
IFR ASIA: If I’m an investor, how do I know my money is going towards sustainable development, and not a company’s next coal plant?
KT: The principles around green and sustainability bonds are very clear in making a very strong recommendation to provide regular reporting and transparency on how the money has been used.
Investors are not just sitting back and getting themselves into green bonds and then not following up on the reporting. They will want to see reporting at least annually, sometimes twice a year, not on just how proceeds have been used but also what the impact of that money has been.
The sustainable development goals are increasingly becoming a framework, if you like, through which investors are actually measuring that impact.
IFR ASIA: What more can be done to stimulate sustainable financing?
KT: Both Singapore and Hong Kong regulators have now put in place programs whereby they will help pay the costs for issuers wanting to sell bonds and list them on those stock exchanges. That’s very helpful to stimulate interest at least, even though it’s a little bit of a myth these transactions come with extra costs.
On the investor side, as I said before, I’m not sure they need a whole lot of incentivisation to come into these transactions. There is just not enough supply in the market.
As I said earlier, appetite for sustainable or green investments is increasing, and fund managers are under pressure themselves to demonstrate their commitment there. I only see that going one way.
IFR ASIA: Clive, is that something you’ve seen as well, that there’s basically a lot of money chasing assets at the moment?
CLIVE KERNER: This is something everyone talks about and it’s absolutely the case in Asia. There’s still too much liquidity chasing too few projects.
I think where it all really starts is host governments need to do more to work out which projects are commercially viable and therefore can be offered to the private sector, and which are not and therefore should stay with the public sector.
People talk about $US6 trillion of demand for infrastructure in Asia. Clearly governments can’t fund all of that, so there’s a clear role for the private sector. That’s a really important initiative.
IFR Asia: What happens when the market changes or interest rates go up, how will green bonds work then?
KT: We haven’t really seen yet a lot of stress where these bonds have been tested. Our view is– and we have seen some evidence already – they do tend to perform better than existing vanilla bonds in a tough market.
I think that speaks to the quality and the structure of the transactions, as well as the underlying nature of what the proceeds have been used for. I think it speaks to what investors want to be holding as well.
This story consists of collected excerpts from a Q&A hosted by IFR Asia.