After pioneering issuers have led the way in creating a green bond market, the full array of debt instruments needs to be tapped to fund the fight against climate change, says the Climate Bonds Initiative’s Manuel Adamini. The recent growth of sovereign, structured and even synthetic deals suggests this is on the verge of happening.
There’s a huge annual global climate finance gap of $2.5 trillion that needs to be covered, hence we essentially need to divert every single dollar that we possibly can to try to prevent catastrophic climate change through investment in climate-relevant assets.
The whole green bonds development is evidently a very encouraging one, because in the past when one has thought about environmental or even ESG investments in the wider sense — such as when I headed one of those departments at an asset manager in my earlier life — that was very much equities-driven. So in a sense the whole green bonds development is particularly positive because it talks about the much, much bigger and much more liquid debt market.
Within that, clearly one begins developing a green debt market by starting with the easy steps first, the most liquid and most sought-after pockets of issuance — which happens to be euro, dollar, sterling investment grade benchmark-sized plain vanilla issuance from blue chip brands. We have seen that over the last couple of years, and the growth we have witnessed has shown that we really are building a market here, and a market that is here to stay.
But what we hope to see is debt issuance increasingly moving away from simply senior unsecured issuance, to essentially covering any debt instrument for climate finance. We need to deploy an awful lot of assets very fast. That will involve a variety of instruments to finance a variety of assets and projects from a variety of technologies put down in different jurisdictions. To finance this, we need to mobilise all sorts of investors.
Catering to their diverse needs and matching that with the asset diversity asks for complementing plain vanilla with other structures.
Indeed we may now be on the verge of that development kicking off. There are some particularly encouraging trends emerging, both on the issuer side and on the investor side.
On the issuer side, sovereign bonds are a big development we have seen since December 2016, and covered bonds another. Berlin Hyp has done an awful lot for the market’s direction with their Green Pfandbrief. It was then quiet for a while, but now finally we have seen Deutsche Hypo. Though DKB and recently LBBW issued senior unsecured green, the arrival of more German financial institutions in the green space may point to more to come.
The same with Schuldschein. We first saw a lot of talk about Nordex’s (Climate Bonds Certified) and later Friesland Campina’s Schuldschein. Then it was silent, but finally we have green Schuldschein from Meggle and Mann+Hummel. So potentially things are getting moving there, which would be particularly exciting in the German context. It may open up opportunities to unlock the huge German SME world to green finance. It would be good if the diversity of the German economy were better reflected in the green bonds space — and for that, we need non-financial corporates, and particularly SMEs, to come to the fore.
And then we have seen some very bespoke deals, like Crédit Agricole’s synthetic risk transfer of EUR3bn of infrastructure loans to free up EUR2bn of regulatory capital, which is then pledged to finance green assets only on a forward basis. That plays into the same idea as many green bonds: first pooling assets on a balance sheet and then freeing up that capital so it can move on to the next green project. And an innovative, but much, much smaller deal at EUR30m, was a synthetic risk transfer from a pool of lease payments on 3,000 German residential solar PV installations, structured as a private placement by MEP Werke/Strasser Capital and sold to Dutch Delta Lloyd as a sole buyer.
Those are all pointing into the same direction, of green bonds moving into a wider green debt range of instruments and products.
On the investor side, we are receiving an increasing number of more focused enquiries corresponding with developments on the issuer side. In speaking to investors two or three years ago, I would mention the potential for reaching into other pockets of their assets under management by going beyond the plain vanilla, and they would understand the arguments but for one reason or another they couldn’t be accessed for green — if we look at the traditional green bond investors, who are largely pension funds and insurance backed schemes, they may be somewhat conservative or risk-averse. Now two years-plus post Paris, those discussions are changing and I see many an investor making pretty detailed enquiries to us about access to, for example, emerging market debt with or without a currency hedge, high yield paper from developed markets, green Schuldschein, very bespoke private placements, and so forth. The level of diversity as well as sophistication of inquiries is clearly on the up.
Meanwhile we see the same investment managers that have already been buying paper now having some asset owners giving them clear instructions to buy green, or the same asset owners allowing for wider mandates to invest in green. Some of the first-mover investors — those that set up specific green bond funds, mandates or green bond exposure targets and have been active in the space for a while — finally start saying, hey, we want more than plain vanilla paper.
That’s all very encouraging.
Manuel Adamini was speaking to Neil Day ahead of the CBI18 conference. Main photo: Manuel speaking in June 2017 at a Frankfurt event to mark the release of a Climate Bonds Initiative report
