Sustainable covered bond pioneer MünchenerHyp is working on a distinct green bond framework to accompany its prior social framework, in a move driven by investor preferences. Proponents have meanwhile denied a claim green bonds are a “lose-lose”, pointing to new issuer-investor benefits.
Münchener Hypothekenbank issued the first sustainable covered bond, a EUR300m ESG (environmental, social and governance) Pfandbrief, in September 2014. The German bank is yet to issue a second, while the sustainable covered bond market has since grown, with repeat issuance of both green and social covered bonds and more issuers working on such programmes.
Speaking on a panel at the Covered Bond Investor Conference organised by the ICMA Covered Bond Investor Council and The Covered Bond Report in Frankfurt on 27 June, Claudia Bärdges-Koch, head of debt investor relations and client acquisition at Münchener Hypothekenbank, described how the bank has developed its approach.
“We are on our way to having a green framework in addition to the social one we already have on the other side,” she said. “This is because in feedback from investors we hear that many have green mandates and wouldn’t buy just social or a mixture of social and green.”
Bärdges-Koch said it is because of such investor preferences that MünchenerHyp has decided to have distinct programmes even though it has some loans on its balance sheet that would be eligible for both.
The introduction of new mortgage loans offered by MünchenerHyp has also simplified the process of identifying assets eligible for sustainable issues, she said, citing the difficulties of tagging assets for the bank’s EUR300m ESG debut, which was issued to finance cooperative housing loans that it identified in its existing cover pool.
The bank’s sustainable mortgage loan programme (MünchenerHyp-Nachhaltigkeitsdarlehen) offers loans with preferential conditions to finance residential properties that have been built or renovated in accordance with ecological principles.
“With our first we used a broad approach, but the problem we realised was in flagging assets in the cover pool,” said Bärdges-Koch. “We have completely changed the way we do that after the first issue, designing loans for our retail customers and getting them certified by oekom to ensure that they would be eligible as collateral for green Pfandbriefe or sustainable Pfandbriefe.
“Flagging of assets is no longer needed because we are using these products. That is one problem solved, although only for new assets and not existing ones.”
She added that the change in approach makes it easier for the issuer to know when it is coming close to having enough cover pool assets to issue a green covered bond benchmark.
Lose-lose or win-win?
Jennifer Johnson, head of economic and legal affairs at the European Mortgage Federation-European Covered Bond Council (EMF-ECBC) and moderator of the panel, asked participants for their thoughts on comments made recently by a chief investment officer of a leading pension fund that described green bonds as a lose-lose product, for issuers due to certification costs, and for investors due to the bonds’ apparent lower liquidity.
The panellists disputed that green bonds are less liquid than conventional bonds, pointing to the additional demand such deals attract and the diversification of investors they can offer. Bärdges-Koch acknowledged the costs and challenges that issuers face in setting up green or social bond programmes, but said the process is made much simpler once an issuer has an established framework which it can easily update.
“When I read those comments I thought that as long as it is a win-win situation for the climate, it’s fine,” she added.
Miguel García de Eulate, head of treasury and capital markets at Spain’s Caja Rural de Navarra, argued green bonds are a win-win for issuers and investors, too.
“I cannot see the point in stating this product has less liquidity when all the issuers sat around this table have experience of getting a more diversified investor base – that doesn’t match very well,” he said. “Of course we have to acknowledge the internal costs, but for me ESG bonds with a use of proceeds is a way of explaining what you are doing to investors, in your strategy and on the asset side of your balance sheet, and I think this is very, very important and valuable.
“It’s costly in one sense, but it pays off.”
Caja Rural de Navarra has printed two sustainable cédulas (Spanish covered bonds), the last a EUR500m issue in April that attracted over EUR1.8bn of demand from over 100 accounts.
On the buyside, Caroline Horbrügger, senior manager, investment strategies, sustainability, at German agency KfW, said the main benefits of green bonds, besides that they are an easy to understand and transparent product, are that they open a dialogue among financial market participants.
“The dialogue on green issues and the climate and the need to change the economy to a low carbon economy just wasn’t there a few months ago, it wasn’t a topic in meetings between investors and issuers,” she added.
Horbrügger said that the green bond investment process includes giving feedback on issuers’ eligibility criteria and whether frameworks need to be stricter, even when they will ultimately not participate in the deal.
Eivind Hegelstad, CFO and head of investor relations at Norway’s SpareBank 1 Boligkreditt, which issued its first green covered bond in January, played down costs, characterising them as “not significant” and one-off.
“The associated costs are probably much less than a fraction of what we’re paying one of the banks that bring the bond to the market,” he said.
He also noted the potential for benefits in terms of lower spreads for green issuances in the future.
“We’re not there yet as it’s a young market and it’s still growing,” he said, “but that is ultimately where we would like to be at some point in the future.”
Main photo (left to right): García de Eulate, Horbrügger, Johnson, Bärdges-Koch, Hegelstad
