The US is going through a massive rate of redemptions with its QE programme. So judging the US’s ability to end QE and the will to do so must be questioned.
With growing populism, trade and the global nature of value chains also need to be questioned. The global nature of trade has been questioned on a number of occasions. Countries are becoming more inward looking.
Currency – particularly the Chinese currency – is a big risk. In fact it’s the biggest swing factor we see. Last on the list is fiscal expansion – which is quite positive for credit spreads among other things.
With growing populism we are seeing the agenda of fiscal expansion quite prominently on the table for a lot of countries, including the UK and the US. This should be positive for credit spreads.
Goebel: What is also quite positive is Europe has sent strong signals pushing back on populist movements. We have seen this particularly in France but it may also have a positive impact on Italy.
Italy would probably draw some lessons on structural reform if Emmanuel Macron is able to put them to work. At least he has a parliamentary majority for this.
Like others, we expect the general election in Germany to be something of a non-event. The problem is we’ve said things like this time and again and we have been surprised.
However, while the likelihood of unexpected events happening sometimes gets grossly underestimated, the impact gets grossly overestimated. It’s a bit of a zero-sum game.
Things happen that nobody thought but then it doesn’t really seem to matter. I’m not saying this is a reason for complacency, but overall sentiment is way more positive than it was two years ago.
Swiss: Do fixed-income capital markets have a real opportunity to help the development of the United Nation’s sustainable development goals (SDGs)?
Struc: Green bonds are a very interesting concept. Coming from a high-yield background I found it staggering when I moved into investment-grade and financials to find no mention of sources and uses of proceeds – the ‘general corporate purposes’ argument as a reason for raising money.
Investment-grade issuers tend to benefit from strong ratings and therefore little disclosure.
For us the real value of green bonds – even before we get into the idea of climate and impact – is the fact that it’s a pari passu investment-grade bond from a large issuer with additional disclosure that otherwise would not be available.
As a result, we don’t pigeonhole green issuance into green-bond funds with limited participation. We buy green bonds across all accounts at PIMCO if we think they are cheap.
Where all this leads us, and what we are most excited about in the ESG space, is what it unlocks. If the market readily accepts investment-grade issuers with additional disclosure, why not repurpose the additional disclosure for a variety of projects – whether or not they are strictly green?
When it comes to SDGs one also needs to be aware of regional demands. We find green bonds in Australia are written under the Climate Bond Initiative (CBI), which is far more stringent as a guideline than a green-bond principle.
KPIs for SDGs in the Australian market would probably have to meet a lot higher thresholds with respect to immediately demonstrable impact than they would have to in Europe or the US.
Dore: The World Bank has been building on the interest from investors in impact or ESG investing and sustainable and responsible capital markets, and providing products that highlight all sectors that International Bank for Reconstruction and Development projects support.
All World Bank bonds help support its sustainable-development activities and all projects the World Bank finances in its member countries are designed to contribute to the bank’s twin goals – to eradicate extreme poverty and boost shared prosperity.
Since 2008, World Bank has also issued more than $US10 billion in green bonds in 130 bonds in 18 currencies. The bank’s green bonds were developed in response to demand for products which support climate-change mitigation and adaptation projects financed by World Bank in client countries.
Nunes: When investors are looking at green bonds, it would be good to know whether it a disclosure issue or a measure to drive more sustainable investments.
We know we have sustainable projects, so is all we need to do to declare the funds will be used for the specified ‘green’ purposes and have these certified to meet green-bond requirements?
We would have been funding sustainable projects anyway, so the green bond is not driving any sustainability investment.
There is no price benefit – it’s flat to our curve. So there is no incentive for an issuer except disclosing and partitioning where we apply the funds.
Struc: This is a very good question. I think the first stage of sustainable development – and we are in it now – should be about fungibility. It’s about bringing to light the work the SSAs and others do in the realm of sustainable finance.
Once it is fungible and once you have a framework, it’s completely leverageable in a way that is not comparable to a niche market. Education is key. In the realm of SDGs, one goal that unlocks a lot of initiatives is education.
Nunes: I think it’s great that you are getting more investors, but are we doing anything different at this stage? Possibly not – and to me, that’s what green bonds should be driving. A greater investment in sustainability.
Struc: These are interesting comments – and it shows that additivity rather than fungibility is what people like to focus on.
Goebel: For me this is an interesting conversation. Everyone here seems to agree investors buying SSA green bonds don’t in any way own the environmental benefit that is created by these investments.
There is no direct link of any kind, and at the same time borrowers are taking more measures and are structuring their language more and more to suggest exactly this.