bluenotes debate: uncertainty & going green

What does a coherent, responsible investment strategy look like in a time of incoherency? At the 10th annual supranational, sovereign and agency (SSA) issuer and UK-based investor roundtable hosted by ANZ and KangaNews in London, issuers and investors spoke about geopolitical risk and socially responsible investment. The following is an edited transcript of that discussion.

Participants included World Bank Lead Financial Officer and Head of Funding Andrea Dore, Rentenbank Treasurer Stefan Goebel, Nordic Investment Bank Head of Funding & Investor Relations Jens Hellerup, Western Australian Treasury Corporation Deputy Chief Executive Officer Melvin Nunes, International Finance Corporation Head of Funding Ben Powell, Nikko Asset Management Head of Global Fixed Income André Severino, Pimco  Head of ESG Portfolio Management Alex Struc, KfW Bankengruppe Head of Capital Markets Petra Wehlert, KangaNews Chief Executive Samantha Swiss and Katharine Tapley, Head of Sustainable Finance at ANZ.

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Attendees at the event.

We started by asking the panel about positioning investment in a time of great uncertainty.

Severino: Political events have dominated markets recently and it’s very difficult to predict outcomes. We’ve found the best tactic has been to try to be as neutral as we can. Brexit taught a lot of people this lesson pretty well.

The US has really dominated markets since its election. Inflation expectations probably got way ahead of themselves for a time but now I think they are probably too low because there is a reasonable chance the US will get some fiscal and tax reform through. 

" There’s no doubt investors would like to have some more concrete information so they can report on the impact [of their investments]." Jens Hellerup

By contrast volatility is very low and it’s hard to see where the next surprise might be. It’s our job to try to figure this out.

Despite all the distractions US Congress has the potential to get some meaningful reforms done which would be good for growth globally. It could help extend the cycle we are in.

We are seeing reasonable synchronised global growth and fundamentals have improved, certainly in Europe. But this has come with very little inflation – other than the UK, which is for different reasons.

I think the US could surprise some people given expectations of what we might get out of the current presidency have been taken way down.

Struc: Globally QE is running out of steam in general. We all speak of Europe as one unit but we often forget that it’s actually multiple countries. There will always be doubts, and therefore volatility. 

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. 

For example, one SSA issuer’s green-bond home page states: “Investors invest in green projects without bearing any project risk.” So finally we have found the way to have the cake and eat it – in green bonds.

I am puzzled and troubled by the direction borrowers are heading in: trying to get a square peg into a round hole by saying when you buy a green bond it creates or triggers carbon savings of however many tonnes.

I don’t think this is true, and I also don’t think it’s a necessary way to promote the message of green bonds.

Struc: I take a different stance, and here’s one reason. I genuinely believe additivity is what we should strive towards and I think in some cases we achieve this.

For example, if you think about investment in emerging markets and promoting growth in emerging markets in the context of climate change or social issues, you have two choices.

One is to invest directly and bear the consequences of credit risk. Alternatively, we can give money to a bank and take the bank risk because it is a bit closer to the borrowers, and we get to tap into its lending capability.

With a green bond the idea of being pari passu – where someone else takes the risk and we take a diversified exposure but we manage to direct finance it – is actually quite valuable.

With respect to the usefulness of green bonds, I think it’s a matter of disclosure and additional information. If anything, it raises awareness of bonds for purpose. The end goal in social development is for the conversation to change.

Goebel: To me, the long-term question remains whether the environmental impact and the importance of these measures should be made more prominent through a bond product, or rather through giving the overall SRI ratings of the issuing entity more prominence.

The link to certain debt instruments creates some ongoing problems that will be difficult to resolve, while to give prominence to issuers’ SRI ratings would be a better way to move this topic forward.

We will be working on improving our SRI ratings, and in the meantime we are happy to do green bonds on a private-placement basis with tailor-made disclosure.

Hellerup: To some extent I agree with Stefan Goebel here. SRI and ESG should be looked at in a more holistic way, meaning it is the whole balance sheet we should look at and not only part of it.

There’s no doubt investors would like to have some more concrete information so they can report the impact. I think this is why we have seen the success of the green bonds or impact bonds.

Tapley: I think we need a combination of these things to take the market forward. There are certain issuers and jurisdictions that need to be encouraged to transition to a low-carbon economy and rewarded with investor support for the climate-friendly projects they are undertaking - notwithstanding what SRI ratings might attach to them at an organisational level.

In Australia, for example, one of our largest energy retailers has made a public commitment to be out of coal-fired power generation by 2020.

This is an organisation of the type for which, in my view, green-bond issuance is legitimate and credible given the deep engagement in transition.

Darren Thompson is a contributor at bluenotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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