Green finance roundtable

2016-11-01

Ahead of COP22 in Marrakesh, and in light of recent high profile global developments, on 1st November 2016 London Stock Exchange, in collaboration with the Green Investment Bank, held a round table session based on Green Finance issues such as G20 announcements on scaling up green finance, China’s new Guidelines for Establishing the Green Financial System and the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures. The discussion considered how the investment community and London Stock Exchange Group can support the growth and development of the green bond market. The focus for this meeting was the buy-side community to better understand the drivers of demand and how LSEG could support them.

London Stock Exchange Group wishes to thank all the participants for their time and valuable contributions. If you have any questions regarding this roundtable session then please use the contact form at the bottom of this page.

Key points from the discussion are reported below.

> Recent green finance developments
> The Green Investment Bank (GIB's) Green Impact framework
> Incentivising green bond origination
> Green bonds demand side: the investor perspective
> Green bond supply - the case for issuers
> Green bond supply - the case for issuers

> Recent green finance developments

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  • The establishment of the G20 Green Finance Study Group (GFSG) co-chaired by the People’s Bank of China and the Bank of England was discussed. With the G20 incorporating green finance into their agenda for the first time this year, public-private initiatives are expected to be launched to scale up  green financing globally including the green bond market.
  • With the GFSG workstream sitting under the “financing track” and given the  direct and visible support of this from respective Bank Governors, Zhou Xiaochun and Mark Carney, it provides powerful signaling to the market that this is of high priority and that there is momentum and follow through here.
  • The G20 and the Financial Stability Board are looking to support and enable all market participants to incorporate climate risks into their operations and risk processes. This may reduce the likelihood of related negative global economic shocks.
  • The world’s first green covered bond was about to be  listed in London by the Bank of China.  In many respects this was inspired by the GFSG recommendations and provided an important structure for future issuance. The size was $500m and many more similar bonds were expected from both China and India in particular.
  • There was an expectation that China would need to raise up to 4tn RMB (approx. $600bn) per annum to invest in green infrastructure and that London had an opportunity, and indeed a responsibility, to enable international capital flows.
  • The work of the GFSG was praised and  that it would continue under the German presidency of the G20, in  2017, was welcomed.

> The Green Investment Bank (GIB's) Green Impact framework

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  • New methodology had been developed by GIB as a tool to quantify the environmental impact and benefits of a given green infrastructure asset or portfolio. This helps ensure they achieve the double goal or bottom line of being both green and profitable.
  • GIB’s tried and tested green impact approach is integrated into every investment for both debt and equity.
  • GIB now asks clients for less input data as through experience they have reached a clear understanding of what is useful for climate impact analysis.
  • In response to investors’ concerns about the reliability of the green bond markets, greater, more transparent and annual data disclosure could allow for better alignment of interest between investor, issuer and project.
  • Based on GIB’s methodology, the environmental benefits estimated to be achievable by a project include estimated reductions in greenhouses gas emissions, other emissions to air and resource use avoided (fossil fuel equivalent).
  • Integral to the methodology is the Green Impact Forecast Accuracy, GIB’s assessment of the level of confidence that can reasonably be placed on the accuracy of any  quantified Green Impact forecast.
  • GIB was now working with a wide range of third parties, often in relation to green bond issuance, to help measure and quantify green impacts. This provides credibility and better, more comparable data to investors in those green bonds and provides a simple way to measure and report on use of proceeds and the resulting green impact.
  • A published example of GIB’s Green Impact reporting methodology is the report on the Galloper Offshore Wind Farm, which can be found at  the following link: www.greeninvestmentbank.com/news-and-insights/2016/what-gets-measured-gets-managed/

> Incentivising green bond origination

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  • The UK is a global hub and an important facilitator for green finance.
  • There was discussion around how to encourage greater issuance of green bonds by UK banks and corporates. Some felt that this was partly linked to a widespread “culture of equity” of both issuers and investors, whereas in continental Europe a reliance on fixed income and bank loans  is more common.
  • There was also a view that much of the green bond issuance was coming from supranationals and from emerging markets.  There was a desire from institutional investors for more developed market corporate green bonds.
  • It was discussed that three players had particular influence in driving the uptake of green finance by UK issuers: the corporate banking sector, London Stock Exchange and the UK Government.
  • Corporate and syndicate banks (in the case of project finance) should more actively advise their clients to issue green bonds as part of their funding structures.
  • The UK Government can play a vital role in boosting green bond supply by providing material incentive to issuers.
  • There was discussion as to whether London Stock Exchange could proactively educate and encourage existing equity and bond issuers around the opportunities offered by green bond issuances. London Stock Exchange agreed to consider how it could further support and promote this market in particular to companies listed on the LSE.

> Green bonds demand side: the investor perspective

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  • There was general agreement that demand for green bonds outstripped supply, and that those investors acquiring green bonds often held them to maturity leaving a relative small secondary market.
  • Some of the investors also made the case that the intrinsic risk and return for most green bonds was usually the same as any conventional bond with the same rating and hence the benefit was for “purpose based investing”. Others disagreed and felt there was a more specific investment case.
  • There were differing views on the importance of certified green bonds where there was a high degree of reliability that the use of proceeds was being used to deliver green impact relative to bonds from issuers with strong environmental credentials sometimes referred to as “climate aligned”.  A climate aligned bond would be one where a company produces revenues from mainly or entirely green products such as renewable energy and issues a standard corporate  bond but with no commitment or measurement to green impact from use of proceeds.
  • Some investors felt that an area for focus was growing the formal certified green bond market whilst others felt there was an important need to grow the environmental data and information for all bond issuance and that identifying “climate aligned” bonds was important for building these considerations into wide-scale debt portfolio strategies.
  • It was noted that negative green credentials were important to understand too and that this all was directly relevant to mitigating tail risks to returns. The example of US debt in lignite coal miners was referenced where the value of those bonds was wiped out impacting many investors globally.
  • It was noted that investment consultants were still developing their knowledge in this area and more work was needed here.
  • Those with portfolios that were positioned as being green bond funds valued high quality information about the green impact and use of proceeds. Anything that helped provide further assurance that their funds would not be misallocated to assets with false green credentials
  • However, due to the limited universe of green bonds some managers would use both labelled and unlabelled green bonds including those that were regarded as climate-aligned bonds could also qualify. For active managers this would usually involve further internal due diligence and research being applied.
  • Large passive managers however would need both standardized criteria and benchmarks to meet their green investment objectives and would be more reliant on climate aligned definitions to build a sufficiently investable universe.
  • There was also discussion regarding the situations in which the London Stock Exchange would delist bonds from the green bonds segments and what would mean that an issuer ceased to meet the admission criteria, for example because the external review was subsequently declared false.
  • There was also a clear view that FTSE Russell developing a family of green bond indexes  covering certified, self-labelled and climate aligned would be welcomed by the market.  
  • Further, at the right point in time, once the green bond market was bigger, the LSE highlighting those certified green bonds which were reporting green impact most clearly and having the greatest green impacts from proceeds could help support further improvements in the market.

> Green bond supply - the case for issuers

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  • Given the demand for green bonds there had been strong pricing achieved by recent green bond issuance over 2016. Some corporate issuers were claiming a lower cost of capital by up to 15bps.
  • Green bonds also enable issuers to diversify their investor base, thus enabling them to raise higher levels of capital. This has been evidenced by high levels of over-subscription for green bonds. Furthermore, this also allows the issuer to come back to the market more quickly for new capital raising.
  • One institutional investor noted that asset allocation thresholds would limit investment into emerging market debt but where it was green bonds that those limits could sometimes be exceeded.

> Next steps

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London Stock Exchange Group thanks all those that took part in the roundtable, and will take into consideration all the suggestions arising from the roundtable.