22 August 2016

Show me the green money!

Issuers of green bonds are increasingly seeking 'green investors'. But how to define a green investor, and why target them, asks Hamza Ali

When Rabobank subsidiary Obvion hit the market with its €500 million ($568 million) green residential mortgage backed security (RMBS), it allocated the entire bond to green investors.

"The book at close was €1.2 billion and, of that, €900 million was green. All along the way we indicated that these green accounts would be the only accounts that would get the allocation," says Max Bronzwaer, group treasurer at Obvion. "The order book enabled us to do exactly that."

"The larger your investor pool, the more players there are competing for your bond, which over time leads to a pricing advantage. It's just supply and demand basics." - Marilyn Ceci, JP Morgan

Obvion's preference for green investors is part of a growing trend in the market. French energy management and automation company Schneider Electric sold its green bond only to green investors.

And numerous other green bond issuers trumpet in their press releases that a large proportion of the issue was snapped up by green investors.

So, why are many issuers keen on seeking green buyers, and how do they attempt to identify them?

Investor diversification

Arguably, a key reason to sell to green investors is investor diversification. Many green bonds are issued by organisations that regularly tap the green bond market, and they issue bonds as part of a broader programme of bond issuance. For them, a green bond is an opportunity to attract buyers who may not buy their regular paper, says Marilyn Ceci, head of green bonds at JP Morgan.

Marilyn Ceci, JP MorganEDF's €1.4 billion green bond in 2013 is a good example. The energy company's paper was off-limits to many sustainable and responsible investors (SRI) who objected to its nuclear activities. But issuing a green bond whose proceeds would be used exclusively for renewables opened it up to SRI money.

It makes sense that, when issuing a green bond, issuers should try to sell to green investors, says Jonathan Weinberger, managing director of debt capital markets at Societe Generale Corporate and Investment Banking.

"The only time you can access the green pool of capital is when you are funding green assets," says Weinberger. "If you dilute your green assets across your non-green investor base then you are not making the best use of your green assets.

"This is because you use up your capacity, or the amount of risk the investor wishes to take with you, with your non-green investors while simultaneously removing potential capital from green investors," he explains.
Issuers are keen to diversify their investor base because it can lead to higher demand for their debt, according JP Morgan's Ceci.

"The larger your investor pool, the more players there are competing for your bond, which over time leads to a pricing advantage," says Ceci. "It's just supply and demand basics."

"Another benefit from diversifying your investor base is that it provides more stability in funding over the long term," she adds.

An additional appeal of SRI investors is that they tend to have long-term outlooks, meaning they are often 'buy and hold' or 'sticky' investors, which can have benefits for a bond's performance on the secondary market, says Sean Kidney, CEO of Climate Bonds Initiative.

"The problem with allocating green is that there isn't a single approach adopted by issuers or investors in defining what constitutes a green investor. It's the next big question the green bond market has to tackle" - Stephanie Sfakianos, BNP Paribas

"Investor diversification does translate into money. The reason you pursue investor diversification is you gain a wider pool of investors, so it is going to put downward pressure on the second and third and fourth issuance. You do not do it because it makes you feel good," he said at Environmental Finance's developing the Latin American green bond market round table.

"Stickiness is the same thing. The reason you develop a deeper engagement with an investor is because the next time you go to the market you just make a phone call. You do not need a roadshow. That cuts your cost of marketing."

Christopher Flensborg, head of climate and sustainable financial solutions at SEB, agrees. He argues that stickiness is partially the result of better dialogue between issuers and investors, which green bonds help to promote.

"This dialogue is creating a higher degree of loyalty with investors, both existing and new, and this is reflected in more sticky money, which will over the long-term result in cheaper financing," he says.

Max Bronzwaer, ObvionThere may also be a public relations benefit to selling to green investors, says Marc Briand, head of fixed income at Mirova, the sustainable investment arm of French asset manager Natixis. In a market in which there is debate as to whether a green bond is really green or is greenwashing, selling to green investors means that the issue has their approval.

A fourth reason is that some issuers may be trying to help scale up the green bond market by giving preferential treatment to green investors, hoping that this will encourage more investors to create green bond funds or dedicated green mandates.

"We made it clear from the beginning the aim of our transaction was to create a market for green RMBS," says Obvion's Bronzwaer.

And issuers can also benefit from a deep relationship with green investors, according to Mirova's Briand. Having early engagement from green investors can help issuers know what it takes to launch a successful green bond.

"We want to participate in the development of this market and spend a lot our time meeting with current and future issuers of green bonds to discuss what we are looking for in a green bond," he argues. "With newcomers especially, we meet with them to ensure that what they bring is truly green."

But as the debate rages on about the possible benefits of allocating to green accounts, the question remains how to define these investors?

How do you define a green investor?

"Allocation is already a sensitive issue," says Stephanie Sfakianos, head of sustainable capital markets fixed income structuring and solutions at BNP Paribas. "The problem with allocating green is that there isn't a single approach adopted by issuers or investors in defining what constitutes a green investor."

"It's the next big question the green bond market has to tackle," she adds.

The growth in green capital means that, for the first time, issuers can target their entire bond at these investors, says Bronzwaer.

Obvion, which already had a successful conventional RMBS programme, hoped through preferential allocation to attract green investors unfamiliar with RMBS. It scored investors on their greenness based on eight factors split into two broad categories, according to Societe Generale, which co-lead managed the deal with Rabobank.

Christopher Flensborg, SEBOf the €900 million that was green, 37% was dark green, 55% mid green and 7% light green, according to the methodology.

"In much the same way as there is a discussion around what constitutes a green bond in the market, there is a healthy debate around what constitutes a green investor," says Societe Generale's Weinberger. "So to help Obvion think about that, we put together a scoring system."

Firstly, they looked at principles-based socially responsible investment (SRI) activities the investors take, such as launching a dedicated green bond fund.

This goes some way to proving an investor's dedication to the market, according to Weinberger.

They then looked at any SRI initiative the investor was a member of, such as the Principles for Responsible Investment (PRI).

Obvion is the second issuer to have placed its entire allocation with green investors, with the first coming from Schneider Electric in November 2015.

Unlike Obvion, the French company only allocated its bond to investors that are signatories to the Green Bond Principles – a set of voluntary industry guidelines for issuing green bonds – or to the Global Investor Statement on Climate Change, an investor initiative representing $24 trillion of assets under management.

The private placement was allocated to three investors: AXA Investment Managers, Mirova and Neuflize OBC Investissements.

It's not just green or brown

The methodology for defining what constitutes a green investor often changes based on who you talk to, according to BNP Paribas' Sfakianos.

Underwriters are increasingly finding that their role is to help issuers identify green investors, with some differentiating themselves from their rivals based on their access to these accounts.

"Some issuers take the view that if an investor is buying green bonds then they are a green investor, and don't care if you are notionally green or not," says Sfakianos. "However, when a client expresses a desire to allocate to green it's very much a collaborative effort and what tends to happen is there is a little bit more involvement from sales and the sustainability teams on identifying green accounts."

Buying a green bond can be the first step in a transition to becoming a green investor, argues SEB's Flensborg, but it doesn't automatically make you green.

"What's most exciting about the growth in investor interest is that it is coming from the large mainstream players. This scalable growth in demand will bring issuers to the table and drive market growth." - Philip Brown, Citigroup

"You won't become green just by buying a green bond, but dipping your toes into the market gives you a chance to learn and decide if you want to make the transition to become a green investor," says Flensborg.

Perhaps because of issuers' preference for green buyers, the number of green bond funds or mandates is growing.

Last year saw the launch of nine dedicated green bond funds from household names such as State Street, Axa and Allianz, according to data collected by Environmental Finance.

In November, Barclays, after achieving its original target of investing £1 billion ($1.3 billion) in green bonds, pledged to inject a further £1 billion into the market. Last year also saw HSBC and Deutsche Bank pledge to invest $1 billion in green bonds.

Philip Brown, Citigroup2016 has seen the launch of dedicated green bond funds from Canadian co-operative Desjardins Group and asset managers Amundi and NN Investment Partners, with another expected from French pension scheme Ircantec later in the year.

"What's most exciting about the growth in investor interest is that it is coming from the large mainstream players," says Philip Brown, managing director capital markets at Citigroup. "This scalable growth in demand will bring issuers to the table and drive market growth."

While an increasing number of issuers and underwriters develop more sophisticated methods of identifying investors they consider to be green, other market participants argue that it is bad for the market for issuers to seek out green investors in this way. They believe that the participation of mainstream portfolios will be essential for the green bond market to grow in value to trillions of dollars.

"Given the fact that green bonds have tended to price in line with their mainstream equivalents, it has been a fairly straightforward decision to switch from non-green to green paper," says Ulf Erlandsson, senior portfolio manager at the fourth Swedish pension fund, AP4, in a recent op-ed for Environmental Finance.

"The switching opportunity into green, for a broadly managed portfolio, is really low-hanging fruit. Given the size of broad portfolios versus dedicated ones, that is something that should have a significant impact on the green bond market."

The size of conventional mandates means that they can buy green bonds at a scale that dwarfs their green counterparts, so issuers targeting pure green investors are losing access to large pool of capital that could, and should, be committed to green investments, according to Erlandsson.

Citi's Brown agrees, citing the danger of marginalising mainstream investors.

"Dedicated environmental impact asset managers represent only a fraction of total investor interest in green bonds," he adds.

Targeting green investors is also contentious because preferential treatment of green accounts means some investors may try to "game the system" by launching green bond funds with the sole purpose of benefiting from this, according to one issuer who wished to remain anonymous. He does not consider green bond funds or mandates managed by mainstream players to be 'deep green'.

One of the key benefits of green bonds is that you can target these green investors, according to Kommuninvest, a Swedish public sector lender which earlier this year targeted the majority of its $600 million bond at green investors. However, scale can only be achieved through wider participation in bonds.

"Targeting green investors can only be beneficial to issuers of green bonds, because it diversifies their investor-base," says Björn Bergstrand, senior investor relations manager at Kommuninvest. "However, all types of investors need to be on board if the ambitions of the green bond market are to become a reality."

"This is too serious to exclude people," agrees SEB's Flensborg. "You want to be able to include everyone in this transition and some people can move faster than others."