12 March 2021

Sustainable bond pricing perk 'not enough' for emerging market issuers

A webinar organised by Environmental Finance and the IFC heard from emerging market issuers of green, social and sustainability bonds about their experiences. Ahren Lester reports

The lure of potential pricing benefits experienced by sustainable bonds should not be the sole reason for emerging market (EM) issuers to consider issuing the instruments, market participants explain, as additional costs and challenges can more than offset this.

Instead, the benefits of these bonds come from demonstrating that environmental, social and governance (ESG) issues are a core focus for the issuer.

Speaking at the International Finance Corporation's Green Bond technical Assistance Program (GB-TAP)-supported Environmental Finance webinar on "Issuer case studies: financing the green transition in emerging markets," there was a recognition that pricing benefits for sustainable bonds were evident.

West African Development Bank (BOAD) resources mobilisation director Gnékélé Gnassingbe said the development bank experienced strong investor demand for its €750 million sustainability bond in January. In total, the orderbook stood at €4.4 billion from 269 investors – including 138 new investors to BOAD. Such was the level of demand, BOAD was able to reduce the coupon on the bond three times over the course of marketing the paper.

Gnassingbe added that the sustainability bond format enabled the bank to "benefit from a broader and more diversified investor base with highly motivated ESG investors".

Cost benefit caution

Nonetheless, the cost of the additional work required to bring a successful sustainable bond to fruition can often more than offset these pricing perks.

Ameriabank capital markets head Shushanik Hovsepyan said, although the Armenian bank also received cost benefits for its €42 million inaugural green bond in November compared with its vanilla bond equivalents, the additional costs meant it could have achieved cheaper financing elsewhere – in particular, there was not any real pricing difference when compared with senior loans it could receive from development finance institutions.

"Don't expect to have better pricing or more cost efficient processes, especially if you are doing it for the first time," she said. "Because there are a lot of fixed costs, a lot of work to be done. And in our case, though in pricing terms it was better than our financing in the local market, it was not better than what we get from our partner financial institutions in the form of senior loans."

EM issuers 'excluded'

Dirk DijksmaThis belief was supported by Dirk Dijksma, innovation investments head at impact investing platform Symbiotics. He said financial institutions in emerging markets are in need of debt from developed markets, but the additional costs mean that they are "largely excluded" from the sustainable bond market.

EM financial institutions – including micro-finance institutions and small- and mid-sized banks – are generally looking for debt of between $5 million and $50 million, he said, but it costs around $100,000 to issue a sustainable bond.

"You need to think about preparation of the framework, the second party opinion, internal training, the amendment of IT systems, but also the promotion of the bonds towards investors," Dijksma said. "Especially when you move to smaller issuances, that is quite a lot."

BBVA Bancomer asset and liability management and capital head Beatriz Muñoz Villa added that the challenges facing issuers before the deal is completed are also just the tip of the iceberg. She pointed out that choosing the projects is actually the easiest part – the real problems emerge post-issuance when reporting demands grow.

"Probably the hardest part is the reporting after the issuance," Muñoz Villa said. "This is probably something that you don't have in mind when you are issuing an ESG transaction."

"Probably the hardest part is the reporting after the issuance. This is probably something that you don't have in mind when you are issuing an ESG transaction" - Beatriz Muñoz Villa, BBVA

"But, really, problems will start once you have issued the bond because you start collecting data," she added. "Trying to see what are the impacts that you are going to report? What are the key performance indicators that you need to address? Probably the easiest part is choosing the projects, but the hardest part is how to measure the impacts."

For some issuers, there are additional – perhaps less obvious – resource costs associated with sustainable bond issuance. Hovsepyan added that, as the Ameriabank issue was primarily focused on a local placement due to its strong local investor base, they had to work closely with the local regulators to translate key sustainable bond terminology and practices into the Armenian bond market. This process, she explained, "took a while".

A great opportunity

Yet, this is not to say that sustainable bonds should be avoided by EM issuers. Hovsepyan said Ameriabank is hopeful that future green bond issues will have better pricing, with more investor interest driving stronger demand.Shushanik Hovsepyan

"I think the major point here is that any institution that considers green bond issuance should not consider it if it is only for pricing reasons," she said. "It should come from the general commitment on the institution's side to sustainable finance. So if you as an institution are already there – in terms of your governance and your mission – then it is really a great opportunity to do that. But if you are looking at the pricing only, then just don't do it now."

Keep it simple

There are also things that EM issuers can do to help make the process of issuing sustainable bonds more attractive. One piece of key advice that was given is to keep the sustainable bond framework as straightforward as possible. Hovsepyan said EM issuers should focus on their core competencies, and limit the scope of the framework from the outset.

"Don't expect to have better pricing or more cost efficient processes, especially if you are doing it for the first time" - Shushanik Hovsepyan, Ameriabank

Dijksma also said that green bond issuers using the Symbiotics platform are focused on a small number of eligible use of proceeds categories.

The Symbiotics platform works by allowing EM financial institutions to issue sustainable bonds through Symbiotics' own special purpose vehicle (SPV). The SPV then passes on the proceeds from the bond to the financial institutions in the form of a loan. By doing this, the 'issuer' does not need its own framework or second-party opinion and receives guidance on reporting and other requirements.

Dijksma said that Symbiotics is now able to issue Green, Social and Sustainability Bonds using its SPV. Increasingly, it is focusing on sustainability bonds due to their additional flexibility for the issuer. With initially few eligible categories, the issuer can slowly build both social and green allocations through its sustainability bonds.

"This starts the internal capacity building within the financial institutions towards developing categories themselves," he said. "This is why we created and introduced this kind of building 'green' via sustainability bonds method."

Strong demand

For those able to present a compelling sustainable bond offer to investors, the demand is certainly there to make issuance worthwhile. Dijksma reported that there is a "very strong willingness" among EM financial institutions to build a green financing programme.

"The major point here is that any institution that considers green bond issuance should not consider it if it is only for pricing reasons" - Shushanik Hovsepyan, Ameriabank

Similarly, Ameriabank's Hovsepyan reported that – as with BOAD – its bond attracted new international investors who previously may have been unaware of the bank.

"So, definitely, we plan new green bond projects and we are sure that we will have a lot of demand from not only development financial institutions, but from other impact investors or sustainability funds as well," she said.

Ameriabank added that its next issue is likely to be on international market – in particular on the Luxembourg Stock Exchange, which is home to both the Symbiotics SPV and BOAD's sustainability bond – as she agrees that this is a "huge benefit" for international investor engagement.

"If someone is considering engaging as many investors as possible, they should definitely go for the international option," she said.

Register here to watch a recording of the webinar on-demand.