11 May 2021
The future of 'transition' bonds as a separate label appeared uncertain as the market experts questioned the validity of the instrument, despite acknowledging the importance of the sustainable bond market supporting the shift to a low-carbon economy.
Speaking on the opening panel, NN Investment Partners green bonds lead portfolio manager Bram Bos said he believed that "transition bonds will disappear".
Bos added the sustainability-linked bond label has proven more popular and benefitted from uncertainties surrounding the "vaguely defined" transition bond label.
Later in the day, Sustainalytics sustainable finance solutions director Heather Lang said she expects transition bonds to eventually prove popular, especially among heavy industry issuers. This is despite accepting that sustainability-linked bonds have already proven a popular instrument for these types of issuers.
"We do anticipate traction ahead [for transition bonds] from heavy industries, though this has not really played out quite as quickly as we expected – in part due to the emergence of KPI-linked instruments as another viable financing option for heavier industries," she said.
Meanwhile, ICMA sustainable finance head Nicholas Pfaff told the conference that the association saw 'transition' finance as a theme as opposed to a product – such as a green bond or sustainability-linked bond.
Quotes from the conference:
Sanna Petersson, head of responsible investment at Captor Fund Management: "I would rather see [carbon intensive issuers] use a green bond than a sustainability-linked bond actually," she said. "At least then there is transparency about how they will use the proceeds to finance their transition to a sustainable company. And then, if anything, we can reduce the risk of greenwash [through green bonds].
"Isabelle Vic-Philippe, head of euro aggregate at Amundi: "Theoretically, we do not believe there should be a premium, because our main risk is linked to the creditworthiness of the issuer – whatever the type of bond they issue, it should be similar. Yes, there is a greenium, it is maybe related to the imbalance between the supply and demand, but it is really limited – there is no major difference.
"Drew Smith, deputy chief financial officer and head of treasury at the City of Boston: "We wanted to set Boston up as national model not only for pricing green bonds more cheaply but also, by extension, getting green infrastructure done more cheaply...The issuance of green bonds shouldn't just be a matter of policy preference, it should be a fiduciary obligation. At the point that we can demonstrate a clear pricing benefit, that's exactly what it becomes.
"Jan Whittington, associate professor at the Department of Urban Design and Planning at the University of Washington: "In order for the US to be able to achieve the goals [of the Paris Agreement], the future will have to be one where in the entire capital portfolio of [muni] issuers is green".
"You can have a green bond which is transition themed, you can have a sustainability-linked bond and sustainability bond which is transition themed," he said. "We don't see this becoming [transition bond] principles."
Consequently, the expectation was for ICMA's Climate Transition Finance Handbook to support transition issuance through these existing labelled products rather than create a new label. He also announced that further guidance on how to link this transition finance handbook to issuance using the GBP and SLBP is currently being drawn up.
Another recurrent topic was social bonds, with Isabelle Vic-Philippe, head of euro aggregate at Amundi telling conference delegates that momentum behind social bonds could be set to swing to green.
She said a switch in focus by the EU from social bonds issued under its SURE programme, to green bonds under its planned NextGeneration EU programme, appears set to shift the momentum in the European labelled bond markets, according to Amundi.
"Since the beginning of this year we have seen the continuation of the trend [that accelerated in 2020] of increasing social bond issuance."
"But maybe in coming months green bonds can again lead the way, ahead of social bonds, because we will see the end of the EU's SURE programme – which has been huge for social bonds – and the return to green bond issuance in line with the [NextGeneration EU] recovery plan."
The final panel of the day considered the growth and innovation taking place in the green US municipal market.
Conference delegates heard that investors are equating green bonds with "better credit" – even when rating agencies aren't necessarily assigning a better rating, said Michael Brown, environmental finance manager at San Francisco Public Utilities Commission (SFPUC).
Speaking on the same panel, John Anderson, global head corporate finance and infrastructure at Manulife – an investor in green bonds – said that for his lending team "green bonds are becoming an evaluation yardstick for the quality of [an issuer's] management team".
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