The social and sustainability bond markets are growing, but Barclays expects investor and issuer focus to remain on green in the coming years. Its green bond experts explain how the business is positioning itself for growth – both on the investor and origination side – as the themed bond markets evolve
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Environmental Finance: What are your expectations for the green bond market in 2019? What are your key areas of focus in the near-term future?
Rhian-Mari Thomas, Global Head of Green Banking, Barclays: Going into 2019 is pretty exciting for green finance and green product innovation. With the EU green taxonomy coming out later this year and financial regulators making strong statements on climate change, investors seeking greater disclosure in order to mobilise capital and the TCdsfsdfdsfsdfsFD that provides that framework, gaining signatories and momentum, there’s a definite sense of accelerated urgency in climate finance.
The growth of blended finance solutions and increasing co-operation between policy makers, development banks and investors could also provide a real boost of green projects in the real economy. This, in turn, could provide more impetus for green bonds.
Also, the recent Fitch Ratings report on how ESG considerations can influence credit ratings more broadly is important for the growth of the green bond market. This is something we really considered when issuing our own green bond – we were conscious we needed to strategically align our organisation with a sustainable pathway rather than issuing a green bond as a one-off exercise.
Maximilian Meyer, Director, Barclays Investment Bank: On the origination side I’ve so far focused mainly on Europe, but we’re increasingly working with clients in the Asia Pacific region and expect more of this in 2019. China is obviously the biggest green bond issuer by volume and we want to keep up with this development.
This ties into another trend we’re seeing. Issuers in industries at risk of being negatively impacted by environmental pressures are becoming increasingly aware of green bonds. We’re already seeing such issuers reaching out to us. Rating agencies are increasingly identifying sectors such as coal mining as being at immediate risk and this is making companies think twice about their business model for the next decades.
Green covered bonds also have growth potential. Covered bonds are considered a safe haven amid wider market uncertainty and volatility, and we’re expecting volatility to continue into 2019.
Stephen McDowell, Managing Director, Head of investments, Barclays Treasury: We definitely welcome more green covered bonds in the future. We saw more covered bonds last year and it’s a sector we’re involved in on the investor side. Because of the huge amount of loans out there we feel we haven’t really scratched the surface yet on green covered bonds. There are of course many challenges in issuing covered versus issuing unsecured, but we do see some issuers solving the problem, and we are very keen to work with more to get this sector up to scale.
In the near term, the growth in sovereign green bonds are really our focus as an investor. The biggest market development for us in recent years is that governments have started to issue green – it really brought scale to the market.
We would also hope to see more issuance growth from financing large scale infrastructure projects such as the Societe du Grand Paris (SGP) bonds, which are financing EUR 35bn of green infrastructure in the next ten years. The SGP green bond programme sets a very interesting blueprint for green infrastructure finance. When we talk about global infrastructure needs it’s a huge financing opportunity - considering that global annual spend on large capital projects total as much as $2.5trn per annum. The SGP programme is an example of how to exclusively use green finance to develop a major infrastructure project. Hopefully it will set an example for other imminent infrastructure projects globally.
EF: You’ve rapidly become a major green bond investor in the past few years – could you explain what’s behind your green bond investment drive?
Stephen: My team looks after the liquid asset portfolio for Barclays, a large portfolio held to satisfy regulatory requirements. Our total portfolio across both cash and various fixed income securities is in the region of GBP 200bn at the moment. We’ve got large holdings of various issuers in the government sector, supranational space as well as in covered bonds. Within all these three sectors there are issuers active in the green space so that’s how we ended up effectively creating a green bond mandate a few years ago. We decided we would allocate a certain amount of our portfolio to green bonds, starting with GBP 1bn and eventually GBP 2bn, which we’ve now satisfied. Our aim is to grow this portfolio to somewhere around GBP 4bn.
EF: What are your thoughts on the growth of sustainability and social bonds?
Rhian-Mari: Clearly we have the capability to support our clients if they want to issue social, sustainability, SDG linked bonds. These markets are growing fast, we’ve also seen the issuance of blue bonds and we can expect other themed bonds to develop in response to issuers aligning their business practices to the SDGs. Green bonds still represent the vast majority of themed issuance and the challenge is to evolve that market to support some of the heavier carbon emitting sectors as they transition their businesses. We want to be at the forefront of that thinking, working closely with the investors and the potential issuers to retain the integrity of the green bond label whilst addressing the underlying aim of mobilising capital to decarbonise the economy.
Maximilian: On the origination side, a lot of client conversations focus on ‘who are the key investors we should target’ and ‘what other thematic bonds will emerge and who will invest in them’? My opinion is that the investor universe is split – a majority of investors have a preference for either green or social. Some invest in both but the majority of them still focus on green.
When we speak to issuers they struggle to distinguish between the two. The International Capital Markets
Association (ICMA) has published green bond principles, sustainable bond principles and social bond principles – but it’s all happened quickly, maybe too quickly for the market to really digest all of this.
Issuers want to widen their access to investors while doing something that boosts their reputation, but they can’t always differentiate between the different types of bonds. Both issuers and investors are confused, to some extent. As a result, I don’t think the investor take-up has been that great on some sustainability bonds.
Stephen: Social bonds right now feel similar to green bonds when we started looking at them back in 2014, which is when we first had the idea of a green bond mandate. We had a first draft of the Green Bond Principles but we were certainly short of any agreed standards and there were few second opinion providers out there. But the market really wanted to get going.
I feel social bonds are in a similar stage of the growth cycle – the market wants to get going and we’ve got Social Bond Principles, but we are still lacking any coalescing on commonly agreed standards and are short of anything to do with certification and verification. That’s our take on that market at the moment.
On a more personal note, my experience with green bonds back at the start of our efforts to develop a mandate was that given the lack of agreed standards, verification and certification in green bonds it was quite a difficult project for us. Entering a new market where reputational risk is reasonable present is difficult. We wanted to make sure we were really getting what we thought we were getting through our green bond investments and that’s not necessarily easy to do.
It is also worth noting that social is much broader than green, so even if we’re in a relatively similar part of the growth cycle as green bonds were a few years ago it’s definitely a more challenging market. The complexity for a new investor probably is greater as things are more complex and blurry than with green bonds when they were quite new.
With green bonds, you can usually measure their impact in terms of outcome. There’s generally something to measure and report on that’s relatively clear and can generate a number. With social bonds, it’s more difficult for issuers and investors to see some sort of measurable outcome. As an institution we like the idea of social bonds and would love to join in on the investor side, but the complexities and challenges give us reason to pause here as an investor for now.
EF: What’s needed for the social and sustainability bond markets to grow and mature?
Stephen: We got into green bonds way before there were any ideas around standards. Now you see certainly some published standards for the market to coalesce around such as what constitutes a good solar project and a not so good solar project. I don’t think the market is there yet to discuss what’s a good or bad education project – is there even a bad education project? I think it’s very hard to measure. It took us a long time to get comfortable with the green bond space but as the market is getting going you see clearer and clearer ideas around what a green project is. We need this type of verification, certification and standard efforts in social bonds also.
Maximilian: The Sustainable Development Goal (SDG) bonds gave the market a bit more of a robust framework. While I think green bonds will remain the focus of most issuers and investors, the social and sustainability market will grow. Many issuers and potential issuers, especially financial institutions, probably have much more social than green assets in their portfolio. So, in order to diversify their investor base further, more issuers will look at getting social bonds across the line.
But there is an acute need for green bonds. We have important climate targets that we need to achieve and there’s an imminent threat to the world if the underlying issue isn’t addressed. That’s why I think the focus will remain on green for now.
Pursuing green through multiple financial products
While Barclays is rapidly expanding its green bond activities, it has also rolled out a number of other green products for clients who cannot access the capital markets, says Rhian-Mari Thomas, Global Head of Green Banking at Barclays. These products include green corporate loans, innovation loans, asset finance, trade loans, corporate deposits and mortgages.
“The green mortgages have a particularly interesting backstory,” she says. In November 2017, Barclays issued a EUR 500m five-year bond, proceeds of which were used to finance or refinance the most energy efficient mortgages in its UK mortgage book. “The positive reaction we got from the market to this bond really elevated the dialogue internally on green finance. It was a really helpful exercise on what we’re trying to do in green innovation.”
When analysing the mortgages Barclays was able to show that more energy efficient mortgages are less likely to default, she explains. “This enabled us to bring green mortgages to the market at a lower price point than non-green. We launched green mortgages in April 2018 and they’ve had the fastest pick-up of any mortgage proposition launched in the UK by Barclays in recent years.”
On a company-level, this created a virtuous cycle for Barclays in terms of green finance, Thomas says. It is now able to demonstrate that its green bond wasn’t issued in isolation but as part of a broader thinking on how to pursue green finance.
Barclays has worked with Sustainalytics to establish a definition of ‘green’ that it applies across its suite of products. Smaller clients who aren’t active in capital markets are “very keen to engage” but want guidance on what is green. “Green loan products meet their demand – a mid-market client can come to us and say ‘can I have a green loan?’ and have external validation that what they’re doing really is green.”
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