11 February 2020
2019 was a busy and successful year for Nomura both in the Japanese and the global ESG market. Jarek Olszowka and Nick Dent of the bank's London office explain why.
Environmental Finance: In December, Nomura rounded off a very busy year in the sustainable capital market by announcing the proposed acquisition of the boutique investment banking firm, Greentech. What is the rationale behind this acquisition, and how will it help Nomura to strengthen its position in the global market for green finance and investment?
Jarek Olszowka (JO), International Head of Sustainable Finance: The acquisition of Greentech is still pending final regulatory approval, but it is big news for us. Greentech is a leading US-based investment banking firm which was established in 2009 and has 75 professionals, which gives it very deep expertise in the ESG market. It specializes mainly in M&A advisory services and private capital placement in sustainable energy technology, sustainable infrastructure such as advanced transportation, and industrial and environmental services. It is US-focused, principally in New York and San Francisco, but it also has people on the ground in Europe.
Having been involved in three times as many transactions as its closest competitor in recent years, Greentech is ranked as the number one in sustainable M&A by Bloomberg.
From our perspective, the acquisition will help us to deliver Greentech's deep expertise to our existing clients. Greentech, meanwhile, will benefit from the debt financing our balance sheet allows us to make available, as well as from the sophisticated solutions we will be able to structure for its clients.
Our extensive franchise across Asia and elsewhere means we can also help Greentech to expand internationally, so there are considerable synergies to be generated from the deal.
EF: What were the other highlights of 2019 for Nomura in the global sustainable bond arena?
JO: It was certainly a successful year. We were chosen as one of only five underwriters appointed to ICMA's new Green Bond Principles and Social Bond Principles Advisory Council. We were also runner-up in GlobalCapital's awards for most impressive Asia-Pacific bank for green and SRI capital markets.
In Japan, we launched a new ESG sub-index. This is an SDG version of the Nomura Bond Performance Index (NOMURA-BPI) which is one of the most widely followed benchmark in the domestic bond market. We have also set up a new sustainability research centre in Japan, and we published a 230-page book on the Age of Sustainable Finance which for a week was the best-selling business book in Tokyo.
Internationally, one highlight of 2019 was the role we played in taking North-Rhine Westphalia on a roadshow to Tokyo in preparation for its €2.25bn 15 year issue in March. This was the largest sustainability bond ever issued, and generated interest and additional demand from Japan.
EF: Looking more specifically at the Asian market for ESG investment, the presentation accompanying Nomura's acquisition of Greentech notes that "Asia will be the largest and fastest growing region for sustainable investment." Presumably this will be led by China and India?
JO: True, in the sense that the expansion in ESG is a function of rapid economic growth. But demand for renewable energy and clean technology won't be confined to China and India. There will also be rising demand in other economies with fast-growing populations which require huge investment in infrastructure such as the Philippines, Indonesia and Vietnam. It is imperative that this infrastructure is delivered in an energy-efficient and climate-resilient manner, because without the commitment of Asia it will be virtually impossible to meet any of the ambitious global climate change targets agreed in Paris.
EF: Is Nomura active in the Chinese market?
Nick Dent, Head of Debt Syndicate: Yes. We were among the first few overseas financial institutions to be awarded a licence in China for a majority-owned securities joint venture.
On the green bond side, we were one of the arrangers of a green ¥30 billion Pro-Bond in November 2018 for Bank of China, and we believe we are well-positioned to support further international sustainable bond issuance from China going forward.
There is considerable potential for sustainable bond issuance in the Samurai market. In 2018 we led two social bonds in senior preferred and senior non-preferred format for BPCE of France. Unlike in many countries, instead of being focused purely on green issuance the Japanese market is highly diversified, with a much higher percentage of the overall ESG bond market accounted for by issuance in social and sustainability format.
EF: Was this historically driven largely by retail demand for so-called Theme Bonds in the Uridashi market? Are Japanese institutional investors now more active in the sustainable bond space?
ND: There has traditionally been very strong demand from Japanese retail investors for instruments such as water bonds and vaccine bonds in Uridashi format besides green bonds. Strong social awareness among retail investors allowed a number of supranational borrowers, for example, to issue in sizes up to $50 million advertised in banks' local branch offices. This formed the basis for the next stage of the market where borrowers started to move to benchmark size.
JO: According to data published by the Bank of Japan, as of the end of March 2019, 53% of individuals' financial assets, or about ¥1,835 trillion, is still sitting in bank deposits, so the Uridashi market has been an attractive alternative for investors looking to diversify their currency exposure and earn a higher return. Up to 2014, this market was mainly driven by SSA issuers such as the Asian Development Bank, IADB, World Bank and others.
This was before ICMA established the Green Bond Principles, which turbocharged issuance of institutionally- targeted green bonds. But it certainly demonstrated that there was strong awareness of these issues in Japan. Now the market is increasingly moving away from theme bonds and towards more properly-structured issuance. This has been supported by a strong push from the Japanese government and the Ministry of the Environment which published its Green Bond Guidelines in 2017. The result of this has been that second party opinions and post-issuance impact reporting have become completely standard in the Japanese bond market.
A key driver of rising demand in Japan has been the Government Pension Investment Fund (GPIF), which with about ¥150 trillion ($1.4 trillion) of assets under management is by most measures the largest pension fund in the world. The GPIF has made a big pivot into ESG fixed income in the last 12 months. It has significantly adjusted its position and is currently a very vocal supporter of the market, signing official partnership agreements with 10 leading Multilateral Development Banks from around the globe in support of ESG financings.
In 2019 alone, the GPIF invested over $3 billion in green, social and sustainability bonds, which in the context of total issuance of $240-$260 billion is a significant share for a single institutional investor.
Additionally, the GPIF has publicly announced that it will no longer award any mandates to asset managers unable to demonstrate very strong ESG credentials or to prove that sufficient ESG integration is embedded into their investment processes.
After subjecting its portfolio to a rigorous climate stress test, the GPIF no longer talks about the long-term, which for many capital market participants implies an investment horizon of between one and five years. As a pension fund with a 15 or 20 year time horizon, it now prefers to talk about "cross- generational investing".
ND: Internationally there seems to be a wider variance of opinions on ESG and approaches to embedding it in the investment process across the buy-side than in Japan, where the majority of asset managers share the views of the GPIF, and at this stage do not have hugely divergent approaches. If you meet 10 investors in London you'll get 10 very different views, but that is not the case in Japan. So we are seeing institutional demand for exposure to sustainable bonds increasing rapidly across the board.
EF: What about Japanese issuance? Nomura has played a pivotal role in supporting growing diversity in the sustainable capital market. It led a new issue for Obayashi Corporation in October 2018 which was the first green bond for a general construction company, and in January 2019 it arranged a notable deal for Japan Housing Finance Agency (JHF), the proceeds of which were earmarked for financing energy-efficient homes. Do you anticipate further growth in the market this year?
ND: Issuance in the green bond market in Japan was originally driven mainly by government-guaranteed borrowers such as Development Bank of Japan (DBJ), which are taking sustainable issuance extremely seriously. There has already been plenty of issuance in this sector and we will see more in the future.
On the sell-side as well as the buy-side, Japan is a very consensus-driven society, and interest in the green bond market is clearly filtering quickly down into the corporate and FIG communities as well. When the new financial year begins in April, I would expect to see more issuance from borrowers outside the government-guaranteed sector.
EF: What other themes do you expect to evolve in the Japanese market for sustainable finance over the next 12-18 months?
JO: One of the areas being most widely discussed is the potential for transition bonds. Another is the likely growth in sustainability-linked instruments such as the recent issuances for Enel, where the bond proceeds were for general purposes but where a coupon step-up is triggered if certain environmental KPIs [key performance indicators] fail to be satisfied.
These are both very much on the radars of the Japanese FSA and the Ministry of Environment. Many of Japan's leading corporates are from the automobile, electronics, steel, iron, pharmaceuticals, bioindustry, shipbuilding, textiles, aerospace and petrochemical industries. A number of issuers we have met during multiple recent visits to Japan have wanted to issue green bonds but have struggled to identity immediately eligible green assets which conform with CBI's Climate Bond Standards, the draft EU taxonomy or the ICMA GBPs.
These issuers are fully aware of global trends, they want to participate in the sustainable capital market and they see the benefit of issuing green bonds, but don't necessarily have the assets they need to be able to issue in liquid format. Transition bonds are a perfect concept for them. So I'd expect to see more activity from companies which are brown today but have an ambition to transition to green, or at least to less brown. There's a co-ordinated discussion globally about how to structure this new sub-asset class, and as part of ICMA's Climate Transition Finance Working Group we are an active participant in this dialogue.
For the same reasons, these borrowers are looking carefully at the precedent established by the world's first Sustainability bond issued by Enel in September 2019.
ND: Another theme to watch will be how the market deals with the inevitable growing pains that will accompany the accelerated growth of the global sustainable capital market. The market itself has clearly developed the self-policed framework it needed to bring issuance volumes to where they are today. But there are a number of people who are yet to be convinced about green finance, so as we move on to the next stage in the maturation of the market, it's important that we address areas such as the dynamics between pricing and liquidity if the market is to develop in parallel with the global fixed income market.
Another challenge is that while the green bond frameworks are well-developed and widely accepted, there is still a multiplicity of definitions of other asset classes such as social bonds.
They have become such a large part of the market that more discussion will probably be needed in order to establish an equally well-recognised framework for these instruments.