22 February 2019
A story from a full-blooded investment banker who turned green – the Why and the How and what new insights can bring.
As an investment banker your duty is to generate the best risk-adjusted financial result for your clients – in short, chasing money.
As a result, investment bankers are often seen as cynical since their rhetoric is built around the cash and not the societal impact (which will be the client’s job to prioritise). The banker’s focus is on the best outcome in terms of cash flow and economic value creation. This is what is expected if you want to keep your clients and your job.
It is a 24/7 job, meaning that the stories you tell are about money, the success you want recognition for is about money and the failures where you need support are about money.
As an insider, nothing can be more stimulating since the price of money is an aggregation of everything going on in society right now, meaning that a precondition for being successful is to be very well informed. But it’s difficult to explain to an outsider.
This all changed with green bonds. Suddenly, the money was in the background (with a clear communication and agreement that the financial proposition needed to be right!), and a new topic – ‘the green’ – became the main focus of discussion.
At that moment, leading environmental experts, academics (assessors), financial specialists and investors, combined their cross-sector expertise to highlight the strengths, weaknesses and pitfalls in the proposal – as seen from their various perspectives – and we started learning from each other.
This has also changed the story we tell and the tangibility, for non-financial experts, of our successes and failures – it is easier to talk about the job. When speaking to nonfinancial experts, a green bond can be turned into a green bank deposit (same model). Then, suddenly, you can ask individuals how they would react if there were two major banks in their country offering the same interest rate but one of them also offered a child deposit account, where the proceeds would be earmarked for lending to technologies which secure cleaner air and cleaner water and you could follow the impact of the bank portfolio. The outcome is: you get attention and a discussion going – and, suddenly, you are reconnected to society.
So how did this start?
In 2006 and 2007 when times were good, yields low and cash plentiful, the financial market faced many imbalances, one of which was the long-term fundamental need to place a big portion of pension and insurance money in so-called riskfree assets (like Government bonds). The challenge was that Governments didn’t need to borrow very much money since their budgets were relatively healthy.
Issuers like SSAs (sub-sovereigns, supranationals and agencies) were, to a large extent, booked in agency or mortgage portfolios but, as their credit quality is more comparable with Government bonds, they often traded with a lower return than agencies and mortgage bonds. However, a large number of investors had also expressed a desire to do something more about global warming and, by combining the challenge with the desire, they opened up to get a deeper understanding of the credit of SSAs. As a result, the foundations were laid for the creation of the first World Bank green bond (for the full story, visit: www.worldbank.org/en/events/2018/11/16/from-evolution-to-revolution-10-years-of-green-bonds).
But, in hindsight, the most interesting development has been the collaborations across sectors, regions and disciplines as well as the (mostly) friendly collaboration between competitors to reconnect finance, in a more tangible way, with societal challenges.
The truth is that most people will think about their given mandate and use so-called key performance indicators (KPIs) to ratify their actions. This means that any ground-breaking business transition will require senior management to implement KPIs which lead individuals to action – and this won’t happen unless the management understand how the engagement of the organisation in a transition will benefit the share price, as that is management’s major KPI.
So, to cut a long story short, for anyone with an ambition to change – start with the value creation proposal for the stakeholders you need on board to be successful.
As a competitive tool, it is easy to understand why retail clients would run to the bank with a filter allowing higher traceability on what their money is financing. So, the question remains: how do you give management the comfort that this is the best way for business at the same time as you raise awareness sufficiently for key stakeholders to realise that it is not only good for business, but the only way to survive?
The issuers, led by The World Bank, allowed us to shortcut this structural barrier by issuing at a comparable return to their regular non-green debt, meaning that the filter we bought came for free for many years, making the deal easy to digest for investors.
Inside my group at SEB, we believe in an inclusive transition for the simple reason that everything else is doomed to fail. With increasing consumption and fundamental assets like soil, water and air being destabilised, there is not enough time for a rhetorical debate about right and wrong. We all need to understand and build consumption models which allow our foundations for living to stay strong. However, this doesn’t mean that we won’t see losers.
Laggards, who in ignorance think that industries can ignore pollution and resource constraints, will eventually lose their access to markets, regardless of their industry, while leaders who forget to attach a workable business and liquidity plan to their leadership, are likely to suffer from premature death. The faster we as credit experts learn the nature of this transition – the more we can reduce both credit and society risk by ensuring that business risk is correctly priced.
For us, at SEB, the real heroes are the investors who have been, and are, investing their time and energy in building better societies and, obviously, issuers like The World Bank (and their staff) who have worked tirelessly to transfer their knowledge to investors until the investors were comfortable moving forward.
The Multilateral Development Banks (MDBs) have worked as guarantors for quality, in allowing stakeholders to acquire knowledge in a digestible way, strongly inspired by The World Bank, which spent years on individual meetings with investors before the market took off.
These issuers are providing their aggregated experience, packaging it and serving it on a silver plate to investors. For example, the Dutch water bank NWB is sharing centuries of experience on Dutch water management, Germany’s KfW is reflecting on its role in supporting the greening of an industrial nation, the EIB is showing leadership on harmonisation and EU integration, Sweden’s Kommuninvest is an engine for a whole country’s municipality sector, and I could mention many others. Each of the issuers we worked with has its own challenges and has made its own contribution and we feel privileged to have worked with every single one.
So, for a decade, we have been in the privileged situation that whenever we had a shortage of knowledge (and believe me, that happens) we could just call issuers and they would find their internal experts on water issues, pollution control, smart cities or something else, and let us arrange a call with the investors to make sure the investors understood how the issuers did their work and their motivation for financing particular projects.
In this way thousands of investors have slowly and steadily been invited into a new world where the focus is on the purpose of the money and good governance structures ensure compliance. This process has equipped investors to include this model in their own due diligence processes and, consequently, slowly influenced the rest of the market who want to borrow money. Put more simply, the issuers have used their experience to provide an instrument to investors to help them ensure that their money provides more than a financial return – that they actually build societies. And investors have now forcefully taken up this tool and used it to turn investments into a filter for longterm impact.
To give an illustration of how powerful this has been – let’s talk about SEB.
In 2019, SEB is a strong regional bank with leadership in corporate banking, wealth management and investment services. We are 160 years old and can, with good reason, be called one of the ‘old guard’. However, our engagement with sustainability, with green bonds and microfinance has brought the bank into a new era. If we can do finance at the same time as we get closer to (and support) our clients’ contributions to building stronger, more resilient and more inclusive societies – that’s what we should do.
When walking through the bank now, it is more difficult to find a colleague who wants to do banking as it was done five years ago than it is to find one who wants to do inclusive finance, and we are all proud of that. Without the guidance from the issuers and the strong signals from our investors, we would never have got here – and there is no doubting that we are grateful to be given this trust. In this way we can re-connect and be more visible in our role in society at the same time as we can use our credit expertise to design better and more resilient societies.
Often we are asked if this means that everything else is ‘brown’. It doesn’t. There will always remain grey areas but most companies’ are working to provide a solution needed by society – all the sustainable finance market is doing is to highlight this purpose and ensure that investors understand how it is governed. We will always have a transition going on and, to ensure longer-term compliance, a long-term strategy and management of that strategy becomes important – the sustainable finance markets are just capturing this.
Nobody would expect us to get everything right. But, if finance could implement a filter to see when projects destroy value (which is normal due diligence) and when projects build societies and save resources, then we could, with high likelihood, reduce most of the short-termism which currently drives the way we consume and replace those projects with projects taking care of resources and securing long term stability. All we need is to identify the economic link – and that is where instruments like green bonds make a difference.
Trying to re-capture this and see it with a traditional investment banking eye – it all makes sense. Investors get transparency and insight on company governance models, allowing better risk assessment alongside guidance on where industry leaders see the major challenges and milestones in their industry. Issuers empower their risk centre (Treasury) to develop or fine-tune their internal supervisory platform on climate-related financial risk at the same time as the production unit gets financial support to highlight the social benefit of their solutions and investor relations are allowed to collect the company DNA to tell their story on societal action. And last but not least – society is suddenly (through the embedded education) able to use the liquidity and risk competence of the financial markets to help get the financial models right when building societies.
The only questions remaining are: how could we ever forget this and how can we avoid forgetting this in the future?
Christopher Flensborg is head of climate & sustainable finance at SEB
SEB Climate and Sustainable Finance (& Green Bonds)
Ben, Brenda, Carol, Chris, Christopher, Gabriella, Gustaf, Johanna, Kristoffer, Mats, Pontus, Sam, Sir Roger, Siri, Stefan, Terje, Vincent