Julian Lewis: Welcome, everybody. Thank you for being here today for this IFR ESG roundtable discussion.
I want to start by asking the panellists to introduce their institutions’ approaches to these markets and, since they are so well known, to tell us something that everyone may not be aware of about their strategies or issuance. Ralf, can you start us off?
Ralf Berninger: Investors tell us they like the fact that our deals finance categories that are a bit different to most other issuers.
A lot of green bonds in the market finance renewable energies or green buildings but, in our case, it’s very different. We finance a range of investments from waste recycling, to water treatment, and to public transportation.
The social bond market, for instance, is very often focused on social housing – which is an important category – but in our case, the focus is on public healthcare. We were one of the first issuers to launch benchmark transactions that finance this sector.
Looking ahead, we’ll also start issuing social bonds to finance public education in France and other social investments by local governments. Again, something that has not really been done up to now.
Investors like the diversification provided by our bonds.
Most social bond investors are happy to invest in healthcare and education. One problem for them is that they often have to aggregate reporting indicators and this is still less standardised for healthcare or education. They want to know how we measure impact and how they can aggregate that alongside what other issuers are doing.
Julian Lewis: Christian, as a newer issuer of green bonds, what feedback do you get on your EU green bond programme?
Christian Engelen: Investors value two aspects of the programme: volume and transparency.
In terms of transparency, this is linked to the fact that we are mobilising financial resources for a particular policy programme – in this case, notably, the Recovery and Resilience Facility, which is the Recovery Fund under the NextGenerationEU programme.
This programme has a very simple and transparent structure, in terms of how it is implemented. Member states have to draw up national plans, with very well-specified investments and reforms. These are translated into milestones and targets, where the implementation can be tracked directly.
We can map those investments and reforms into eligible expenditures for our green bond framework. Investors can track the evolution of this pool of eligible expenditures and progress their implementation in real time, including through a dashboard on our homepage. This gives investors the opportunity to see how their green bond investments are allocated also in between the annual NGEU green bond reports.
Investors also like the volume on offer in the programme – we have already issued €60bn and we will issue a lot more. It’s not only the green bond programme that is growing, so is our broader issuance. It is creating more liquidity on the conventional side of the market, and that is spilling over into our green bonds.
Investors can participate in the transition and invest in sustainable products in a programme that provides critical mass to the EU sustainable finance market.
Julian Lewis: Do you feel you get rewarded for the levels of transparency you provide?
Christian Engelen: It’s very difficult to measure whether we get a greenium from our issuance, but we see that ESG investors are more loyal and provide solid demand for our transactions. It reduces execution risk and that has value in itself.
It’s also fair to say that, with the size of programme to be implemented in a very short timeframe, our prime objective is not to get a price advantage – something that, in itself, just reflects the overall balance between demand and supply in the market and is out of our control as an issuer.
Our main goal is to place this programme successfully with focused investors and I think, on that front, we are making good progress. We have seen the development of a very loyal and focused investor base and that is our reward.
Julian Lewis: Is that also KfW’s experience?
Marlene Walch: Definitely. You could almost say that we have a green investor community that repeatedly buys our bonds. We also have investors that only buy our green bonds and do not buy our other bonds.
Investors like the volume, liquidity and transparency with KfW bonds. And, since this year is the 10th anniversary of our green bond issuance programme, you can safely say that investors know what they’re getting with our deals. We’ve repeatedly delivered high-quality transactions over several years and that is well appreciated.
It’s not just our bonds. Investors also appreciate the institution and its overall focus on ESG and the transition towards a sustainable future. It’s something investors value, especially in our green bonds but also in our conventional bonds.
A Triple A rating also helps.
Julian Lewis: Aldo, as the longest established issuer of these instruments, what’s your perspective on the development of the investor base?
Aldo Romani: Investors want more clarity, more comparability, more reliable information when they make their investment decisions.
Investors have always appreciated EIB’s engagement and coherent approach to the market as it has developed. From the very start, we have devoted the utmost attention to accountability.
I remember the motivation behind the ‘request for approval’ of the very first transaction: to create accountability in our future disbursements – in renewable energy and energy efficiency – with precise definitions of the types of projects to be included in this category.
Without a set of precise definitions, it would be impossible for capital markets to monitor the actual development of our disbursements.
In effect, the bank’s capital markets operation pre-empted – by three years – a public set of definitions, the so-called ‘climate action’ indicator, that EIB introduced on the lending side in 2010.
Looking at it from the point of view of a capital markets practitioner, it has really been a discovery process. When the market picked up again after the crisis, in 2013, 2014, we were interested in creating a level playing field that could help avoid misperceptions.
We conducted due diligence that clearly showed that everybody was reporting on different grounds, on the basis of different definitions. This is what eventually led to our engagement, both among the MDBs and then within the Green Bond Principles, in the area of impact reporting and then of green project selection. In line with our initial promise to investors, we wanted to impart our experience to other market stakeholders for broader consensus.
We also spearheaded implementation. From 2018, we had already introduced reference to the evolving EU legislation on sustainable finance, and we have worked on the gradual alignment – with reasonable assurance – of our climate and sustainability awareness bonds with the EU Taxonomy and the upcoming EU Green Bond Standard ever since.
From the capital markets side, we want to be sure that when investors hear from us, they hear something that is factual, or at least has a high degree of actuality that is verified with the help of an independent and supervised auditor.
Julian Lewis: What developments have you seen in your investor base over time, particularly with that focus on accountability that you described?
Aldo Romani: The sustainable investor community has changed a lot since 2007.
The market has developed step by step since then and now investors can rely on a platform of legislation that was not in place even five years ago. Despite the challenges posed in terms of implementation, the developments in the market regulatory framework offer investors the opportunity to steer their investment in a more targeted and efficient manner.
The European legislation takes the capital markets investor as a core interlocutor in its efforts to increase the clarification capacity of the market and to serve the objective of the European Union: sustainable development.
Today, investors have the opportunity to refine their panoply of instruments in pursuing the objective of not only putting capital to work but also of identifying where that capital should be best deployed.
All of this has a knock-on effect. While it is clear that some investors have been looking at these aspects for a long time, other investors recognise the value that comes from their focus and commitment. We can see this in the support for green and social bonds which, despite equal creditworthiness and larger issuance sizes, continue to outperform conventional bonds in the secondary market.
Julian Lewis: As an institution that is not only an underwriter but also an investor and issuer, how have you seen the investor base for these instruments develop over time? And where do you sense the critical mass now?
Laurent Adoult: There are three things that investors expect from issuers. The first is a clarity between the firm’s overall ESG strategy and what assets go into your green or social bond. I think clarity between the two is essential.
A lot of people ask me: “Now that investors are increasingly focused on issuer profiles, is it the end of the green or social bond market?” The answer is no; they are complementary.
As a green bond investor, you first need to understand
the decarbonisation strategy or the climate policy of that issuer; only then can you properly analyse their green bonds.
You want clarity of the two objectives because if your climate path requires decarbonisation of a particular sector, then hopefully you will have the investments, the financings, that are related.
The second thing investors want is eligibility criteria. We are gradually moving, at least in Europe, towards the implementation of a taxonomy, meaning issuers are trying to align with the first pillar – the substantial contribution criteria. That’s what investors expect at the moment – hopefully with transparency around full alignment. But we all know how difficult that is for issuers.
The third thing investors want is reporting – the integrity of the market is based on transparency. Investors like regular, timely and investor-friendly information. Issuers may produce fabulous reports, but when you are an investor with hundreds of investments to analyse every year, you want to have information in a format that is accessible and enables you to carry out your analysis efficiently.
In terms of development of the investor base, I would say that pretty much all segments of the market – asset managers, bank treasuries and even central banks – are increasingly active in the green bond market.
Julian Lewis: Anything to say about how that emphasis on coherence affects the bank’s own issuance?
Laurent Adoult: For ourselves, but also when we advise other banks, the question that comes up from investors is: “Okay, you may have come up with your decarbonisation commitments, but how does that translate into more investments/more financing toward that particular sector?”
For example, if you’re going to decarbonise your exposure to the power sector, does that lead to an increased commitment to lend more to renewables? Hopefully, yes, and hopefully that means more renewable assets in your green bond portfolio. It’s a logical step.
Julian Lewis: We’ve had several references to the EU Taxonomy and to the Green Bond Standard. Since you’re all European issuers, you’re inevitably affected by it but how important is it to meet the standard and how much of a challenge will it be?
Ralf Berninger: It’s going to be a significant challenge for us for two reasons.
Firstly, we finance a very wide range of green investments. It’s not just renewable energy, it’s public transportation – bicycle lanes, electric car-charging stations, etc ¬– it’s other municipal investments, such as waste recycling, waste collection; it’s water treatment. There a lot of different boxes to tick for all these categories.
Adding to the complexity is that we provide very small green loans to local authorities – the minimum size is €300,000. That restricts the verifications you can make on a loan-by-loan basis. It’s challenging for us.
We do finance large projects, for example, in the area of public transportation where you can more easily show taxonomy alignment. For these projects occasional issuance aligned to the Green Bond Standard could be an option, but it’s definitely not going to be 100% of our issuance.
Christian Engelen: As the European Commission, we are definitely a proponent of the Green Bond Standard. However, for our own issuance, you have to reflect that it is very closely linked to this one programme, the Recovery and Resilience Facility, which was established at the end of 2020, with issuance beginning in 2021.
At that time, the Green Bond Standard was not fully negotiated and, because of that, we couldn’t link our green bond framework fully to the Green Bond Standard. We took what was clear at the time and then we designed our own green bond framework, based on ICMA principles. Basically, we’re trying to combine the best of both worlds.
Since then, we have published the degree to which the expenditure side from our green bond issuance is compliant with the taxonomy. Over 57% is fully or substantially aligned and another more than 36% is partially aligned with the taxonomy.
The overall degree of alignment is very high: around 93% of expenditures. We are very close to full compliance with the Green Bond Standard but we cannot guarantee full compliance because the Green Bond Standard and our green bond framework are not identical, given the earlier mentioned timing issues.
We also think that it would be very disruptive for the market, as well as to member states, which are the beneficiary of the NGEU green bond proceeds, if we rewire our green bond framework on which existing issuance is based. Because of that, we will continue with our framework, but we will also continue to report the degree of alignment with the taxonomy.
We hope that this will give investors the transparency needed to factor it into their investment decisions and to determine the degree to which they want to adhere to the Green Bond Standard.
Julian Lewis: What kind of signals do you get from investors about their willingness to support this approach?
Christian Engelen: So far it’s very positive. Investors very much appreciate the transparency we provide.
When you look into our reports – both on the allocations but also now the impact report – it provides so much information, not just on taxonomy alignment but also on the environmental impact of those expenditures.
It provides investors with the information and assurance that they are adhering to their own investment guidelines. It’s important for investors to know both.
Julian Lewis: That begs the question: how important is it for investors that any issuer should be fully compliant with the GBS?
Marlene Walch: It is difficult to meet all the requirements of the EU GBS, but even though it is a challenge, it is important to be transparent.
Perhaps if you’re a corporate and you have control over the project that’s being financed, you have access to the data, then you might be able to get the information to issue a green bond under the EU Green Bond Standard. If you’re a financial institution, then you are always reliant on third-party data.
Relying on other people’s data is the misery we all face.
We have a similar approach to others on the panel. We go step by step, getting closer to alignment, because we appreciate that transparency is very important.
I also think that having the standard out is important because it gives credibility. We should all head in the same direction, but if we can’t do it in one big step, then we should take little steps.
In our last framework update, from January, we included a lot of information on the alignment with the substantial contribution criteria – similar to what Christian said. We have about 78 activities, and 63 of them are aligned with the criteria.
We’ll keep going in this direction, disclosing as much as we can.
Julian Lewis: Would KfW, as an investor, be open to buying non-GBS-compliant green bonds?
Marlene Walch: We’d like to have a certain percentage of compliant bonds in our portfolio but we don’t have a fixed target. We do want them but I don’t believe that in the beginning there will be many issuers offering large volumes of fully aligned bonds that we could buy.
I’m pretty sure issuance of bonds compliant with ICMA standards and the EU Green Bond Standard will develop in parallel for quite a while – hopefully with volumes of EU Green Bond Standard bonds growing. But we will still invest in ICMA standard bonds – especially as we’re still issuing ICMA standard bonds ourselves.
Julian Lewis: The EIB perhaps exemplifies an issuer that is committed to achieving eventual compliance with the GBS. Aldo, what’s your take?
Aldo Romani: This is a question that’s very dear to me, as you can imagine. But it does not prevent me from having a pragmatic view.
First of all, it has been easier to take a policy-driven approach at the EIB than perhaps elsewhere, because the bank is the bank of the European Union. In 2020, in its core operational plan – the so-called ‘climate bank roadmap’ – it committed to aligning the tracking methodology for green finance with the framework established by the EU Taxonomy regulation. It also committed to the policy of gradual alignment of climate and sustainability awareness bonds with the EU Taxonomy and EU Green Bond Standard.
We have moved within a clear institutional framework and been able to take a structured policy approach from the beginning. At the same time, I would just like to highlight that we had already tuned the use of proceeds of our bonds to EU legislation in 2018, driven by market-related considerations.
This experience permits me to emphasise the opportunity created by using this legislative framework: it establishes a very strong narrative for a structured dialogue between investors, issuers and intermediaries on a subject characterised by a lack of clarity from the beginning.
Why did we adopt this approach in 2018? Because, when we extended the methodology of our climate awareness bonds to sustainability awareness bonds – to environmental and social objectives other than climate change mitigation, with an initial focus on water projects – we were conscious that, in these areas, we had a more limited flow of disbursements.
It was necessary to take a cumulative approach to issuance, to allocations, in order to develop a programme. And the open-ended, cumulative, objective-focused approach of the taxonomy regulation that had been proposed in May 2018 offered an ideal opportunity to redefine the documentation in an evolutionary manner while forcing us to develop a framework that we described and had assured by KPMG from 2020.
We have been through a process of gradual discovery. Initially, we targeted ‘substantial contribution’ because this has been the focus of our use-of-proceeds bonds since their inception. Alignment with the logic of the taxonomy has required a comparison of our environmental and social standards with the other areas of the EU standard, ‘do no significant harm’ and ‘minimum safeguards’, and then further investigations of our experts with project promoters.
This has led to the conclusion that several usability issues exist and they are being addressed pragmatically with the help of our clients. These issues and ongoing endeavour were openly declared in the mid-term review of our climate bank roadmap in December.
It has enabled us to reach a point of assurance where all the projects to which funds from CABs were allocated from 2022 onwards, and which are taxonomy eligible are indeed aligned with the technical screening criteria for ‘substantial contribution’ of the Climate Delegated Act as well as with the logic of the remaining criteria.
Why is this important? Because it has an instrumental value. It enables us to now focus on those same projects but with an eye to ‘do no significant harm’ and ‘minimum safeguard’ requirements.
It is part of a process, not just a question of complying with a standard that, in any case, is voluntary. The standard represents a kind of a litmus test against which the status quo, with regard to the availability of information, the collection of information and the development of our clients on the lending side, can be tested. It is the basis from which a solid programme for improvement can be established.
By delivering this on a timely basis to the market, providing even partial information, then the market has the potential to monitor progress whenever this may materialise. Our positive experience from this kind of approach has been substantiated by an extensive outreach that we conducted on behalf of the EU Platform on Sustainable Finance, together with ESM, over the course of last year.
There is a market-driven push for more taxonomy-based reporting; this is absolutely clear. And there are a lot of people that want to use the taxonomy wherever possible. They must just be encouraged to see things dynamically and not frozen in time.
This has been recognised in ‘A Compendium of Market Practices’ that was published by the platform in January. On the basis of this recognition, we have been entrusted this year with the development of guidance that should identify the core features of taxonomy-aligned bonds that are in the process of developing the necessary infrastructure to improve the understanding of the sustainability activities of issuers that are not subject to regulatory reporting, such as public and non-EU issuers. It gives the market the potential to compare on the basis of a concrete voluntary plan that looks at improvement.
This approach represents a huge opportunity for the market and it has really enhanced the policy value of green bonds. It’s not just a question of applying a standard now, in a static manner, that inevitably captures only a limited portion of the economy and a limited portion of the market. It is a question of using it as the starting point to clarify all the other things that must be done to promote sustainability in the economy, in all those areas not yet taxonomy aligned.
Julian Lewis: Nonetheless, can I ask a very crude, journalistic question: should the market expect the EIB to begin issuing under the GBS soon after it comes into force in December?
Aldo Romani: What the market can expect – and I think this is no secret – is that we are definitely working to clarify in which areas fully EU GBS-aligned bonds can be allocated. Whether we will be able to issue just after, a little while after, or long after the standard becomes applicable, is a process of discovery and not down to programmatic statements.
I think that investors appreciate this. And this is the point: it’s not just a question of making generic statements, it’s a question of making a statement vis-a-vis the concrete methodology that one uses to deliver solid results. That is the significance of this approach. It’s not just the notion that you have to comply with a standard because it is a standard and because you’re the EIB.
We are doing all the necessary work to be in a position to issue this kind of bond as soon as possible, but also with the intention of pursuing the action required to extend the reach of such instruments meaningfully over time.
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