Julian Lewis: Laurent, what is the view of the market, more generally, on the GBS? Do you subscribe to the view that as of December there will be a two-tier green bond market? A more expensive elite issuing under the GBS, and a second, cheaper market trailing in its wake?
Laurent Adoult: A super greenium for EU GBS bonds?
First, I would say that the comments we’ve heard are a relatively good representation of what the entire market thinks. We all know that for the EU GBS the big difficulty lies within the EU Taxonomy. The rest of the requirements are just best market practice that a lot of issuers have already implemented.
We know that SSA issuers tend to be relatively far from the project, so it’s a question of data collection, etc. That’s the first difficulty.
The second difficulty is about claiming alignment to the taxonomy. What sort of proof do you need? Here comes the question of lawyers. Increasingly, people will have litigation risk when claiming something is green, especially when it comes to the taxonomy.
To answer your question, I think we’ll see a gradual take-up of the EU GBS due to the difficulty in managing the taxonomy. There will be a few issuers in some sectors – maybe the SSAs, maybe the corporates, maybe the banks. But do I expect a huge wave of EU GBS bond issuance in January? No, just a few issuers, those that are already able to manage the taxonomy.
As the economy becomes more at ease with the taxonomy, as corporates change their industrial processes, then they will increasingly be able to say: “Yes, that project is aligned to the taxonomy.” Once issuers can claim alignment, then they will be able to issue under the EU GBS format.
As for a super greenium, personally I don’t expect to see one for EU GBS bonds, apart from perhaps the first trade in January because everybody will want to say “I participated in the first EU GBS deal”.
But in general, I don’t think a super greenium is likely. I can’t remember any investor telling me that they will have a particular investment strategy for EU GBS because – as has been mentioned – the investment universe for EU GBS would be too small, too narrow to really build a specific fund just investing in these deals. At least for now.
Julian Lewis: Impact is now such an important part of the discussion that we even have one of the major UK institutions reframing everything it does in ESG capital markets through an impact lens, talking about their green bond portfolios as impact investments.
What is the importance of impact on your issuance and how do you measure it?
Ralf Berninger: On the green bond side, market practice is quite well established so we try to align with that. We calculate, as accurately as we can, avoided CO2 emissions, for example, when we finance public transportation.
On the social side it’s a lot more complicated. We finance, for example, hospitals and schools and very often investors are interested in getting more data than just the number of hospital beds that we’re financing or the number of patients treated in the hospitals we lend to.
For us that’s complicated. When you look at socioeconomic indicators, like life expectancy, it’s very difficult to show a clear link between the financing that we provide and improvements on those indicators. We really try to stick to what can be audited and where we can be sure to present the right figures.
When we finance municipal investments, green and social aspects are often closely linked. For example, when we finance a tramway project, we’ll report on avoided CO2 emissions, but we’ll also try to provide some figures on the social impact, on how many people are benefiting from the investment.
It’s the same on the social side. When we finance a school, it’s typically going to be a green building so we have an environmental impact.
Julian Lewis: That idea of ‘co-benefit’ is gaining ground. Do you find that investors are sensitive to the notion? Is it something they’re looking for and willing to pay for?
Ralf Berninger: Yes, they’re definitely interested. It’s something they regularly ask for. As to whether they are willing to pay for it, however, I don’t think so. For investors, it’s really a nice add-on but it’s not essential.
Christian Engelen: Each institution needs to find its own approach to measuring impact. I think we would all agree that we need to take a very prudent approach.
We, for instance, issued our first impact report – together with the allocation report – at the end of last year on a pool of around €190bn in eligible expenditures. We converted these expenditures into output indicators and then, helped by third-party experts, translated the output indicators into greenhouse gas emission reductions. For us, that is the key metric for our green bond framework.
With a pool of €190bn, we calculated a potential saving of more than 44 million tonnes of greenhouse gas emissions per year upon full implementation of the programme. That’s quite a significant and material impact.
Since then, the pool has grown to more than €260bn. If all the measures are fully implemented, the next impact report will likely show an even higher figure.
One important point to note that goes back to what I said about being prudent is our very conservative approach. Our programme has very well-defined milestones and targets – and I’m talking about 1,700 milestones and targets in member state national plans. Out of this number, we’ve only taken about 350 milestones in our calculations because they are the only ones making a quantifiable impact.
That shows that you really need to boil down what you’re financing with green bonds to come out with a realistic and credible and convincing assessment of impact. The real impact, nonetheless, will be multiples of what we can credibly demonstrate and quantify because a lot is just not quantifiable, not measurable.
Hopefully that is something that investors value in our programmes. They get something black and white in terms of the impact we can measure and demonstrate but there is also the assurance that the rest of the investment is not without impact. It’s just not quantifiable.
When we talk about sustainable finance and ESG investment, particularly green bond investment, it is important to translate that into real impact with a measurable basis, but we also have to accept that there is a whole sphere of investments beyond that which also have an impact. Just not in a measurable way.
We, as issuers, are all doing everything we can to provide investors with the information they need but we cannot give full assurance or translate each and every euro of investment into some kind of quantifiable impact. It’s simply not possible.
Julian Lewis: Sustainable Development Goals are a lens on all of this. Are investors asking you about SDG alignment?
Marlene Walch: I have to admit that SDG is not actually much of a topic in the conversations I have with investors, even though KfW maps every activity it does to at least one SDG. Either they’re already looking at our mapping report before we talk, or it’s not of much interest anymore.
That doesn’t mean that SDGs are not important, but maybe – especially when it comes to the green sector – it is not the main focus. The focus is more on the impact that you can measure in terms of greenhouse gas reduction, for example.
We have been moving away from SDGs to other indicators, such as the ones in the ICMA handbook.
Julian Lewis: Does that mean that SDG targets are too soft for investors?
Marlene Walch: Not too soft, but we live in a world of numbers, right? A world of data. And by only looking at the goal, it does not give you guidance on how to actually get there.
The whole environment is developing in a really positive way. More and more people actually want to know the impact of their money.
We are moving from shareholder capitalism towards stakeholder capitalism, which means that everyone is involved and everyone wants to know what’s actually happening and who is affected – the social effects and also the environmental ones.
The more we can actually measure the impact of our investment, the more credible it becomes. It also becomes more steerable. If we take the Paris Agreement, for example, our role as financial institutions is to steer cash flows towards a certain goal – net zero. But how are you going to do it if you don’t know the impact of your investments? If you don’t have directions it’s like trying to find something without Google Maps.
It is just super important to have impact data. And data must also be well measured, calculated and as standardised as possible for us to reach our goal.
Julian Lewis: Aldo, having spent so long thinking about the impact of your ESG issuance programme, what’s your sense of what’s most important in this area?
Aldo Romani: I make reference again to the idea of discovery. The science of green bonds and of the legislation that has been put in place is to enhance comparability so the market can work more efficiently. This is not always possible, of course, but where the boundaries can be stretched, how this objective can be taken forward, is a matter of market development in itself.
It is important to expand the discussion by a few additional elements. The first one is that EU GBS is useful in terms of gradual alignment because it focuses market attention towards what, by definition, contributes substantially to environmental objectives that have been established by legislation after a longstanding process of exchange among experts.
This is, however, only a starting point. Substantial contribution needs to be accompanied by an analysis of ‘do no significant harm’ and ‘minimum safeguards’, which implies the need for systematic feedback to the legislator via the platform where usability issues persist.
This point is very high on the agenda of the commission and of the platform. In the ‘Compendium of Market Practices’, there is the clear statement that one important priority for the work of the platform this year is a review of the ‘do no significant harm’ criteria ahead of next year’s review of the Climate Delegated Act.
Taxonomy-aligning green bonds are also a way by which market participants and issuers can voice their concerns and propose alternatives or proxies that work better on the ground.
This is also a principle that has been officially recognised by the commission, which on December 21 – upon the EU GBS regulation entering into force – also issued a notice providing guidance on the interpretation of certain provisions of the Disclosures Delegated Act that clearly highlights that the commission itself is aware of the fact that reporting cannot be limited to regulatory reporting. It should also be accompanied by partial reporting where not all of the elements are aligned. This is a discovery process.
There is another waterfall effect. It’s not just a question of drawing the market’s attention to what contributes substantially, what has the most significant impact on objectives. It’s also about what activities are compatible with that objective, those that do no significant harm to the objectives themselves. Many of them can be improved in terms of performance by additional investment.
Indeed, a working group of the platform chaired by the EIB issued a report two years ago that highlighted the opportunity of extending the logic of the taxonomy to the broader spectrum of activities in the economy.
The EU GBS is useful because it will also kick-start a broader discussion on how to improve comparability in the wider economy, an economy where sustainability can be improved despite the contribution not being as high as if taxonomy aligned. This is a very important element.
With regard to the SDGs, the taxonomy regulation makes reference to the fact that the SDGs are taken into account by all measures of the European Commission upfront. The taxonomy external regulation is an attempt to operationalise that by eliminating ambiguities and redundancies.
We have taken on board, for example, in the context of our use of proceeds issuance, the idea that there should not be an inflation of figures. If there is a core objective that is pursued, then the activities that are allocated should be attributed to this objective. This does not prevent additional information on the impact of the project, for example, on other objectives, but this is ancillary information to the core objectives being mapped.
There is the opportunity to enter into a dialectic process where issuers and those implementing on the ground have the possibility to propose alternatives that work and should be recognised by the market in a constructive dialogue with public authorities.
Julian Lewis: Laurent, in your role on the panel as a proxy for the wider market, what’s important to investors around impact and how do you see that changing?
Laurent Adoult: I think impact reporting has always been a key component of the GSS [green, social and sustainable] bond market. Investors want the regular reports, as usual, but I sense there has been more and more attention paid to the methodology behind the reporting.
I don’t think there are any investors that would rather buy a bond from issuer A versus issuer B because the impact is greater from A versus B. That’s not the way it works. Investors want to understand the methodologies behind the figures.
Methodology, to me, is important because being transparent on the methodology is key in understanding claims on impact and the conservative approach to those claims.
Investors are also asking issuers things like: “What are the financed emissions coming from the project being refinanced by a green bond?”. We might see more discussion around that topic in the future.
One more thing on impact reporting. You should never forget that, depending on what category you finance, the calculation behind the impact reporting might be relatively standardised, or super difficult.
When talking about climate change mitigation activities, generally you end up with tonnes of CO2 avoided, and there are lots of accepted methodologies in the market to calculate it. It is relatively easy for issuers to compute the data. But if you talk about categories linked to, for example, recycling or the circular economy, then calculating the impact is a lot more difficult – and will remain so for a number of years. In some areas, it’s very difficult to calculate proper, reliable, impact-reporting indicators.
Julian Lewis: And finally, additionality. Is that a topic on which investors put emphasis? How do you advise new issuers on, for example, the look-back period and how that relates to the potential additionality of their issuance?
Laurent Adoult: Additionality to me is about being transparent in your activities and how this relates to your ESG strategy because that’s where it makes a difference.
I think each issuer and each investor may have their own view on look-backs. The EU GBS is clear that for some types of assets like opex, a look-back period is necessary. For others you don’t need one.
Julian Lewis: Thank you all for your comments and insight.
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