Investors and issuers have been slow to embrace the integration of environmental, social and governance (ESG) issues in fixed income, but regulatory pressure and a shift in investment patterns are now leading a change, according to Carmen Nuzzo, head of fixed income at the Principles for Responsible Investment (PRI).
The volume of ESG bonds has certainly grown dramatically. Global issuance surpassed $250 billion last year – about 3.5% of total bond issuance, according to the Bank for International Settlements – while by the end of August, issuance this year was up around 6% at $157 billion, according to DBRS Morningstar.
“We are actually seeing a revolution, away from a pure risk assessment or risk-return assessment [to] a type of analysis that adds a third dimension, that we have called a real board outcome,” said Nuzzo.
“Analysis investors are considering more carefully the impact that their investment decisions may have,” she added.
She was speaking at the APAC Digital Symposium held on September 17 by PRI, a United Nations-supported non-governmental organisation.
Much of the demand for ESG debt is coming from European investors, said Doreen Saik, senior corporate analyst of emerging markets debt at Neuberger Berman in Singapore. That is where “a large part of our client money” comes from, she explained.
What this has meant is that Neuberger Berman has seen an 87% increase in growth in ESG funds year-to-date.
While traditionally the regulatory push for ESG has been driven by Europe too, Katherine Han, head of ESG research at Harvest Fund Management in Beijing, pointed out that it is now being championed by China.
She cited the Asset Management Association of China’s green investment principles as “a driving force alongside the regulators to promote sustainable finance in China.”
The transition to ESG investments is not, however, without difficulties. Saik emphasised the need to help companies shift their focus.
“This is very relevant and close to my heart because emerging Asia is still very heavily reliant on coal. Simply to say ‘no we don't want to invest in coal’ causes social issues. That's why we have taken a difficult way through with transition investments, rather than complete exclusion.”
As Nuzzo concluded: “It's not just only about making a positive impact or achieving positive outcome but also helping corporates to transition towards a business model that has fewer negative outcomes.”
First commercial blue bonds
The increase in demand for ESG products is partly a reaction to Covid-19, but as Australian bank ANZ pointed out in a report published earlier this week, there has also been a shift in issuance patterns.
“Historically, social bond issuances have been driven by national and supranational public sectors, who continue to lead this part of the market. However, interest from commercial banks and private entities is growing,” noted Tessa Dann, director of sustainable finance in the report.
This was seen clearly at the end of last week when Bank of China printed the first blue bonds from a commercial bank. These are bonds where the proceeds are used to fund new and existing marine-related green projects.
They will be used to fund a number of offshore wind projects – seven in China, one in France and one in the UK – as well as 16 sewage-treatment facilities in coastal cities in China that address the problem of the release of untreated sewage into the sea.
The two-tranche, dual-currency issue included a $500 million 0.950% three-year piece that priced at 99.694 to yield 1.054% (Treasuries plus 90 basis points) and a Rmb3 billion ($442 million) two-year Dim Sum that went at par to yield 3.15%.
Demand on the A1/A/A rated notes was significant if not spectacular (books of $950 million and Rmb4.5 billion) but it was enough to tighten pricing by 40bp and 35bp respectively from initial guidance.
BOC, Credit Agricole, BNP Paribas, Natixis and Societe Generale were joint global coordinators for the US dollar tranche, with BOC, Credit Agricole, BNP Paribas, Agricultural Bank of China Hong Kong branch, Citigroup, DBS Bank, KGI Asia, Mizuho Securities and Scotiabank on the Dim Sum tranche.
The first blue bonds were issued in November 2018, when the Republic of the Seychelles sold a $15 million 6.5% 10-year sovereign blue bond, which was partly guaranteed by the World Bank.
