Sustainable finance fast becoming a mainstream financing tool
IFC and HSBC are sending a clear message to the market on the importance of mobilizing capital needed to make meaningful progress with climate finance
IFC and HSBC are sending a clear message to the market on the importance of mobilizing capital needed to make meaningful progress with climate finance
One of the newest and fastest growing asset classes are green bonds, a debt instrument used by corporate treasurers to exclusively finance new or existing green projects under climate finance. Since their introduction in 2007, green bonds have become mainstream in the financial community with the annual issuance of Green Bonds reaching $167 billion in 2018, according to the Climate Bonds Initiative.
The green bond market was given a major boost after the signing of the Paris climate agreement in December 2015, with China, the EU and India all doubling down on their commitment after President Donald Trump withdrew the US from the accord.
The latest to target the untapped opportunities of climate finance and green bonds are International Finance Corporation (IFC) and HSBC.
The Real Economy Green Investment Opportunity (REGIO) Fund by IFC and HSBC Global Asset Management announced the establishment of the first global green bond fund targeting real economy issuers in emerging markets, thereby increasing access to climate finance and promoting the further development of green bond markets.
The REGIO fund is aiming to enable investors to achieve real economy impact to deliver against the Paris Climate Agreement and Sustainable Development Goals.
IFC CEO Philippe Le Houérou said: “This innovative fund will provide new opportunities for an important class of borrowers in green bond markets. The capital raised by REGIO will make a vital contribution to the fight against climate change and further promote sustainability-oriented capital markets.”
Sridhar Chandrasekharan, Global CEO, HSBC Global Asset Management added: “HSBC Global Asset Management has deep expertise and experience in investing in global emerging markets and a strong commitment to playing its part in mobilising capital to deliver on the UN Sustainable Development Goals and transition to a low-carbon global economy.”
IFC, a member of the World Bank Group, will provide a US$100 million anchor investment in the fund, while HSBC will invest up to US$75 million. The fund will have a total life of up to 15 years, including a seven-year investment period.
REGIO draws on IFC’s strong experience in the green bond market — as an issuer, investor and standard-setter. Since 2010, IFC has issued 143 green bonds in 16 currencies, worth over US$9 billion.
The fund is expected to catalyze at least $500m to $700m in private capital to support a diversified portfolio of climate-smart investments, largely through a mix of bonds from manufacturing, agribusiness, services, infrastructure and subsovereign issuers, in addition to a smaller allocation of financial-institution bonds.
Non-financial borrowers represent an untapped opportunity in the global green bond market. REGIO will increase access to climate finance for these borrowers by targeting a mix of manufacturing, agribusiness, services, infrastructure and sub-sovereign bonds, in addition to a smaller allocation of financial sector bonds.
Hong Kong has emerged as an Asian capital markets hub for green bond issuance, with an estimated $11 billion in green bonds issued in 2018. The rapid growth of green bonds has been driven by large-scale new green bond issuance in China in 2017 and last year. China has opted to embrace green finance as part of its 2015 five-year plan. Last year, China’s green bond issuance totaled $34 billion, with Chinese lenders responsible for more than 50% of total green bond issuance by banks, according to data compiled by the ratings agency S&P Global.
In India, Adani Green Energy, the renewable power arm of Gautam Adani-controlled Adani Enterprises, is set to raise $500 million through an overseas bond sale. GMR group controlled Delhi International Airport (DIAL) raised $350 million via similar type of issuance where bonds were priced at 6.45 per cent, 30 bps tighter than the 6.75 per cent initial guidance.
Talking to The Asset, Mitch Reznick, Head of Credit Research and Sustainable Fixed Income at Hermes Investment Management analyzed: “To date it’s been a record year for green bond issuance and what’s interesting is that you are seeing more and more Asian-based issuers issuing into the offshore market.
“The environmental, social or governance (ESG) demand is driven in Europe and the US from the bottom up, whereas in China the shift to greener standards is more of a top-down development. For instance, the People’s Bank of China and six other government agencies jointly issued the Guidelines for Establishing the Green Financial System.
Investors and issuers green bonds in Asia expect an alignment of standards to take place as this asset class is gaining traction in the secondary markets.
The launch of REGIO complements the World Bank Group’s commitment to investing and mobilizing US$200 billion over five years to combat climate change and increasing climate finance to at least 35% of its direct financing commitments. IFC pioneered this commitment with the Amundi Planet Emerging Green One (EGO) fund last year. IFC is a cornerstone investor for EGO and the fund focuses on financial-sector bonds.
Talking to the Financial Times, Philippe added: “Of course, supporting the supply side of the green bond market and implementing strong market standards are key to bolstering the market. At IFC, we help borrowers issue their own green bonds by providing investment capital for specific green bond issues and technical assistance. Frequently, such borrowers are first-time issuers and the bonds are in diverse currencies. The REGIO initiative with include a technical support programme designed to help potential issuers.
“At the World Bank Group, we have committed to investing and mobilising $200bn over five years to support climate business and pledged to increase climate finance to an average of 35 per cent of our direct annual financing commitments.
“As a new generation of investors becomes more socially aware and eager to make a difference in the world, green bonds have the potential to become the investment vehicle of choice. Working together, we can make sure that the financing needed for a low-carbon, resilient future is within reach.”
Demand for green bonds is outstripping supply, as institutional investors come under increased pressure from clients looking for investment projects that help rather than hinder the environment.
As more and more corporate treasurers around the world continue to see the benefits of embracing the green bond, the fledgling financial instrument is well on its way to becoming a mainstream financing tool for treasurers. Long-term investors are on the look-out for assets resilient to the impact of climate change and that brings with it additional obligations on companies in terms of data collection and transparency.
These early developments are fueling sustainable finance’s burgeoning momentum. However, greater levels of innovation and market-building efforts are necessary to truly exploit its full potential. Also, the dearth of consolidated standards for issuance is a big hindrance for green bonds in the Asia Pacific region.