International Finance Corporation (IFC) has been one of the world’s leading promoters of green bonds as a new asset class that can help finance the world’s attempts to transition to a low carbon environment.
Since it launched its first $200 million issue in 2010, the triple-A rated credit has gone to raise a total of $3.8 billion in the format.
Globally, green bonds really began to take off as an asset class in 2014 when a total of $40 billion was issued. Market participants are hopeful there will be $1 trillion in outstandings by 2020.
Asia and particularly China, the world’s biggest greenhouse gas emitter, has a big role to play, but so far issuance has been fairly limited. According to figures from data provider Dealogic, five issuers from Asia ex-Japan have a raised a total of $1.563 billion so far this year.
Here, IFC’s London-based funding head, Ben Powell, explains how the supranational is trying to foster greater issuance from Asia and the transformational role the Chinese government is set to play.
How strong is IFC’s commitment to green finance?
It’s core to what we do. Climate change and how the world addresses it is one of the World Bank Group’s key priorities. Every region, every section of the organization is focused on the issue. So it was always a very natural leap for us to enter the green bond market.
And we plan to do a lot more issuance. Over the last financial year it’s taken a bit of time to get to the stage we’re at now because we had to digest and then disburse the proceeds from earlier issues. But now we have capacity for more issuance.
How much do you intend to raise this year?
In our last financial year, which ended in June 2015, we raised approximately $400 million in green bonds through various markets and currencies. We haven’t set a precise green fundraising target from our overall $17 billion annual target, but our overall commitment to green finance is about $2.5 billion per annum and perhaps $1 billion of that might be financeable by green bonds.
Recent issuance in our new financial year included a Rp3.15 billion ($50 million) investment in a bond issue by India’s Yes Bank.
This deal had a two-prong structure. We issued a green masala bond raising Rp3.15 billion ($50 million) with a 6.45% coupon. This is an offshore bond denominated in rupees. Then those proceeds were invested in Yes Bank’s Rp3.15 billion onshore transaction, which came shortly afterwards and carries an 8.95% coupon.
How did this deal come about?
Yes Bank is a client of ours and also has a green focus. We’ve worked with them quite closely and they were very keen to execute a green bond to fund domestic projects mainly in the renewable energy sector, which the Indian government has a big commitment to as well.
They were also keen to ensure their bond was issued to international standards and met the Green Bond Principles. This is a framework established by market players in 2014 and then revised in 2015.
This meant Yes Bank got a second opinion, which is an independent certification that use of proceeds will be for green projects and will publish regular reports.
Do you want to do more bonds with a similar structure to the Yes Bank deal?
Yes we do. We’d love to build on that deal and do more in Indian rupees. The beauty of the structure was that the deal was denominated in rupees and we could pass the proceeds straight through to Yes Bank.
This contrasted with a Rmb500 million ($78.4 million) offshore green bond we completed in July 2014. That carried a 2% coupon and the proceeds were swapped back into dollars.
However, this deal was an important benchmark for us. We wanted to do it as a proof of concept to demonstrate there are international funds willing to invest in the renminbi for green purposes.
The deal was also designed to help London, which wants to raise its profile as an offshore renminbi centre. That’s where the bonds are listed.
What about issuing onshore in China? There’s a lot of speculation the government is about to re-open the Panda bond market (domestic bond issues by foreign entities). Earlier this year, Deutsche Bank forecasted that outstandings could grow from Rmb7.6 billion to about Rmb100 billion over the next five years.
Our ultimate aim is to raise funds onshore. We’d like to raise funds in renminbi and then keep the money onshore to fund projects there.
Right now, we’re not able to issue in China’s domestic bond market, but we’ve been working with the Ministry of Finance and I believe we will get there as China continues to liberalize and open up its capital markets. Alternatively, we could raise money offshore and then bring it onshore via our various mainland accounts.
How much could you envisage yourself eventually issuing in China?
It’s difficult to say. We’d like to become a regular issue and by that I mean executing a series of bonds and private placements from an MTN programme to fund projects there.
China’s rating also really helps because it means we can hold the renminbi as part of our liquid assets, which is not the same with a number of other emerging market countries.
What’s the rating threshold?
It’s AA-/Aa2, which means we can hold Chinese government bonds and those from state-owned banks as part of our liquid portfolio.
What measures would you like to see the Chinese government take to incentivize green bond issuance?
Well there appear to be a number of different propositions on the table including adjusting banks risk weighted assets to incentivize them to hold green bonds, or tax alleviation on interest income. I don’t think it matters what route the Chinese take. What’s important is the fact they’re doing something.
In fact, they are the first government to propose such a far reaching policy, and really taking leadership on this issue. This is a tremendous opportunity for China. I think this will be a real trigger for investors.
Green bond issuance in Europe is clearly a lot further down the road than Asia. There’s now talk of introducing covenants for high yield issuers and imposing interest-rate step-ups as penalties if borrowers do not stick to their commitments. Do you think this is a good idea?
It’s about getting the right balance. Transparency is absolutely key. Issuers have to be completely transparent about their use of proceeds as stated in the Green Bond Principles.
Market players would like investors to introduce requirements that prioritize green bond investments as part of their investment guidelines. Is this something the IFC does?
Our number one priority is to maintain liquid investments and second to secure a reasonable return. So our priorities are slightly different because we need to have a liquidity buffer.
But as the market matures and has greater liquidity I do think external managers will be competing for green mandates. We’re not there yet. Today it is about building liquidity, diversifying the issuer base and bringing in more investors.
What other measures can the IFC take to push forward green bond development?
As everyone is aware, there’s a huge gap between global infrastructure financings needs and the ability of the world’s banking sector to fund it. We have a role to play by encouraging institutional investors into the green bond market by using guarantees to remove some of the risk for them. This should also encourage more issuers because our guarantee can give them a ratings boost.
Governments could also be doing this as well. Meet the private sector half way and provide the partial or full sovereign guarantees that enable more companies to raise funding to improve infrastructure and aid climate change development.
