Sitting in the Kowloon Bay headquarters of Hong Kong metro operator MTR Corp, finance director Herbert Hui appeared satisfied. He had joined the company only a few months before, and had already pulled off MTR’s first dollar bond in four years.
But perhaps more importantly, he had ensured MTR Corp would be part of a growing conversation among global debt investors.
That’s because Hui had decided the company was not going to simply issue a conventional bond. Instead, he opted for a green bond — joining a movement towards environmentally-conscious financing that took on a life of its own in Asia in 2016.
Unsurprisingly, Hui talked up the benefits of the deal in an interview with FinanceAsia, pointing to the value of attracting new demand from European investors and saying that the deal “cemented our financial success and environmental friendly objectives in one transaction".
Other issuers, and plenty of bankers, make the same noises about the benefits of the green bond market. The sheer volumes show that their arguments are convincing. Asian issuers outside Japan had sold $23.7 billion of green bonds by December 2016, a whopping 82.3% increase from 2015.
But although bankers are succeeding in convincing clients of the benefits of green bond issuance, they cannot point to economic benefits. At least not yet.
Bonds with benefits
Most bankers admit that, at this point, green bonds do not offer a pricing advantage to issuers. But banks, supranationals and corporations selling green bonds can often price them in line with existing debt, meaning other benefits can shift the needle.
Laurent Morel, Societe Generale’s head of debt capital markets and advisory for the Asia-Pacific region, said issuers of green bonds were usually more aware of their corporate image and therefore take steps to manage any reputational risks.
“There is reputational benefit for the companies [selling green bonds],” said Morel. This means that besides allowing green bond issuers to attract a more diverse set of debt investors, they can also bolster support among environmentally-aware shareholders.
Other bankers told FinanceAsia about the public relations value banks and corporations get from selling green bonds, especially when they are the first from their country or sector. They can also get positive feedback from government officials, allowing them to present their issuance plans as part a wider national project.
There is also, of course, the moral dimension. MTR Corp’s Hui talked about how issuing a green bond was an important part of educating Asia’s financial community, helping promote public awareness over carbon emissions and actions taken to tackle pollution.
But the market would become a lot more attractive to issuers if they got some pricing advantage. There are some signs that may happen in the future — although it requires shifting your focus away from new issuance.
Secondary concerns
In 2015, analysts at Barclays studied the difference in secondary spreads between green bonds and conventional deals sold by the same issuers. They found that green bonds traded on average 20bp tighter than conventional bonds, thanks in large part to demand from environmentally-focused funds.
That hefty spread differential is unlike to hold in all situations — Morel pointed, instead, to a 1bp or 2bp difference at the moment — but it does appear in a variety of markets.
John Barry, head of capital financing for Asia at National Australia Bank, said there was evidence among his clients of green bonds tightening in the secondary market against conventional issues. But he has gone one step further, closing an asset-backed deal in the primary market that came with a 5bp saving to a non-green alternative.
“It was a relatively small trade and largely bought out by cornerstone investors in the US,” Barry said.
The rarity of this example shows that green bond issuers should not get too excited at this point. The ancillary benefits of issuing a green bond are likely to remain the key motivator for some time to come. The extra documentation costs are likely to wipe out any marginal saving.
But small differences can lead to large cost savings, and if the pricing discrepancy in secondary bonds should start to spread to the primary markets — as theory would dictate — then the movement towards more green bond issuance will only gather momentum in the years to come.
Greenwashing
For that to happen, however, investors and issuers may need to start agreeing on definitions. There is no one accepted definition of a green bond. Some issuers agree to voluntary ‘green bond principles’, or hire external auditors to evaluate their environmental credentials. But this is not always the case.
Chinese companies, which represented 40% of global green bond supply by the time this article was written, sold the bulk of their green bonds to local investors that are not necessarily as demanding as their Western counterparts. For example, a Chinese clean-coal producer could get the status of ‘green’ at home, which may confuse fund managers outside of the country given the nature of business.
“The green bond market is essentially a best practice-driven market, in which some non-government organisations have issued guidelines and standards for issuers to follow,” said Rahul Sheth, an executive director in Standard Chartered’s capital solutions group.
This means the standards Chinese issuers adopt — and that their investors accept — could go a long way to defining what ‘green’ really means in Asia’s bond market.
This is going to be important for ensuring that any pricing advantage that comes from increasing investment from so-called ESG investors — focused on environmental, social, and governance issues — will help push down the cost of issuing green bonds for Asian companies.
The movement towards ESG investment is only going to grow. BlackRock, the world’s largest fund house, has a 20-person team focused on so-called ESG investing. Other major assets managers are following suit. Whether the growth of these funds leads to a major pricing advantage in Asia’ green bond market remains to be seen.
But like most markets in this region, all eyes will be on China.
