The development of Green and Sustainable Financing

By Rory Fletcher

Rory Fletcher recently joined HSBC DCM, based in New Zealand, after a long stint with HSBC’s DCM team in the global HQ in Canary Wharf, London.

Given that Europe remains the epicentre for the global push into sustainable finance, we wanted to ask Rory a few questions on the topic.

Q: What’s a Green bond?

A: The short answer is that Green bonds are used to fund projects that have a positive environmental and (or) climate benefit. The heightened focus among corporates on sustainability and the increasing size of investor side mandates for socially responsible assets has been a marriage made in heaven. Issuance of Green bonds has exploded.

Q: What are the advantages of issuing a Green bond?

A: There are a range of different reasons for issuing a Green bond. The most obvious ones are listed below:

It demonstrates innovation. It is becoming a more mainstream product, but issuing in Green format is still a useful means of differentiating one’s debt from peers.

It provides great publicity and positive profiling in what is a growing market. That makes them useful for both internal and external marketing purposes.

It ties in nicely to the core mission of most businesses.

It leads to investor diversification and sees a larger number of investors able to participate. The broader point here is that no normal investor is restricted from investing in Green, whereas Green investors are restricted from investing in conventional bonds. So that opens up larger pools of liquidity.

It can lead to a pricing benefit given that additional demand. That is difficult to quantify, however, the Euro market in particular has good examples of issuers that have Green bonds trading inside non-Green equivalents. Other currency markets are expected to follow suit.

The same is true of secondary market trading where we see Green bonds outperform non-Green ones. That is once again the product of the increased number of fund managers able to purchase.

It is simple to execute off a standardised documentation platform. It simply requires additional language in the Use of Proceeds section. There are then the Green specific documents (Green Bond Framework and Second Party Opinions), but those can lean on the sustainable reporting already done.

It has large scale support across the globe among regulation and policy committees.

Q: What’s the difference between a Green Bond and a Social Bond?

A: In many ways these two subcategories are incredibly similar, but where a Green bond seeks to address specifically environmental goals, a social bond seeks to address existing social issues or challenges, such as a lack of housing or the need for greater education for a particular group.

Q: How would I go about issuing a Green bond?

A: First, we would develop a Green bond framework, which is a document that identifies the Green use of proceeds, outlines the process for evaluating Green projects, references the manner in which those proceeds will be managed and ultimately comments on allocation reporting. Then, we would engage a third party to provide an opinion that this Green bond framework meets the Green Bond Principles and finally we would look to structure and market a green bond instrument, along a process that is materially the same as an ordinary fixed income issuance.

Q: Are there any examples of locally issued Green or Social Bonds?

A: Yes, in fact HSBC led the first Green Bond issued by an Australian corporate name, Stockland’s EUR300 million bond back in October 2014, which allowed it to finance the conversion of some of its real estate assets to more energy efficient footprints. Since that time we’ve seen all four major banks issue green bonds, the first green USPP from Hallett Hill wind farm, the first Green securitisation, and the first NZ Green bond framework and bond from Contact Energy. More recently, HSBC led QBE’s first Social bond, an inaugural gender equality issuance.

Q: Why do investors buy this asset class?

A: Green bond investors look to purchase assets that align with a relevant set of principles, under the aegis of their institution’s commitment to an international agreement (Paris Green Bond Statement – part of COP21; Montreal Carbon Pledge; UNEP Positive Impact Manifesto) but investors have also joined in their own groups to commit to act together, for example, the Investor Network on Climate Risk. Ultimately, investors are acting because their stakeholders’ and institutional view is that addressing climate change is an important corporate responsibility.

Q: How has HSBC demonstrated its commitment to sustainable financing?

A: In conjunction with a market leading Green bond team within Debt Capital Markets, HSBC has also been at the forefront of sustainable issuance and research. In November 2015, HSBC issued a EUR500 million green bond, which funded eligible investment in projects of renewable energy, energy efficiency and sustainable water management and has since continued to build on that platform. HSBC has recently promised USD100bn to fight climate change so if I were a betting man I would assume there would be more Green bonds on the way!

This commitment is recognised at the top of the house, with former HSBC CEO Stuart Gulliver on record as saying, “There is a business imperative as well as a moral imperative to get involved in green financing … HSBC has a strong commitment to sustainable development and will continue to work with customers, clients, governments and business to respond to the climate challenge.”

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