Green bonds are fast becoming in-demand instruments for capital markets investors, and BNP Paribas has restructured its debt capital market business to capture this growth. By Edward Russell-Walling.

Green bonds, climate-aligned bonds, sustainable-use-of-proceeds bonds. Whatever they are called – and each name means something slightly different – ethical investing is being taken more seriously in the world of fixed income. BNP Paribas has sustainability high on its agenda and is helping to diversify this growing segment into retail and emerging markets, high-yield and private placements. 

Like the names, numbers differ but, however they are measured, ethical bond issues have been taking off. BNP Paribas quotes Bloomberg figures showing that $85.3bn equivalent of "sustainable-use-of-proceeds" bonds have been issued since 2006, with $37.9bn of them (or 44%) in 2014 alone. Year-to-date issuance for 2015, it says, is $20.2bn.

Sustainable bonds 

It was only 18 months ago when BNP Paribas appointed Stephanie Sfakianos, previously head of liability management, to the new post of head of sustainable capital markets, debt capital markets (DCM) structuring and solutions. "In the DCM solutions business, we were keen to do more in corporate social responsibility [CSR], and this coincided with the time that the green bond market was taking off," says Ms Sfakianos. "Having begun with multilateral development banks, green bond issuance was getting more traction with utilities, corporates and banks." 

Her own team is small, including a dedicated person in Asia-Pacific and another in the US, but it has sponsors in each of the bank's specialist product teams. "The idea is not to have 20 people replicating what is going on elsewhere, but that everyone in the bank should engage with clients on sustainable matters," says Ms Sfakianos. 

Sustainability is a topic of growing importance to everybody, she insists. Investors are more aware, because they are under pressure to demonstrate CSR. "And CSR is how we do business," says Ms Sfakianos. "It used to be looked at solely as risk avoidance, but now it's more positive, about changing behaviour." 

One of those who works with Ms Sfakianos is Attila Czudar. Head of flow rates sales in the Netherlands, he is also CSR coordinator for G10 rates. "All of our investors are interested in sustainability and responsible investment, because their own stakeholders want them to be," says Mr Czudar. "The topic will only grow in importance in the future."

So far, the bulk of investor demand for sustainable bonds has come from Europe, reaching its peak in Scandinavia and the Netherlands. "It started with pension funds, but now insurance companies are asking questions," says Mr Czudar. "We can help them add value to their policies and processes – that's now an integral part of sales."

Green Growth bond 

If demand has been European, and institutional, most of the early issuance has come from the sovereign, supranational and agency (SSA) sector. One of the first issuers was the World Bank, with whom BNP Paribas recently worked to develop the World Bank Green Growth bond. The first of its kind, this was targeted at retail investors, initially in Belgium and Luxembourg. 

“Retail is the holy grail for green bonds,” says Jamie Stirling, BNP Paribas’s head of SSA DCM. “That’s because it broadens distribution and gives the bonds a higher profile. Our retail sales force told us that investors were looking for green investments that offered a higher yield than typical fixed income." 

The Green Growth bond seeks to address that. While the investment is capital protected, the seven-year bond pays no coupon. Instead, its return, if any, is linked to the performance of the Ethical Europe Equity Index. 

Issued in January, the bond was originally set at a minimum size of $15m. But appetite from retail investors was so strong over the six-week subscription period that this was increased to $91m. The proceeds will be used by the World Bank to support projects addressing climate change. 

On the back of this success in Belgium and Luxembourg, the Green Growth bond programme has since been expanded to feature a $103m ‘pan-European’ tranche, and others aimed at Switzerland, France, the US, Asia and, most recently, Italy. Total proceeds are now approaching $600m. 

“Given how low yields are in euros, nearly all green bond deals are in dollars,” says Mr Stirling. “The hook for investors is that they are doing something good. We are now looking to leverage [the Green Growth product] into new issuers, new structures and new indices.”

Wider audience 

Different issuers are needed if green bond issuance is to keep up its momentum. “We need this not to be business as usual,” says Ms Sfakianos. “Multilateral development bank yields are wafer thin, and if this market is to go anywhere it needs diversification.” 

In June, waste management group Shanks launched the first retail green corporate bond to target Belgium and Luxembourg. BNP Paribas Fortis was global coordinator and green structuring advisor, and joint bookrunner with KBC Bank. The seven-year bond, with a 3.65% coupon, raised €100m. 

Earlier, the bank was joint global coordinator with Credit Suisse on the first euro high-yield green bond of 2015, from Paprec, the leading French recycling company. A secured seven-year tranche yielding 5.25% raised €295m, while the subordinated eight-year piece, paying 7.375%, raised €185m. 

The bank was one of six bookrunners on the first green bond out of South America. Brazilian food group BRF turned to Europe hoping to lower its funding costs with a seven-year, euro-denominated green bond. While some investors complained of a lack of transparency around the green use of proceeds, the €500m issue was four times oversubscribed. The transaction priced inside the Brazilian sovereign curve, and its 2.75% coupon was the lowest ever paid by a Brazilian issuer within the five- to seven-year tenor.

Over the Atlantic...

While the US market has lagged Europe by a considerable margin, it is stirring. “It’s a big growth area,” says Ms Sfakianos. “There are a lot of municipal borrowers, as well as universities, the health and hospital sector, and makers of energy-efficient products.” 

With National Australia Bank, BNP Paribas managed the first US private placement of green bonds, on behalf of an Australian wind farm, Hallett Hill no 2. The A$206m ($152.2m), 12-year deal was also the first green bond issued by a single asset project finance issuer in any market. It was structured in two 12-year tranches, paying 1.75% and 1.85%, respectively, above US treasuries. 

The transaction was underpinned by a 25-year asset management deed and a guaranteed offtake agreement. It achieved long-dated maturities not typically available in the Australian market, and was more than three times oversubscribed. 

Right now, there appears to be no pricing benefit for bond issuers who choose a green format. "But there is a consensus that prices should be stickier on a green bond, because they are harder to replace and so investors tend to buy and hold," says Ms Sfakianos. "If markets became less buoyant than they are now, green investors would be those most likely to sacrifice a bit of yield, because they have a clearer commitment." 

Now, however, demand continues to grow, as product types and structures proliferate. "Banks are a growth area for green bond issuance," says Mr Czudar. "We have already seen the first green mortgage bond, the first green pfandbrief and the first green ABS." 

Recent developments have demonstrated a more coherent international commitment to climate change, which means that investors are focusing even more intently on the subject. "In 2012, 21% of all professionally managed assets had some responsible/sustainable element," says Ms Sfakianos. "Now it's more than 30% and growing, and I can't see it ever going into reverse." 

She adds that the industry needs to see more green bonds from Asia. "But there are a number of initiatives out of Asia, particularly China," acknowledges Ms Sfakianos. "China is now offering serious fiscal incentives to investors and financial institutions to develop more sustainable product offerings. That's likely to be a game changer."

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