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Green Bonds: Income with Impact


TIM EDWARDS: Green bonds are nothing new, but their availability through new ETF launches has opened up access to the secondary market and allowed investors to align impact with income. I am joined today by Martina Macpherson, Global Head of Sustainability Indices at S&P Dow Jones Indices. Thanks for joining us. Martina, can you give us your take on the green bond market at present?


MARTINA MACPHERSON: First of all, green bonds are plain-vanilla fixed-income instruments with an environmental or climate-related benefit. They were actually launched over the last decade. In 2010, the World Bank came out with one of the first green bond issuances. Now, in 2016, the corporates and a broad diversity of issuers have actually joined the ranks. We are now seeing issuances amounting up to US$92 billion for the labeled green bond universe, and the market is still growing and shows no signs of slowing growth. It's interesting that this is a sign for the sustainable investment market overall. Over the last decade, again, signatories to the Principles for Responsible Investment [PRI] have grown from somewhere around four trillion to more than US$60 trillion. Generally, there has been an enormous asset-owner and generally a market commitment towards more green finance and sustainable development.


EDWARDS: That is an extraordinary statistic: 60 trillion dollars looking for ways to invest responsibly. On the flip side, it raises the issue that it seems like you will get a lot more money if you call your bond "green." What really makes a bond a “green” bond, and how is that classified from an index perspective?


MACPHERSON: For the labelled green bonds universe, the process is done in multiple stages. First of all, in 2014 the Green Bond Principles were launched, and they are now seen as one of the guidelines for the labelled green bonds universe. Underneath, you have three major taxonomies: second-party opinions and third-party verification statements; the climate bonds initiative standard; as well as government-backed guidelines and initiatives. Most recently in China, we have seen People's Bank of China and NDRC [National Development and Reform Commission] getting together, developing green bond guidelines. But a conundrum remains, as many investors continue to be suspicious about the green credentials of many of the so-called green bonds. Hence, we have seen over the year’s strong investor alignment ― whether through the Ceres green bond statement or the Paris green bond statement ― and the launching of multiple coalitions to look into this conundrum. Most recently, HSBC and other market participants – including Mark Carney [Bank of England Governor] as well as the G20 Group [Global Governance Group] ― have actually called for more alignment and standardization of some of these principles. Over the course of 2017 that is probably exactly what we will be seeing.


EDWARDS: In 2014, it was decided what is and what isn't a green bond. S&P then launched its green bond indices. They've been around for three years. What's new?


MACPHERSON: You are absolutely correct. In 2014, we were one of the first to market, and we launched the S&P Green Bond Index, really designed to encourage market growth and momentum. Hence, no constraints in relation to liquidity, in relation to investment-grade, in terms of issuer type, size, and jurisdiction ― you name it. In 2017, we are moving further along with the market, and we want to create more investable instruments. We are trying with the S&P Green Bond Select Index [SPGRNSLT], to ensure that there is a vehicle in place that still meets the green credentials demands from investors, but at the same time, is an investable instrument itself. We are ensuring that we are including investment-grade rated bonds in the Index, ensuring that there are certain caps in relation to high yield, ensuring that there is also an issuer concentration which is capped at around 10%, and also ensuring that liquidity plays a key role within the Index; we have created a sub-index under this green bond family.


EDWARDS: The concept is that perhaps this Index could be used for investment products like ETFs, perhaps. Is that the thinking now?


MACPHERSON: Yes. It is important to say that we have seen, apart from the barriers to entry around the green credentials of green bonds, that there have been investor demands to make the market more liquid ― make it more open to investable instruments. Now we are seeing that with ETFs being launched, we are one of the first ones encouraging this market momentum and that we make best use of these tools, which are very powerful, because they're ultimately packaging an entire market segment into a single trade. We are offering through the new S&P Green Bond Select Index an underlying vehicle that is liquid enough to encourage ETF development on top of the Index. It is also fair to say that liquidity is generally a key prerequisite for investors, but still a challenge in the market. In order for the market to grow beyond what we are seeing now, we need more ETFs, we need more index-linked funds, we need secondary market growth. We are very delighted that in 2017, we are now at a point where we can actively support this growth. The S&P Green Bond Select Index has been designed with further market growth and momentum in mind, and with the prerequisite of aligning income with impact.


EDWARDS: You have two versions of a green bond market. You have the benchmarks built three years ago, capturing the whole market. And now you have these newer benchmarks focusing on more liquid bonds with higher credit quality. The question is that once you pick just the liquid, investment-grade component of the market, is what you are left with just another fixed-income benchmark, or does it still retain green characteristics?


MACPHERSON: It is fair to say that the S&P Green Bond Select Index was actually designed with liquidity in mind. It was designed by focusing on the most liquid and most tradeable segments of the market. The Index actually applies a variety of restrictions and exclusions in order to ensure that we are, on the one hand, still supporting green growth, but at the same time, creating a fully investable instrument that is in alignment with the broader fixed-income market. Coming back to where I started, green bonds are literally nothing more than plain-vanilla fixed-income instruments with green or climate-related benefits in mind. Again, we are now taking the journey back towards the broader green bond market in order to ensure that we are now making this instrument more investable and encouraging growth more generally. We need to ensure that, first of all, financial criteria and exclusions, etc., are in place, and criteria are met, but secondly that we are still ensuring ― and this is what investors are looking for ― that we have the relevant green assessment frameworks in place, and that we are still sticking very strictly and rigorously to our multiple layers of looking at green disclosure ― may that be at issue level, through second-party opinions, verification statements, SEC filings, generally public disclosure on websites. Or that we are working with the Climate Bonds Initiative, and using their green flags in order to get an independent level of assurance that what we are looking at are really green projects and, hence, green bonds.


EDWARDS: Martina, thank you very much for joining us. To read further papers and watch other videos on this and other ESG-related topics, please visit us at www.spdji.com. Thank you for joining us.


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