Green Bond Round-up, April 26: More on the IFC’s $2bn emerging market green bond fund

Moody’s may have revised its 2017 green bond calculations down last week, but there are other, positive signals too. The ratings giant slashed its estimate for global issuance to $120bn, from $200bn at the start of the year. A slow-down in the Chinese market, as well as fewer deals than expected from Sovereigns, Supranationals and Agencies (SSAs), were cited.

However, one SSA making headlines was the International Finance Corporation, which has made the biggest move yet to get emerging markets to issue more green bonds and provide a broader universe to yield-hungry investors. The IFC, the investment arm of the World Bank, has been looking at how to stimulate emerging market issuance over the past few years. On Friday RI reported that it has now hired Amundi to run a $2bn fund to invest exclusively in the asset class. RI understands that there were 16 asset managers bidding for the contract. The IFC has committed $325m to the vehicle, with a view to raising the balance from the private markets. The fund will be split into senior, mezzanine and equity tranches.

The latter will be taken entirely by the IFC and will provide a ‘first loss’ piece for debt investors in the fund. The senior tranche is aimed at pension funds, insurance companies, sovereign wealth funds and other institutional investors (IFC also has money in this tranche as part of its $325m) and the mezzanine debt will be marketed to family offices and foundations. Fundraising is expected to be complete by the end of the summer, at which point the fund will be formally created. Initially, the capital will be invested into plain vanilla bonds, but these will be swapped out for emerging markets green bonds as they become available. IFC says all holdings will be disclosed throughout the process; Amundi will make all investment decisions.

It said: “The first step is to focus on banks. Most green projects in emerging markets are too small to warrant bond issuance and the capital markets in many of these countries are not very active or developed. But banks lend to the projects and issue bonds on the international markets.

“So we analysed the banks in 21 emerging markets and identified those that already issue plain vanilla bonds, and could issue cross-border green bonds. We found that 40% of those banks are clients of the IFC, which means we already have a relationship with them and they have already passed our environmental and social screens.”

The IFC will also provide education and e-certification programmes to staff to promote good quality issuance. This will be financed by donor money, rather than investment capital.

Arguably the key element is IFC’s commitment to remove the cost difference for issuers weighing up whether to issue a labelled green bond or a plain vanilla deal.
“There is plenty of appetite for emerging market green bonds,” says Jean-Marie Masse, Chief Investment Officer at the IFC Financial Institutions Group.

“But one of the big obstacles is trusting the greenness of those bonds. And from the issuer side, the additional costs of labelling a green bond can be off-putting initially. To overcome that, we intend to use donor money to cover the cost of a second-party opinion for the issuer, as well as the annual impact reporting that investors expect. We will also provide technical assistance to ensure that those documents are completed to a high quality.”

Masse told RI that the IFC would not dictate the service providers that issuers could use under the initiative, and would not attempt to create formal standards, but would use the work of the Multilateral Development Banks’ harmonisation initiative as a best practice reference point.The IFC expects to buy between 10% and 20% of bonds that come out of the venture, with the remaining notes bought directly by third-party investors. However, all investors will have access to the same “high quality” reviews and impact reporting, to encourage more participation in these green bonds across the entire market.

There is a seven-year deadline for the fund to allocate its $2bn to green bonds. Masse says the hope is that the IFC’s $325m will ultimately lead to more than $12bn in investment in emerging markets green bonds over that period – some through the fund and the rest through co-investors.

“We believe it’s very important to enable green bond investors to find yield. The green bond universe as it stands is very concentrated on investment-grade offerings. The emerging market segment is an important way to diversify this.”

Eligible projects will be “as broad as possible” while staying in line with the Green Bond Principles, he said. Focus areas will include energy efficient buildings, mass transport, green vehicles and renewable energy. The IFC will not move its existing green bond investments into the fund and will continue to invest in proof of concept deals in the space alongside the Amundi fund.

In other news

The OECD has released its latest report on green financing. The document is aimed at policymakers and “proposes a framework for understanding potential directions of bond market evolution, increased convergence of rules and definitions, and quantitative analysis of the potential contribution that bond markets can make to a low-carbon transition”.

Australian insurance and reinsurance firm QBE has sold its first green bond, kickstarting a programme as part of its overall $4bn medium-term note (MTN) programme. The proceeds from the $300m, five-year deal – which offered a fixed rate of 3% – will be used to refinance investment in its own portfolio of labelled green bonds. It is not clear if there are any mechanisms in place to enable additionality of any kind through the programe, or whether it will simply act as an intermediary between other investors and the green bond portfolio. Eligible bonds require a second-party review or a certification, and must finance one of eight green categories. QBE also performs a negative screen to rule out projects linked to 17 ‘controversial’ activities including the manufacture of alcohol, tobacco and palm oil, and operations around fossil fuels, gambling and whaling. The programme has a second-party opinion from Sustainalytics.

Spanish infrastructure firm Acciona has become the second company to secure a labelled green loan from BBVA, to help finance its renewable energy projects in Chile. Acciona has engaged Vigeo Eiris to provide a second-party review of green credentials the loan, which will be invested into solar photovoltaic and wind projects. BBVA performed a similar transaction with Spanish utility Iberdrola earlier this year.

In Latin America, Brazil’s state-owned development bank BNDES is in discussions with investors ahead of its long-awaited debut on the green bond market. It dipped its toe in the water late last year with the creation of a R$500m Sustainable Energy Fund to buy Brazilian renewable energy bonds in order to stimulate the country’s market, but this will be its first move into tapping the asset class itself.