projects and pricing: issuers and investors debate the ... · boakes tracy, asria: the industry has...

Sustainable and Responsible Capital Markets 51

Asia SRI Bond Roundtable

: I’d like to start the discussion with the question of definitions. Much has been said over the past few years about whether the various labels related to this topic are useful. Does the existence of terms such as SRI, ESG or green bonds serve a purpose? Does it help investors and issuers? To get an issuer’s perspective first, perhaps we might start with the World Bank.

Yoshiyuki Arima, World Bank: Any definition must be simple, easy to understand. So I would say that any investment contributing to society should be regarded as SRI.

There are of course many brands, like green bonds or ESG, but the core thing is that are we sure that the money will be used for something good for global soci-ety. I think that’s enough.

Participants in the roundtable were:

Masaru Arai, chair, Japan Sustainable Investment Forum (JSIF)

Yoshiyuki Arima, lead financial officer and representative, Japan, capital markets department, World Bank

Alexandra Boakes Tracy, chairman, Association for Sustainable and Responsible Investment in Asia (ASrIA)

Thierry de Longuemar, vice president (finance and risk management), Asian Development Bank (ADB)

Kang Sung Ho, managing director, head of sales department, FICC, Daiwa Securities

Mariko Kawaguchi, chief researcher, Daiwa Institute of Research

Ian Lewis, associate managing director, corporate finance group, Moody’s

Yasusuke Mitani, general manager, funds and securities department, The Chugoku Bank

Akihito Nagata, director, capital markets, treasury department, Japan International Cooperation Agency (JICA)

Hiroshi Ozeki, chief investment officer, Nippon Life Insurance Company

Kenichiro Shiozawa, senior financial officer, IR Tokyo, treasury department, International Finance Corporation (IFC)

Kazuyuki Takigawa, foreign fixed income chief fund manager, asset management division, Resona Bank

Saori Tanaka, associate, syndicate department, Nomura Securities

Mark Baker, moderator, GlobalCapital

Projects and pricing: issuers and investors debate the future of Asian SRI

Japan has played an important part in green finance, with its retail investors enthusiastic buyers of themed Uridashi bonds. But the institutional investor base there and in the broader Asian region has been slower to build.

For its Tokyo roundtable, GlobalCapital gathered together representatives of prominent Japanese investors, key supranational and agency issuers, as well as Asiabased SRI experts to discuss the regional challenges in the area of sustainable investment and green finance.


52 Sustainable and Responsible Capital Markets

Thierry de Longuemar, ADB: I would agree on the simplest method, particularly given the communication objectives around this new category of bonds. I would refrain from using acronyms like SRI or ESG, which can create confusion among investors. I would favour a simpler definition: green bond is OK provided there is a good definition of what is green and not green.

We know that some aspects of climate finance are dif-ferent — mitigation or adaptation, for example — but generally speaking I would favour the term “green”. I think there is a need to have some common practice and definition across the world of capital market activities in green finance.

Alexandra Boakes Tracy, ASrIA: We speak to people working at public and corporate pension funds in emerg-ing markets and one of the reasons that they may not have an appetite for green bonds or clean tech is because the concepts are unfamiliar and they are not quite sure where they might fit from an asset allocation perspec-tive.

As far as the labels go, green bonds is a relatively straightforward one, although there would be a debate about whether it should include technologies like nuclear or CCS [carbon capture and storage]. But others like “cli-mate finance” are more complicated to define.

Ultimately the debate over definitions reflects the immaturity of the sustainable investment market, and I suspect it will fade over time. But now I think hav-ing some kind of standardised definition or vocabulary would be helpful.

: How formal does the panel think that this needs to be? ICMA’s Green Bond Principles, for example, are voluntary. Is there a need for investors and issuers to have a firmer set of guidelines, or even rules, to give confidence?

Arima, World Bank: My impression is that the Green Bond Principles are like a manual, a guide to the mini-mum requirements for issuers. It is still in the process of being developed further to give better guidelines for investors.

Kenichiro Shiozawa, IFC: We agree with Mr Arima’s opinion. This is just a starting point and the green bond market is still a new area for all of us. This market is

expanding and will continue to expand in the future. As Mr Arima mentioned, we can use this as a standard or definition for now, and with further development and better understanding, a few years later we can revise the Green Bond Principles to be better or more appropriate. But as a starting point, it is a good refer-ence for us.

: I’d like to ask the investors here to explain how they approach the topic of SRI, and what you find useful in terms of definitions.

Hiroshi Ozeki, Nippon Life: From the investor side, I would like to emphasise that whether it is called SRI or green bond, the concrete image of those investments is extremely important. As investors, it is important to strike a balance between the pursuit of profit and the contribution made to society. If you are an individual investor, the investment can be made with tax relief and can be considered as a type of donation. But if you are an institutional investor, gaining understanding from stakeholders is very important when making such an investment.

In order to provide the information there are two approaches: one is from the economic rationale point of view, and the other is in terms of the contribution to society. For the latter, aspects from both the public inter-est aspect and the global environment should be taken into account, and if the social responsibility is clear the investment can be made.

In order to gain that understanding, disclosure to investors will be important and should clarify what the investment is for. The World Bank and others should provide a standard for green bonds or SRI bonds that we can rely on.

: To pick up on that last point, do you feel that even an issuer such as the World Bank needs to provide an additional green certification or label to give you confidence, or is it sufficient just to look at the identity of the issuer and make an assumption about your ability to invest?

Ozeki, Nippon Life: Certification is not required, so the establishment of a code or a principle that would be a standard for the industry, which issuers can respect, will be sufficient. Also we would like to see a separate disclo-

Thierry de LonguemarASIAN DEVELOPMENT BANK

Hiroshi OzekiNIPPON LIFE INSURANCE COMPANY



sure on the type of green investments that the issuers are making, so we can monitor if they are fulfilling the purpose of a green bond.

De Longuemar, ADB: I think this raises an issue which could be confusing. The World Bank, IFC, ADB and JICA are institutions that by definition are socially responsi-ble. By differentiating some of our activities from others, one can create confusion that some could be considered socially responsible and others not.

Therefore, I caution those who would want to push us in that direction, which could lead us to be not as active an issuer of green bonds as other issuers which are not as socially responsible with respect to their mission or their definition. Market participants have to be cau-tious about pushing the supranational institutions in the wrong direction.

Akihito Nagata, JICA: We do not issue green bonds — we always say that our bonds are recognised as SRI, as our Official Development Assistance or ODA operations on the whole are regarded as such. We always make that point to investors, and they are satisfied by the explanation.

De Longuemar, ADB: We have issued $2bn of what we call thematic bonds since 2010. They were water bonds and clean energy bonds, but like JICA, we have not issued green bonds as far as they are currently defined. But this can also be related to a question that perhaps we can touch upon later, which is the potential pricing dif-ferential between green bonds and other bonds.

Mariko Kawaguchi, Daiwa Institute of Research: From the standpoint of looking at all SRI investment, not just bonds, communication is the key element of the concept of sustainable finance. If you are looking at a car, you could say that it’s a green car — which could mean a hybrid, it could mean it runs on green diesel, it all depends on the make or the manufacturer. But you get the image: it’s a green car, and different from a con-ventional one.

But there’s a double stage: for the general public you can have a rough idea, but for professional investors you have a more precise definition. I think Mr Ozeki would like to see those precise definitions.

Boakes Tracy, ASrIA: The industry has evolved. It start-ed off with sector-screening — not investing in certain sectors. Now a lot of people have moved on and don’t want to limit the investible universe in that way, so it is becoming more about best of breed, investing in compa-nies across sectors that are doing the right things.

: I’d like to ask our other investor repre-sentatives here today to outline what sort of assur-ances they require in order to make an investment. What information do you want from issuers in order to be able to feel comfortable?

Kazuyuki Takigawa, Resona Bank: There are two points that are important. One, a simple definition, and two, differentiation from existing bonds. If those two are clear then it would be much easier for us to invest.

: I suppose it is that differentiation where some issuers would have difficulties, which we will discuss later when we talk about pricing. I’d like to ask who bears the responsibility for implementing some sort of standard? Is it the role of SSA issuers to take a lead?

Arima, World Bank: Since the World Bank issued green bonds several years ago, we have been thinking of a rigid standard and what kind of bond can be called green, and we set a lot of internal standards like how we choose our projects, how we ring-fence the money we borrow and keep a separate portfolio internally to make sure we use that money for green projects.

Reporting is also important, so from time to time we report an update on green projects. For example in May we offered a green Uridashi bond through Nomura’s network and that time I worked closely with Tanaka-san to give information to retail investors. The kind of reporting that Ozeki-san mentioned is very important. We put that information on our green bond website and I hope that corporate issuers will learn from how we are handling these issues and use this knowledge base to issue green bonds by themselves. Because of our DNA, it is easy for multilateral development banks, including ADB, JICA and IFC, to do so.

Boakes Tracy, ASrIA: The World Bank and other multi-laterals have done a lot and contributed a huge amount

Mark Baker GLOBALCAPITAL

Mariko KawaguchiDAIWA INSTITUTE OF RESEARCH



in setting precedents with their methodology. They obviously have a policy mandate and they are setting a benchmark — even a yield curve of some sort — and I think they are really trying to drive the market. But for a corporate I think the rationale may be more to do with diversification of the investor base.

: For issuers like the multilateral devel-

opment banks, it is a different proposition to what it is for corporates. Does that suggest that there should be perhaps more attention on issuers aim-ing to sell bonds targeted at a certain project rather than saying “this is a bond issued by this issuer and it’s green”, which then throws up all the problems we’ve discussed?

De Longuemar, ADB: I think it is more complex. You can assess the environmental impact of a green bond but there are other strategic objectives that we want to meet when financing a “green” project than the environmental impact. I would favour a more flexible approach that would not limit the definition to the environmental impact but also incorporate the overall objective of the projects.

The issue with a straight definition is that it would limit the bonds that would be able to comply. We need to keep an open mind and give more consideration to the need of educating investors on how this money is used. This will improve the objective of more funding diversification.

: I want to bring in a ratings angle to this. Ian, could you outline for us how Moody’s approach-es this topic and what you think are some of the likely challenges?

Ian Lewis, Moody’s: We don’t differentiate at the moment between green debt and ordinary debt. But we are observing what is happening in this market, which is very fast moving, and we are very interested to facilitate the ground between issuers and investors. I think we are keen to understand how we can add value to investors in the process and we are setting up a group globally to tackle that question. Some of the concepts that have been raised today — such as simplicity, certainty and transparency — resonate for us.

: And that value would be playing a part in the assessment of whether something met what-ever standards were chosen? Do you see parallels between the credit rating process as it exists now and the process of evaluating SRI investments in terms of their compliance?

Lewis, Moody’s: That’s a very interesting question. Obviously investors are going to drive those sorts of requirements on information and financial metrics, and I don’t see the agencies as stepping in to rate the process. But certainly it is an area that we will be keen to look at in terms of whether investor requirements are being fulfilled.

De Longuemar, ADB: I have a question for Moody’s: how would you envisage the concept of green default? I mean when an issuer is setting objectives and then those

objectives are not met. A credit default is clear, but a green default…

Lewis, Moody’s: Certainly in the investment grade space I think this would be quite difficult. I can’t see an invest-ment grade issuer swallowing that kind of language.

De Longuemar, ADB: But before that, you may need to create a green rating scale?

: It’s an interesting point, and I’d like to ask the investors here what would you do if an investment you have made no longer turned out to conform to the assurances you were given at the start. Do you discuss at the moment what you would do in that situation?

Ozeki, Nippon Life: We haven’t had that experience so far, but if it were to happen we would have to scrutinise the terms and conditions of the bond and look at it in more detail. Once a green default occurs the image of that organisation would deteriorate significantly so it would be extremely difficult to continue investing in the green bond, as well as the issuer’s other bonds.

Kawaguchi, Daiwa Institute of Research: I’d like to look at it from a different angle, because the impact of green can be difficult to quantify when you issue the bond. You may be targeting this or that, you are planting trees in a certain area or you are educating people. But this is more difficult to predict than just financial results.

It can be difficult to accomplish all the social targets so I think what is more necessary now is transparency. What are you doing, what is the impact and how far did you achieve your targets?

If it is acceptable then investors will say so, but if you do not explain then you will fail and damage your image.

: I’d like to move on to whether the panel thinks there are specific challenges faced by issu-ers and investors in Asia. Are there regional issues that make the concept of SRI problematic? Are there challenges related to the level of development of different economies that make standardisation dif-ficult to achieve?

Ian Lewis MOODY’S



Shiozawa, IFC: Since I have been involved in Uridashi bonds in Japan, I’d like to speak in the context of my experiences in Japan. I believe the Green Bond Principles have been very important in facilitating a common understanding between investors and issuers, and there are four areas that the Principles stress as key points. The first one is with respect to the use of proceeds, the sec-ond is the process for project evaluation, the third is the management of proceeds and the fourth is the reporting thereafter.

In terms of the use of proceeds, we declare the eligible project categories in the legal documentation. Also, in terms of the nature of the project, we share the informa-tion, while in terms of the management of the funds we have set up a sub-portfolio and ring-fenced the proceeds from others. And in terms of the reporting, we have most recently started SRI newsletters distributed annu-ally on our website. This is what we are doing and as the initiatives expand going forward we can share our expe-rience with other countries.

Arima, World Bank: We have a pretty long history of SRI bonds, and we also believe that conventional World Bank bonds are also SRI bonds, as the ADB mentioned. Since the mid-1990s interest rates in Japan have been very low, almost nothing for decades, and investors were looking for extra return by taking additional risk. In that process we issued many structured bonds that were driven by demand.

Our first themed bonds were the ‘Cool’ bonds arranged by Daiwa Securities in 2006, which were linked to a hydro project in China. If the project pro-duced certified emission reduction, or CER, and if the market price of that CER was higher than a certain set price, then investors could get an additional return.

So I think the starting point was a background of really low returns, the equity market not being good, bank deposit returns being almost nothing. In that situation dealers and investors look for more risk and more return.

De Longuemar, ADB: In this discussion you need to dif-ferentiate between developed and developing countries. The level of awareness and interest from investors in developing countries is lower. It’s lower for financial or other reasons, such as the level of interest rates in their local currency. In this case they don’t necessarily care about getting a green label if they already have an accept-

able yield in their own currency. But it’s also a question of culture, education and perceived needs. In Asia you would have more demand for SRI or green bonds from more sophisticated investors in Japan, South Korea, Australia, even maybe Hong Kong, China and Singapore. But when you speak with, for example, Chinese, Indian, Indonesian or Thai investors, frankly the main interest remains the yield and liquidity rather than the green aspect. This differentiation is important.

That does not mean that more should not be done in developing countries, because their role in address-ing climate change challenges is crucial, and therefore if green bonds are a good way to catalyse more financing in those countries and target those investors, we should do more. This debate started in the US and Europe, which are more developed, but we should not forget developing countries, whose role is increasing.

: That presents a challenge. How does one go about broadening and deepening the aware-ness in developing countries?

Kawaguchi, Daiwa Institute of Research: I think inves-tors in equities and bonds are a bit different, especially in developing countries. If you are looking for com-panies for growth, the company must do well in ESG. China is suffering from air pollution and water scarcity, others are also. So a company that wants to be successful has to care about this. I think ESG criteria are indispens-able. What I think is an important area is that of admin-istrators and stock exchanges, which can set criteria for companies to develop in an environmentally friendly way. That’s what’s happening through the Sustainable Stock Exchanges Initiative, with exchanges such as Johannesburg requiring CSR reports for all listed com-panies. I think that kind of movement is going forward in developing countries because they are suffering more from ESG issues. If that can work on the equities side, why not take it to the bonds side?

: On the bond investor side, Japan is an interesting example of where there has been histori-cally a lot of interest at the retail level but it’s been more of a challenge to develop a deep institutional investor base. Why is that and what might be done to resolve it?

Kang Sung Ho DAIWA

Kenichiro Shiozawa INTERNATIONAL FINANCE CORPORATION



Kang Sung Ho, Daiwa: We have the biggest track record in terms of bringing SRI related bonds to the retail market so far. The first SRI bond that we arranged was issued by IFFIm [the International Finance Facility for Immunisation] in the form of a vaccine bond in 2008. At the time this was referred to as impact investment, and at the time the objective was to create a social impact by issuing such bonds.

This product was launched against the backdrop of the prevailing significant household assets to the tune of ¥1,400tr to ¥1,500tr and a need to diversify this inves-tor base. This was promoted by Japanese securities firms by way of providing SRI bonds in Uridashi format and as a result we believe that a large market has been created. I believe that issues like green bonds and vaccine bonds from international agencies have led to individual inves-tors having a real feeling about contributing to society. It is important for the individual investors going forward that the funds they have invested are truly contributing to society.

It may be a good idea to develop initiatives such as a lottery among retail investors, where you select 10 winners who then go to a project site to get a first hand understanding of how their investments are being put to good use. But I understand that there are still challenges to be overcome with respect to soliciting the interest of institutional investors.

Yasusuke Mitani, Chugoku Bank: To give an institu-tional investor point of view, we started investing in green bonds two years ago, and that opportunity was provided when we met with Arima-san to have a discus-sion about funding. Two years ago we didn’t even know about the existence of such bonds, and one of the points I wanted to make is that it’s not just us — there may be many institutional investors that are not aware of the existence of green bonds.

Another aspect that is important is the economic ratio-nale. We need to explain to our depositors why we are making investments in something when the terms and conditions are not necessarily good, for instance in terms of liquidity. In that regard, issuance from the World Bank and ADB would help in that the use of proceeds is clearly explained and we would have more comfort in investing in such bonds.

One of the themes we are trying to develop at our organisation is altruism, so this matches that theme and it has been helpful that we have had people at our

management level who understand the concept of these investments.

Arima, World Bank: Since September 2010 we have been issuing a lot of private placement green bonds for Japanese institutional investors, as many as 18 transac-tions. All were private placement bonds. In the past with such deals issuers and investors never announced what they purchased, because the deals were private. But for our green bond private placements we always made joint press releases saying that the World Bank has issued the bonds and that the investor bought them to climate change issues. This kind of reporting transpar-ency is important to develop this particular market.

Nagata, JICA: For the benefit of a better understanding by investors every year we organise a tour to a country to introduce and explain our activities, so last year we went to the Philippines and showed the JICA-financed infrastructure projects and had meetings with Japanese companies working on the ground. That’s one of the activities that we are trying in order to give a better understanding to institutional investors.

And we have contributed to the development of the Japanese domestic retail market. In the past we have seen many bonds from multilateral development banks denominated in foreign currency, but my understanding is that retail are looking for yen bonds from a Japanese name, and we think JICA was the first government agen-cy to sell to retail bonds in the domestic market here.

Saori Tanaka, Nomura: We have done a number of transactions involving Uridashi bonds. In March 2011 the Great East Japan Earthquake struck the country, and six months later we had an opportunity to handle a clean energy bond issued by ADB. We tried to explain what it was about — green, clean energy — but the question we had from investors back then was: was it going to be used for the reconstruction of nuclear power plants?

Of course we prepared leaflets and other marketing tools to provide as much information as possible for retail and an explanation of how the issuer intended to use the proceeds of the bonds, but with such a touchy issue we ended up getting these questions. So despite the fact that this market is growing nicely in green and clean energy, we need to continue to provide as much

Akihito Nagata JAPAN INTERNATIONAL COOPERATION AGENCY

Yasusuke Mitani THE CHUGOKU BANK



information as possible, and looking back we could per-haps have gone a step further in providing information to retail investors.

De Longuemar, ADB: This was a rather challenging transaction because of the timing as it was conceptual-ised before the Fukushima disaster. We decided to delay it by a few months because of the sensitivity of the situ-ation. Sometimes circumstances do not help when you want to be active in the green space.

I would like to come back to the general discussion. Yes, we have and we will continue to benefit a lot from the Uridashi market, which is a very cost efficient mar-ket, as we all know. But we must not forget the reality and the reality is that the majority of our supranational debt is held by central banks. They hold our debt because of three reasons: liquidity, maturity and quality of credit. If ever central banks were to decide that part of their reserves should be invested in the green space, I am not sure that we would be able to address their needs in that space, particularly given the potential dif-ferentiation of price — something on which I don’t see central banks compromising.

: You’ve raised the issue of pricing, so let’s tackle that. Investors want a reason to invest in a product and they need to have something to convince them since it is new and something that is still quite uncertain. At the same time, issuers want to be rewarded. How do we bridge the gap? I’d like to start from the issuer side. What in your view is the justification for more favourable pricing from your perspective?

Arima, World Bank: Of course we would like to borrow at a lower interest rate through a green bond, because then we can help our client borrowers better. And of course the monitoring, reporting and ring-fencing brings more costs. However, that spread should be decided by the market — demand and supply, right?

At the moment we don’t see any price difference in the secondary market, so that’s the short term answer from the market right now. Investors do not pay up for the green brand, that’s the reality. Hopefully MDB issu-ers can make more efforts in reporting and so forth, and then investors will see more value in the primary and secondary market. Then the supply should increase. But

the portfolio for green at the MDBs is limited, which means the total outstanding balance of bonds should also be limited. If the demand is larger than our portfolio then the spreads should be tighter.

De Longuemar, ADB: I agree. When you buy organic food you pay more. When you buy a hybrid car you pay more or it is subsidised by a government. Why shouldn’t you pay more for a green bond? As the World Bank said, it is a question of supply and demand. Today, there is more demand than supply and that gap may increase. At some point, we will reach equilibrium of price that will lead to a yield haircut on green bonds versus ordinary bonds. It is the market itself that may lead to a differen-tiation in price.

Lewis, Moody’s: We too have observed that green senior unsecured bonds have continued to price in line with other offerings from the same issuer with the same rating, size and maturity. We would question perhaps in the debate over pricing, if the probability of default or loss given default track record for green bonds is no different from standard bonds of the same debt class, rating, size and maturity, why they might price differ-ently?

Moody’s will continue to observe this fast moving space for the ability of such things as different costs of issuance and codification of binding requirements, for example in relation to use of proceeds, reporting and standards, to lead to variation in bond pricing.

: How do investors approach pricing? What are you prepared to do to compensate issuers?

Ozeki, Nippon Life: I was very surprised to hear that there is no difference in the secondary market between green bonds and ordinary bonds, in terms of pricing, because if there was a choice it will always be the green bond.

Arima, World Bank: But when you are offered both a World Bank green bond private placement and a conven-tional World Bank bond, if the liquidity of the green PP is lower, would you still buy it?

Ozeki, Nippon Life: Nippon Life is a long term investor, and we don’t care much about the liquidity of a bond.

Yoshiyuki ArimaWORLD BANK

Saori TanakaNOMURA



So if we are looking to get a certain maturity and hap-pen to find a suitable yield in a green bond, then we can buy it.

Masaru Arai, JSIF: I’d like to just add to what Mr Ozeki of Nippon Life said, based on what we are talking about in the SRI investment community in Japan nowa-days. The introduction of Japan’s Stewardship Code in February this year has had a significant impact for Japanese institutional investors. 160 institutions, includ-ing the GPIF — the Japanese national pension fund and the largest in the world — have declared that they will follow the Code.

Nissay Asset Management, one of Nippon Life’s arms and a leader in the SRI community, has disclosed its policy on the Code, such as its long term investment strategy, the importance of non-financial information and of ESG.

Nissay Asset Management is also a signatory to the UNPRI [United Nations Principles for Responsible Investment], which looks to integrate ESG approaches into conventional investment approaches. We are sure that many Japanese institutional investors are committed now and watching not only the financial returns but also the ESG returns.

In the case of equity investment, the situation is a little more clear than with green bonds. We have expe-rienced some bad disclosures. One such case was by a South African listed company. When it became obvious that the ESG disclosure was incorrect, investors faced the challenge of how to ensure the accuracy of the disclo-sure. Green bond issuers might face similar issues, and some kind of guidance on this is quite important.

De Longuemar, ADB: What investors have today when they buy a triple-A ADB or World Bank bond is no credit risk, a certain yield for a given maturity and a reasonable liquidity. Today with a green bond, they are getting, in addition to these, a green label for free, so the question is would they be willing to take the green project risk?

The reality is that they want to be more involved in green finance but without taking the project risk. My question to investors is if we were considering green project bonds, which means sharing the project risk in addition to other risks, would they be interested in doing that? In that circumstance the yield would likely

be higher to better reflect the underlying risks, an incen-tive maybe?

Kawaguchi, Daiwa Institute of Research: I think in the longer term green could actually be less risky. People have traditionally assumed that it is more costly and they used to say that SRI meant sacrificing return. It used to be the case, but in equities if a company now doesn’t care about stakeholders, the environment or child labour, you will lose money on your investment in the long term. The concept is changing. Unless a company is green and sustainable, you will make lower profits in the longer term.

If you are not green you may damage the environ-ment, for example, which could lead to being forced to exit a country or being taxed, so there is a heightened risk. This is being better understood on the equity side. Companies cannot grow in the long term if they have issues on the environment or human rights.

We are currently in a transition period from green being considered negative to not being green being considered a higher risk. So on the bonds side investing in a green project could be more profitable in longer term.

Arima, World Bank: So you think investors are willing to take more project risk if they can put their money into green projects?

Kawaguchi, Daiwa Institute of Research: If they can be persuaded that risk is lower in the long term.

Arai, JSIF: I would like to ask the issuers, when you say the risks are higher on green project bonds, is this because of the green element or because of the project risk? I think it’s important to separate the two. We need to clarify the pricing relating to the project risk and from being green.

De Longuemar, ADB: The bottom line is to identify properly the project risk. Green project risk would include a green component that would not be included in a non-green project risk. Then you have to evaluate the core risk and the green risk; so your assessment is correct.

But the fact is that we are talking here of a different space, which is the project bond space as opposed to the traditional bond space.

Shiozawa, IFC: Conventional green bonds have recourse to the issuer and so it all comes down to credit risk — as long as there is recourse it just comes down to credit risk and liquidity as far as pricing is concerned. But now we are talking about the possibility of non-recourse green project bonds, or it could be a project-backed ABS-type bond.

In that case it may be that a different type of thinking is required. We have been doing project risk assessment conventionally but the problem is how to go about assessing the green component of the risk as well as the project risks.

: To conclude, I’d like to ask the panel what they consider the key future developments in this sector to be. We’ve discussed one of those just

Masaru Arai JAPAN SUSTAINABLE INVESTMENT FORUM



now, the possibility of green project bonds, but are there other developments that the panel thinks would move the industry forward?

Arima, World Bank: We are almost finishing the first stage of Green Bonds or SRI bonds, because triple-A issuers like the World Bank and ADB are already active. Those bonds are basically producing the same return as conventional bonds issued by us, and investors are get-ting a free green brand over conventional bonds issued by MDBs. But in the future I do believe there will be many other types of green credits. Green ABS could be issued, responding to investors’ demand for higher risk and high-er return for green bonds. They may not be triple-A rated, but those could be important products for the next stage.

Arai, JSIF: I’d like to mention the Japanese market of the future. What I am most interested in is the changes in pension funds, especially the public sector pension funds — and they may be followed by corporates. The Abenomics policy introduced last year includes various words that the SRI community was talking about, like climate change, the environment, human resources or co-existing with nature. This policy is quite important because it is the policy to expand the Japanese economy and to re-strengthen Japanese industries.

Various ministries and the cabinet itself have embarked on specific tasks such as the reorganisation of the GPIF, the introduction of the Stewardship Code and a review — Competitiveness and Incentives for Sustainable Growth: Building Favorable Relationships between Companies and Investors. The GPIF has also started to study engagement and ESG.

We in the SRI community have observed in the last 10 years how retail investors were the target for SRI and green issues, but now institutional investors are thinking of ESG investment strategies. I am quite interested to see the result. It might be easier for them to apply ESG policy to bonds rather than to equities.

De Longuemar, ADB: I am coming back to my point of considering developing a green bond culture in develop-ing countries. I believe that one way to achieve it better is by introducing local currency denominated green bonds. And why not go further, given our discussion of project green bonds, by considering local currency denominated project green bonds? This is my suggestion.

As a more general conclusion, despite some scepticism I expressed on the expansion of a green bond market, I believe that the supranational institutions like those represented around this table have a real catalytic role to push this market forward in order to push green finance, because our common objective is the need to increase financing support for green growth, and it is clear that ADB, the World Bank, JICA and others have a role to push this space further.

Boakes Tracy, ASrIA: Over time I would like to see the involvement of the mainstream rating agencies in this sector, perhaps working in close partnership with spe-cialist advisers. In my experience what helps new prod-ucts to be successful is when they can be as similar as possible to traditional products from the investor’s per-spective. If you can get the kind of report that you are already used to on the credit side — and perhaps those

reports would be backstopped by climate experts — then it will help to persuade your credit committee.

: A final comment on the most attractive potential development from the investor side?

Ozeki, Nippon Life: For our organisation, we are not just interested in green investment but also in areas such as infrastructure financing, because there will be a shortage of financing given that governments will have increasing problems in financing projects, so we would like to capture and identify investment opportunities in those areas.

As Mr de Longuemar said, there are many develop-ing countries here in Asia. To provide assistance for the development of these countries we would like to invest in something green and environmentally friendly.

Takigawa, Resona Bank: As a pension fund manager we have to be mindful of two objectives: one, to provide the return that we have promised to our pensioners, and two, to channel our funds into better issuers. By better issuers I mean a project or issuer which can assist in the sound development of the world economy. If we can invest in such projects or issuers we would be able to provide a better return to our investors.

Mitani, Chugoku Bank: Mr de Longuemar mentioned having emerging currency denominated project bonds, and of course if each country can undertake such a proj-ect then that would be best. But if it is difficult then the World Bank and ADB could provide a guarantee to help such an effort, and by so doing perhaps we will be able to help raise the awareness of such governments or peo-ple in those countries. And if that happened we would be keen to invest.

Kawaguchi, Daiwa Institute of Research: My sugges-tion is to develop the concept of SROI, or social return on investment. A green bond has a social outcome but it is rather vague, and if it were possible to quantify or qualify a certain level of ideal SROI on top of ROI in a more concrete way, and if you could show this to inves-tors, they could make a decision to invest with a finan-cial return of this much and social impact of this much.

The world is changing and investors want to be able to make a social return as well as a financial return. s

Kazuyuki TakigawaRESONA BANK

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