Sustainable bonds are a new addition to the arsenal of financial instruments, which alongside more-established green bonds, promote positive change in society and the environment.

    Finance can have a real impact in the world. In the fight against climate change, investors, corporates and financial institutions can work together to help direct capital toward the massive amounts of investment needed to de-pollute and de-carbonise our economies.

    “We have to recognise that the way we live our lives and plan our economies is financially unsustainable,” said Jonathan Drew, Managing Director, Infrastructure and Real Estate Group at HSBC. “We have to quickly make radical changes. If we do not change, we will simply not be part of the future.”

    Mr. Drew was speaking as a moderator of a panel discussion that was part of HSBC’s 2018 Asia Credit Conference, which assembled experts to talk about the crucial importance of sustainable investing, and how both issuers and investors could benefit from building a greener future.

    From green to sustainable bonds

    Climate change is a long-term problem that can be measured in the coming decades. Investors however, tend to plan over a shorter time horizon. There is therefore a need for a product that can connect institutional capital with sustainability projects that investors might otherwise overlook.

    “That’s where green bonds come in,” said Sean Kidney, Co-founder and CEO of the Climate Bonds Initiative. “We have this beautiful instrument that bridges short-term portfolio management strategies with long-term risk horizons.

    Corporates that issue green bonds, he said, enjoy a number of benefits. Investor diversification is one positive result, as the bond will attract funds with an interest in sustainable assets. These investors are also more likely to come back for new issues, as there is a shortage of green bond supply.

    Modern Land China is a property developer that has tapped the green bond market three times and has plans to replace all of its offshore debt with sustainable instruments. The company is motivated by social responsibility – in particular, to provide energy-saving houses, as environmental issues are becoming a growing concern for the buyers of Chinese homes.

    “As a large part of the Chinese economy, we believe that the real estate industry should show its leadership in the green revolution,” said Cristiano Cui, Managing Director, Modern Land China.

    Green investing is just one part of the broad category of sustainable investing that includes social projects and an emphasis on corporate governance. Sustainable bonds are a new asset class that aims to channel funds to both green and social enterprises.

    Bank of China recently issued its first sustainable bond. It is an instrument that allows the lender to diversify its portfolio into long tenor projects, by matching long-term funding with asset liabilities. The proceeds will be spent on social projects, such as student loans, as well as environmental endeavours that include green transportation.

    The role of disclosure

    There are however concerns relating to disclosure and market transparency that impedes the development of the sustainable bond market. “The slow growth of social bonds can be attributed to the fact that social impact is a nebulous concept, which is harder to quantify than environmental impact,” said Trisha Taneja, Head of Sustainable Bonds, Americas and APAC, Sustainalytics.

    New guidelines will likely bring more clarity to the market. Ms. Taneja highlighted the recent introduction of the Sustainability Bond Guidelines, which were published in June by the International Capital Market Association (ICMA) to standardise everything from external reviews to impact reporting so that investors are aware that the bond’s proceeds are being used effectively.

    The investors on the panel said that disclosure is still a developing area in the sustainable bond market, as investors are making greater demands to know that a bond’s proceeds are going to the right projects. At the same time, the more data disclosed allows portfolio managers to make more informed investment decisions.

    “Over the last year, we have been pushing issuers and the ratings agencies to push the issuers to disclose more of what is happening with the proceeds, and what they are doing as a company generally – such as data on emissions – so that we can compare one company with another,” said Thomas Thoden van Velzen, Senior Portfolio Manager, PGGM.

    But perhaps the most important message from the investors was that sustainable investing is no different from any other kind of investment activity – in terms of assessment of risk and expected performance.

    An investor always has to consider the underlying quality of the credit, said Christina Bastin, Portfolio Manager, Muzinich. If a company has weak financials and prospects, she said, but a strong ESG rating, it is still an unattractive investment.

    “There’s a misunderstanding that when you run an ESG fund that you have to give up on performance. That is definitely not the case,” she said.

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