In emerging markets, Vigeo Eiris supported the first green bond issued out of the Middle East, by National Bank of Abu Dhabi, several green bond issuances in Morocco, and has provided CBI certifications of green bond issuances in several markets including Brazil. We speak with Fanny Tora, Head of South American Markets at Vigeo Eiris about the development of South America’s sustainable finance market, and how providing investors and borrowers with deep insights into ESG profiles can push the sustainable finance market forward.
Q. The green bond market has enjoyed significant growth outside Europe, its birthplace, in recent years. Can you give us a sense of the outlook for the green bond market in Emerging Markets? What are some of the factors driving the market’s growth?
A. Green bonds issued in developed countries do often finance projects to be implemented in emerging markets, so the final use of proceeds of green bonds issued in places like Europe do impact emerging economies. What we have observed in the last few years, however, is growth in issuance from emerging market borrowers. This demonstrates that the ESG strategy of some corporates in emerging markets has attained levels considered acceptable by “responsible investors”, so that they can trust these issuers’ capacity to responsibly manage projects that make a positive contribution to environmental or social objectives.
Among the key drivers, it is a great opportunity for EM issuers to diversify their investor base. Through a one-shot green bond issuance, they can attract new investors with an ESG mandate who are very likely to become long-term partners, as they tend to be more focused on long term value creation than on short term performance. Issuing a green bond is a good way for EM issuers to get on these investors’ radar.
Q. Latin America seems poised to become a leader in green bonds globally, but a lack of ESG-scoring and thorough ESG reporting – which investors increasingly demand – could hold the market back. Is it difficult getting deep insight into these elements? What can prospective borrowers do to make this kind of information more readily available?
A. As Latin America is the focus of more and more interest from international investors, we can already see that local issuers have improved their ESG reporting. The Latin American market is learning, and it’s learning fast, as it benefits from lessons learned in other markets.
Latin American organisations have been facing specific ESG challenges that have also pushed them to enhance their ESG strategy and reporting. Involvement with communities, biodiversity conservation, corruption risks, and relations with indigenous communities are some of the challenges that Latin American issuers have had to address for several decades.
In addition, for many countries in the region, the largest companies contributing to economic development are still owned by a small group of families or business leaders, but they are increasingly opening up to new investors and liquidity pools. This has led many to adjust their corporate governance structure and operations, improve their transparency and their relations with minority shareholders. Continuing in this vein will ensure Latin American companies will be ready to provide the ESG data that is crucial to investors among a broader set of stakeholders.
We believe that any green bond issuance is a sustainable issuance. Sustainability criteria such as human rights, impacts on the local community or safety at work are fundamental and important to secure for both investors and issuers in terms of risk exposure. That said, we would always look at the ESG profile of the issuer and integrate sustainability criteria in the framework evaluation.
Q. Green bonds only form one area of a broader group of sustainable finance instruments – for instance, social bonds are beginning to become more prevalent. How difficult is it to gage the impact and credentials of instruments as they begin to stray away from measuring carbon, air pollutants and the like?
A. Although they’ve enjoyed less publicity, social bonds are also great investment opportunities. We can expect that the specific framework provided in the Social Bond Principles recently issued by the International Capital Market Association will foster their development. Emerging markets and Latin American issuers in particular should be natural targets for projects financed through social bonds. Challenges in terms of education, healthcare, poverty, access to finance, are very likely to be addressed by these instruments.
We also anticipate the development of hybrid green and social bonds, an attractive proposal to the bond market for investors wishing to contribute to positive development in both social and environmental areas, and a complementary solution from the issuer point of view, or for gathering different issuers in a sole emission.
Q. Sustainability certification is important for issuers and investors of green bonds, but some issuers- particularly smaller or mid-sized companies – have complained that it is hard to justify the extra cost, relative to just issuing a vanilla bond, and that it is largely the investor that gains at the expense of the issuer. Is there some truth to that? How do issuers benefit from a thorough sustainability check on these instruments?
A. The Green Bond Principles have established that it is recommended that issuers use an external review to confirm the alignment of their green bond with the four components of the Green Bond Principles.
The cost of going through a second party opinion process is to be balanced by the several benefits of a successful green bond issuance, the main one being the ability to attract new investors to the issuer’s base. Reaching investor base diversification is a tough challenge for smaller and mid-size companies that do not have the same communication and prospection means that large corporations do. A successful green bond issuance is an excellent way to reach new long-term investors who would likely not have engaged with a simple vanilla bond.
In itself, the second opinion process is also a good opportunity to engage in a deeper assessment of the ESG strategy, risk mapping and management of the company. Lessons learned through this process are likely to benefit the company through long term value creation and improved risk management, which makes these assessments overwhelmingly valuable. Finally, green bond issuance is also one of the few opportunities to unite different departments of a company around its vision, with a common objective and shared success at the moment of issuance. So, is the cost worth the additional benefits? We think so.
Vigeo Eiris expresses an opinion on the green bond issuer’s credibility in terms of social responsibility policies and practices. The company provides the market with an independent third-party opinion on the consistency of the selected projects’ responsible aims, as promised by the issuer. Vigeo Eiris’ Second Party Opinion expresses an assurance level according to the Voluntary Process Guidelines issued by the Green Bond Principles (GBP), it is aligned with the UN Sustainable Development Goals, and with international standards and sector guidelines applying in terms of ESG issues. Vigeo Eiris is also an approved verifier for the Climate Bond Initiative.
This article was jointly developed by Bonds & Loans and Vigeo Eiris.