GRESB Green Bond Working Group, March 2016
The fourth meeting of the GRESB Green Bond Working Group addressed the constructs, protocols and benefits of a green bond roadshow. Speakers included Victoria Clarke from HSBC’s green bond investment banking group, Christophe Garot representing two-time green bond issuer Unibail-Rodamco and Viktor Stunnenberg who serves as Senior Portfolio Manager at the institutional investment arm of Achmea Investment Management. Each provided their unique experiences and perspectives on green bond issuer-investor best practices for effective underwriting and communication strategies.
Impacting the Learning Curve
Green bond roadshow dynamics aren’t widely discussed within industry circles. GRESB Green Bond Working Group members learned how effective roadshow communications can bridge issuer intentions with investor expectations. A primary reason for issuing a green bond is attracting and broadening a company’s bond investor base – setting upfront expectations and intentions is an important component to the successful underwriting and green bond placement process.
Several GRESB Members noted the learning curve experienced by first time issuers and/or investors requires additional upfront effort to identify and communicate targeted impacts and expected outcomes. Examples include ring-fenced investments in energy efficiency upgrades that can impact the bond’s overall risk profile and carbon footprint. Roadshows are used to narrow the knowledge gap between a sponsor’s intent and investor expectations, thus improving market understanding for the differentiation characteristics inherent to a green bond.
Besides market differentiation, green bond roadshows allow issuers and investors to engage pertinent business issues on deeper levels, going beyond the transaction-based nature of a traditional bond offering. By elevating discussions on energy and water consumption, stakeholder engagement dynamics, and asset-level investment opportunities, investors often gain a deeper understanding of the issuer’s underlying business dynamics, investment risk mitigation strategies and insights into management’s use of capital proceeds.
Working group members emphasized the important role underwriters play as they assist issuer’s efforts to identify and describe sought-after impacts, and work to guide investors on the targeted outcomes from the green bond. Underwriters recognize certain challenges arise when projecting investment impacts and outcomes in the face of ever-changing real estate market dynamics and tenant demands. Striking a balance between economic terms and sought-after ESG impacts is an important element in any green bond offering.
Investors bring a wide range of experiences and expectations to a green bond discussion. Breadth and scope of investor knowledge plays a crucial role in the roadshow process, and directly impacts investor questions and information requests. HSBC indicated that green bond meetings increasingly include the investment analysts focused on debt-oriented credit risk issues joined by ESG analysts who seek to understand the issuer’s overall ESG reputation and track record using sources like GRESB and related investment research analytics coupled with the specific objectives of the green bond offering.
Early green bond investors report basing their investment preferences on one or more specific impact issues including carbon emissions reduction, water conservation, ecology impacts, or other related concerns. As the green bond market advances, an increasing number of mainstream investors are seeking to keep pace. Expanded investor interest leads to investors taking a closer look at an issuer’s ESG profile and related data. Investors seek comprehensive ESG information about the issuer in an effort to evaluate both the framework underlying the green bond alongside the entity’s credibility and overall track record on sustainability-based aspects.
Investors typically seek alignment between overall sustainability goals and the underlying green bond framework. GRESB members surfaced a point of considerable industry discussion, specifically if a company should be required to have a high ESG score as a prerequisite for issuing a green bond. It was generally agreed that investors should provide latitude to entities financing credible forward-looking sustainability objectives with green bond offering. In instances where issuers lack an extensive ESG track record, issuers should describe the specific uses of bond proceeds and prepare to describe detailed plans to deepen engagement on ESG issues thus improving the firm’s baseline score.
Primary Road Show Benefits
There are two main benefits of a green bond roadshow:
- Enabling the issuer to better align financial strategy and ESG strategy thus positively impacting bond terms. [see GBWG Meeting #3]
- Forging deeper and stronger relations between the issuer and its investors.
Successful green Bond issuances require cross-departmental coordination to develop and articulate the investment strategy and use of proceeds. The investment strategy typically includes targeted operational impacts, financial outlook refinements, and associated risk adjustments. These financial projections are developed alongside the GRESB Green Bond Guidelines for the Real Estate Sector to project outcomes that reduce energy and water consumption, waste generation, and/or GHG emissions.
A competent green bond offering is the result of internal alignment. Management teams must work closely to develop and construct the sustainability-focused investment program, thus improving the overall business underpinnings within a range of executives and line personnel.
Experience shows that green bond roadshows deepen and strengthen relationships with investors. Beyond the base financial discussions, meetings typically expand the conversation to cover particulars of the overall green bond framework, investment strategy, implementation and sought-after outcomes. The result is enhanced opportunity for investor and issuer alignment regarding long-term goals and sustainability-based improvements affecting collateral risk and obsolescence.
Road Show Preparation
Call participants engaged in-depth discussion around how issuers should prepare for the roadshow. Main suggestions brought forward by experienced underwriters and issuers include:
Targeting: Decide early on which investors to pursue – green investors vs. non-green, those who have green bond fund vs. those who don’t, etc. when contemplating a strategy to broaden the investor base. Investors maintain a knowledge disparity on green bonds leading to a range of meeting dynamics.
Preparation: Sophisticated investors take a closer look at the green bond framework alongside the issuers overall sustainability credentials. Be prepared to address both use of proceeds questions and entity track record as these aspects are important to the credibility of the green bond offering.
Prioritization: Time efficiency is the key with underwriters connecting to the right people within the investor organization. The objective is to focus attention on investors most likely interested in the particulars underlying the green bond investment strategy, thus minimizing time invested in those who seek market education.
Underwriter Presence: Having a knowledgeable green bond underwriter at the issuer’s side during the roadshow is often helpful to answering detailed questions sure to arise regarding use of proceeds, implementation, and ongoing reporting of impacts and outcomes.
The fourth meeting of the GRESB Green Bond Working Group included a discussion on impact reporting. Several institutional investors voiced a continued desire for a comprehensive reporting framework that provides information on impacts and outcomes stemming from the use of proceeds [see GBWG Meeting #2].
Working group members acknowledged challenges faced by issuers who are developing new buildings, as it is difficult to provide specific projections and commitments to ESG-based outcomes during the roadshow. In these cases, future performance is subject to a wide array of unknown factors including tenant type, space use, energy intensity of the underling economic activity, and other related factors.
The meeting concluded with members agreeing that the green bond roadshow is more extensive than the usual credit-focused bond underwriting meeting, or ESG update discussion. Green bonds provide an opportunity to engage detailed discussion on the use of proceeds, overall sustainability goals and framework, and how the green bond fits into the firm’s financial strategy.
Resources: KPMG: Gearing Up For Green Bonds
RBC Capital Markets: Fifty Shades of Green Bonds
GRESB Green Bond Working Group, January 2016
The third meeting of the GRESB Green Bond Working Group (GBWG) addressed the costs and benefits of green bond issuance and investment. GRESB presented original research on the performance of corporate real estate green bonds, sharing its findings on the quantitative costs and benefits identified, to date. Speakers, including two green bond issuers from the property sector, Digital Realty and Stockland, and an asset manager, BlackRock, presented complementary qualitative factors grounded in their own experience. A lively discussion and Q&A, open to all participants, followed.
Insights from market research
The financial benefits of green bonds have been a recurring topic within various publications. A recent study from Barclays (The Cost of Being Green, September, 2015) concluded that investors may be paying a premium of 20 basis points to acquire green bonds in the secondary market. Few other studies exist, but those that do present less definitive results.
In order to provide working group members with an overview of market trends specific to the real estate sector, GRESB conducted in-house research and data analysis on the sample of green bonds issued by real estate corporates, to date. (The same sample represents the CRE universe, as defined in the second working group meeting on green property bond metrics.) In this case, we studied not only the overall performance trends of green property bonds, but also the pairwise performance of green vs. grey (non-green) bonds, from the same issuer. Pairs were selected using matching principles in order to ensure comparability. The research presented below outlines several interesting trends.
Trends and Highlights:
- The structure of green bonds—the rate type, amount of issue and market focus—is aligned with the overall debt structure of the issuer;
- Among comparable pairs from the same issuer, coupons for green bonds are higher than those for grey (non-green) bonds. This trend persists even when matching principles are relaxed.
- Green bond price volatilities are similar or slightly higher than the volatilities for their grey counterparts, but this pattern is highly issuer dependent;
- For six of the seven real estate corporate issuers studied, green bond yields were above the issuer’s yield curve (or trend line for grey bond issues). This would imply an investor discount for green, not a premium. However, pairwise yield comparisons revealed that higher green bond yields are not always the case. Thus the results on yields are inconclusive.
Of note is the limited data currently available. The trends mentioned above require more robust analysis and more data points before conclusions can be drawn. While some real estate corporates have realized a pricing break with green bond issues, this is not always the case, and pairwise analysis identifies possible inconsistencies. The higher volatilities of green property bonds may reflect strong investor demand, shortage of supply, and the buy and hold strategy of institutional investors. It is too early to draw distinct patterns within the CRE universe of green bonds, but the trends outlined above are nonetheless noteworthy and deserving of follow-on study.
Insights from the GBWG dialogue
The global GRESB Green Bond Working Group continues to grow in tandem with interest in the green bond market. Currently 18 active working group members lead engagement and discussion. 35 GRESB Members joined the third session. Various group members, plus one guest speaker, shared their views on the costs and benefits of green bonds, as summarized below:
- Issuers confirmed that green bonds are considered within the context of their overall funding strategy. Some issuers made minor adjustments to their green bond offering, as a result of discussion with potential investors prior to issuance (including roadshow feedback). This underlines the necessity of such communication, which facilitates strategic messaging and investor understanding of the green bond. Most issuers adjusted their initial issue amount upward. All issuers realized investor diversification.
- Most issuers found that there was a significant learning curve associated with their first green bond issue. The upfront work — research and internal conversations about use of proceeds, accounting and auditing — was required to initiate their green bond offering from a place of full understanding and buy-in throughout the organization. However, for these issuers, already engaged in the sustainability issues relevant to the performance of their real estate portfolios, this upfront cost was more one of time and resources than additional monetary expense. Leveraging existing standards, such as the Green Bond Principles, was also cited as beneficial in establishing a green bond framework. Similarly, investors expressed their reliance on independent, third party verification of a bond’s use of proceeds and impacts, while allocating existing resources to develop a more holistic analysis of the particular bond.
- Issuers agreed that some flexibility within the framework for eligible green project selection is imperative in order to avoid the potential high costs associated with small scale energy improvements and monitoring. Selecting a range of green building certification levels or allowing for third party engineering reports to assure some projects, may be a way for issuers to balance the need for eligible green project pipeline with the cost of high impact verification.
- Strong investor demand for allocation to green bonds is apparent and fueled by appetite for social benefit. This trend is contributing to more and more capital targeting a relatively small number of corporate bond issues. Such supply/demand disequilibrium could lead to a (green/grey) pricing differential. However, the consensus among issuers and investors is that there is no clear indication of a secondary market pricing difference, and that limited data plays a role in this inconclusiveness.
- The cost of impact reporting was difficult for some issuers to estimate. Annual reporting is typical, and some issuers had not yet been through the first annual cycle since issuance. Others report green bond impacts or outcomes in conjunction with their annual report or less frequent sustainability reporting, making isolation of green bond reporting costs, challenging.
When asked what developments they would like to see in the green bond market over the next twelve months, working group members stated the obvious: market growth. Clearly, more transactions would mean more investable supply and more precedents for issuers to piggyback on. Market growth would also supply more data for studies on performance and lead to a greater understanding of how green bonds behave in relation to their non-green counterparts. Greater transparency was also mentioned, but interestingly, not in relation to issuers or use of proceeds; rather, transparency related to investor actions. The big question for 2016: what are the ins and outs of why investors are targeting green bonds?