Green and Sustainability Bonds: bonds with a sustainable character. They are not only a hit for CFO’s and Treasurers of bond issuers, but also for investors looking for sustainable returns.
What can we learn from the bond issuance by Philips, Vesteda and Ahold Delhaize earlier this year?
The market for Green Bonds is growing at a fast pace again this year. Transactions were heavily oversubscribed, with a huge interest from institutional investors in particular. "We see two drivers for this positive development," says Maarten Biermans, head of Sustainable Markets at Rabobank. “On the one hand, investors - and their supporters - want to make their portfolios more sustainable as soon as possible. On the other hand, large corporations seek appropriate financing for their own sustainability targets. These two trends come together in Green and Sustainability Bonds."
What is a Green Bond?
Green Bonds issued by governments or the World Bank have been around for some time. But the fact that modern Green Bonds are now taking off is caused by larger corporates. Of the twenty or so companies that are issuing bonds in the Netherlands, a third have already had their first experiences with this specific form of bond issuance.
Green Bonds are bonds with a label: the money raised is intended for making the organisation more sustainable or for new sustainable innovations. In order to be allowed to issue a Green or Sustainability Bond, these spending targets are specifically described in a so-called framework that must comply with the Green Bond Principles. Frans Baas of Vesteda, a Dutch institutional investor in the residential housing sector, explains: "Our Green Bond framework complies with these principles, has received a second party opinion from Sustainalytics and is certified by the Climate Bonds Initiative. That offers a lot of guidance, especially for the real estate sector."
This document is the basis for the story to potential investors. It not only describes the Use of Proceeds, in the case of Vesteda for example the improvement of its real estate by two labels to a minimum Energy Label C, but also specifies precisely how this is to be reported. "In the end, you need a party, a second party opinion provider, to have your framework screened. Their advice and approval ensures that your descriptions are in line with market expectations. Such a second opinion gives investors extra confidence," says Baas.
The thorough preparation - on average it takes 6 to 8 weeks to write a first framework - pays out in the rest of the process. During a typical three day roadshow along the financial centres of Europe, it determines the enthusiasm of potential investors. Julie Holt, who is coordinating the European bond issue market from London on behalf of Rabobank: “As a syndicate, we invite leading investors to the roadshow. If the story and framework that are presented are credible and in line with the overall strategy of the company, this reflects well on the mandated banks as well as the issuer. And just as important: it ensures strong demand for the issue. If demand for the bond is strong and widespread among investors, you as the issuing party have the potential to also get a more favorable pricing.”
"It ensures a well-filled order book"- Julie Holt, Rabobank
Diversification of investors
The greater the demand, the sharper the interest rate, the better the conditions. But all interviewees also point to another big advantage. Julie Holt calls it a diversification benefit: "Green Bonds ensure that the company has access to new investors. After all, there are more and more investors and funds with a strong focus on the sustainable profile of their investments. For Ahold Delhaize, Vesteda and Philips, we have seen an increase of these investors which makes the pool of investors larger and more diverse. This is beneficial for future issues."
"In addition to new investors, we also saw existing relationships subscribing for larger amounts," says Baas. "They too have to meet their sustainability targets, and every tonne of CO₂ that we have proven to save, they can of course - for their percentage of the bond - include in the reporting on their own targets.
Strategy and financing hand in hand
Rabobank considers it to be an interesting side effect that treasurers are happy to be able to contribute to the company's sustainability goals from their own position as well. "The company's sustainability efforts logically go together with their financing strategy via Green Bonds. Internally, that achieves a lot for the organisation," says Biermans.
Philips, which recently issued its first Green Innovation Bond, also showed this high level of internal commitment. Rabobank acted as Green Structuring Advisor. With the proceeds, the company invests in a portfolio of green innovations and the transition to the circular economy. Paul Rekmans, Head of Corporate Finance at Philips: "This framework was developed through close collaboration between our Corporate Finance and our Sustainability teams. We recognized increased investor focus on sustainable investments and developed a product that fits in very well with the direction the overall bond market is going. At Corporate Finance, we realized that this development in the market is a natural fit with Philips’ vision to make the world healthier and more sustainable through innovation."
The fact that investors are eager for such issues was also evident in this case. Philips' Green Bond issue of 750 million was significantly oversubscribed, as a result of which Philips only had to pay 0.574% interest over a 7-year term.
"Green Bonds grant access to new investors"- Julie Holt, Rabobank
This effect was also felt in the Rabobank-led issue of Ahold Delhaize. In Europe, Ahold Delhaize was the first among retailers to introduce their Sustainability Bond this summer. Ahold Delhaize opted for a Sustainability Bond instead of a Green Bond because, in addition to green, social objectives were also designated in the framework. For example, Ahold Delhaize intends to spend the 600 million euros proceeds on the one hand on the sustainable procurement of sustainably sourced products, and on reducing the climate impact from its refrigerants, and on the other hand to offer access to healthier food to more customers.
As Ahold Delhaize CEO Frans Muller commented: "The issuance of our first Sustainability Bond is a vital step in creating and sharing sustainable value for all stakeholders. It not only can have a positive environmental and social impact, it also helps us accelerate our promise to help our customers and communities eat well, save time and live better."
Green bonds on the rise
Vesteda's Baas: "Especially if you have been developing sustainably for years, if it is in your DNA, it is worth the extra effort threefold. We see the enthusiastic reception of our first Green Bond as a reward for all our sustainable efforts of the past years."
"Green Bonds are very popular," says Biermans. "In coming years the issuance of Green and Sustainability Bonds is expected to continue to increase, more companies will issue their first Green Bonds and an even larger group of investors will enter this market.”
Rabobank first to meet EU Green Bond Standard
Rabobank was the first issuer worldwide to issue a Green Bond meeting the 2019 version EU Green Bond Standard. In doing so, Rabobank took a step of paramount importance for the evolution of the Green Bond market. The standard is a key development in the EU's Action Plan on Sustainable Growth. The plan’s focus is on reaching the EU's 2030 climate targets.
As there is a large investment gap to overcome to achieve the climate targets, the private sector needs to contribute strongly to the EU’s plan. This means that Green Bonds can play a pivotal role in the fight against climate change. Rabobank’s Green Bonds, for example, will be used to finance Renewable Energy loans.