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As reported yesterday, the Export-Import Bank of Korea (Kexim) has issued its first “green” or climate friendly bond – $500m in size, 5 year tenor, coupon 1.75%. This is the first benchmark-sized bond marketed as a green bond outside the multi-lateral development banks. A big step forward and a big contribution from Korea, the standard-bearer of Green Growth Government.
Demand was strong: they had $1.8bn of orders from 100 investors for their $500m; which means, other potential issuers take note, they left some hungry investors out there.
US investors took 47%, European investors 32% and Asian investors 21%. The break-up by buyer types was 55% to asset managers, 31% to banks, 5% to insurance and pension funds, 4% to companies and 5% to ‘other’ investors. Compare this to the IFC $1bn AAA bond we blogged last weekend, where only 30% went to asset managers. Asset managers are looking for yield, and Kexim’s AA3 rating gives them that important extra with, to be frank, very little risk.
BTW, demand was from both mainstream (30%) and “green” (70%) buyers (such as responsible investment funds). What’s most amazing about the mainstream interest is that the Green Bond has been priced at a small premium to existing Kexim 5 year bonds – despite absolutely no difference in the credit characteristics.
The Green Bond’s initial “guidance” was a price of 100 basis points over US Treasury 5 year bonds, but that then tightened to 95 over US Treasuries. According to FinanceAsia, outstanding Kexim 2018s were today trading at 104 basis points over US Treasuries. I.e. mainstream buyers invested even with the Green Bond being priced at 9 basis points lower interest!
Green is not a barrier to mainstream investors, but rather seems to have become an attractor.
Will the bond continue to trade at a premium? There’s a good chance because a lot of investors were ‘buy-and-hold’, so supply to the market will probably be restricted.
But … is it Green, as a few institutional investors have asked us?
Well, Kexim hasn’t given a lot of detail (not great), but it has promised to use the proceeds to extend loans to projects that promote the transition to “low carbon and climate resilient growth” (excellent).
According to FinanceAsia, this “may include projects that foster clean sources of energy, such as wind, hydroelectric and solar power; or that lower the dependence on fossil fuels. It also includes projects that reduce carbon emissions or filter waste, such as water treatment projects.” All sounds OK, albeit there’s potential for a lot of grey areas in there – for example many countries argue that switching from coal to gas leads to reduced emissions, but this may be contestable (for a free freakout see last month’s Nature magazine report and the subsequent Climate Progress comment piece).
The good news is that co-manager SEB‘s style has been to use CICERO – the highly reputable Centre for International Climate and Environmental Research in Oslo – to vet criteria for projects to be funded by Green Bonds they’re involved in bookrunning, notably World Bank; and CICERO is again cited in Kexim‘s material as vetting investments. CICERO, for example, argues that coal-fired power station retrofit investments should not be included (to the initial consternation of some institutions); we’re with them on that.
Kexim also say they will follow OECD guidelines on environmental and social due diligence. All good.
So yes, we think this is Green. Kexim is a blue-chip institution and investors have good reason to think it will deliver on its promises, and most importantly they have promised to get a blue-chip climate research organisation to vet their portfolio.
However, in areas like energy efficiency in buildings, bioenergy and waste and water, performance criteria are required to ensure these investments are good enough for a 2°C world.
We’d prefer it if Kexim, SEB and Bank of America Merrill Lynch (the other co-manager) helped support a corporate climate bonds market (where trust about environmental promises is at a ‘slightly’ lower level) by using and promoting a standard set of criteria that can be used to judge whether a bond is green. Coherent and standardized definitions would help the development of a much broader market. But then of course we have developed the Climate Bond Standard, so we would say that.
Back to Kexim - their objective was to broaden their pool of investors – which worked. The bonus was that they ended up with a price premium as well. Bingo and Bravo.