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Converting Emerging Markets to Green Finance one Bond at a Time

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Stockholm(NordSIP) – Jean-Marie Masse, Global Head and Chief Investment Officer at International Finance Corporation (IFC), seems tireless in his efforts to develop the market for emerging market green bonds. To reach their high goals he has developed an ambitious education program at IFC within the framework of the largest green bond fund in the world, the Emerging Green One (EGO) fund, managed by Amundi with IFC as the cornerstone investor.

At the end of June, IFC had invited professionals from banks in emerging market economies to Stockholm to take part in a program designed to give them insights and tools to start emitting green bonds in their home markets. The program was developed by Stockholm School of Economics Executive Education in cooperation with IFC and the Swedish International Development Cooperation Agency (SIDA), Switzerland’s State Secretariat for Economic Affairs (SECO), and the Luxembourg Ministry of Finance.

- Promotion -

Being more sustainable than others is a defining goal of Amundi’s and running the EGO-fund they view as a project to define a new asset class.  Timothée Jaulin, Head of Supranational Entities at Amundi Asset Management, talked to the training participants about the positives of the fund; transparent investment projects, highly rated issuers, emerging market spreads and additionality since the fund convinces commercial institutions that are new to green bond issuance to start emitting green bonds. Interest in the fund has been tremendous and more participants representing banks in emerging market economies are likely to join further education programs.

At launch the fund was fully invested with a small portion in green bonds, but most of the capital was invested “with financial institutions that could potentially become issuers of green bonds tomorrow, and a small part in sovereign bonds to add liquidity”, Timothée Jaulin explained. The goal is to have reached 100% green bonds at the end of the 7-year investment period of the fund. Then starts the five years over which the investors get their return as bonds mature. “Amundi is aiming for a target gross yield of 5%”, Jaulin informed.  The fund is focused on emerging markets from two perspectives; first, where the managers see the best risk-reward potential and second, where they see the highest potential for green bond issuance. “The aim is to keep the credit profile consistent over the full 12 years, so when we substitute the conventional bonds for green bonds, we substitute like for like, Jaulin said. “For example, if we sell a Chinese bank conventional bond, we buy a green bond from the same issuer or a similar issuer”, he added.

Most of the present investors in the fund do not invest in emerging markets. Through the set-up of the fund, Amundi is introducing them to emerging market green bonds and can offer them an exciting combination of investment-grade risk and emerging market yield. Apart from IFC, investors are mostly mainstream European investors and public development institutions represent a small part.

The fund was launched in March 2018. “Performance for 2019 up till the end of June was 6%”, Maxim Vydrine, manager of the fund informed the audience. “In May 2019 the gross yield was 5,5%. The modified duration was 4,7 years, and the average rating was BB+”, he added.

The launch of the EGO-fund has created much interest in green bonds globally, Jaulin said, “and it has helped the market to grow”. So far, demand exceeded supply for green bonds in emerging markets. While Amundi is responsible for the performance of the fund and is focusing on the demand side, IFC is running an ambitious training program to educate bank professionals and create an interest for issuing green bonds in those emerging market where they see the most potential.

The market for green bonds has developed rapidly in China and India. The challenge for the fund is to see an increase of supply of green bonds in the other markets where the fund is invested in conventional bonds that shall be converted to green bonds over the next years. IFC is, therefore, focusing education efforts on emerging market countries outside of India and China to teach them via executive educational training how they can prepare themselves to issue green bonds. By raising the level of knowledge at banks in those countries and explaining to them that the EGO-fund can take the role of anchor investor in green bonds that the banks will issue both IFC and Amundi see the great potential and are confident that the development of the fund will fulfil its expected goals.

“We are at a stage where the green bond market is more and more established, and size will drive sophistication in terms of more specialised funds like the Amundi One and a more standardised process for green bond issuers to investors. We try to bring new countries to become first time issuers of green bonds”, Jean-Marie Masse explained, “what is most important now is to diversify the number of issuers in emerging markets, in particular, to bring to the market higher yield green bonds”, he said. “Today more than half of green bonds are rated AA or above, so they don’t carry a lot of yields”.

Masse sees the most significant need and potential for green bonds in emerging markets for green building projects thanks to population growth and urbanisation. Linked to the building activities come needs for water consumption, green energy and transportation. In IFC’s EDGE-platform, they benchmark water- and energy consumption, for example, in the building of houses in different countries in emerging markets. Buildings with consumption below the defined targets can get a certificate to use when marketing the apartments et cetera. Another critical area for green bonds is the financing of renewable energy as this in many countries is less expensive than energy production via fossil fuels.

“There is a vast need for training and knowledge transfer”, Masse says. In Bangkok, IFC had a training session with 70 seats to offer, 160 qualified bank employees applied. For the Stockholm session, ten banks were invited, 9 had participants in place from Thailand, Georgia and Nigeria, for example.

When travelling around the world in his quest to increase the green bond market, Jean-Marie Masse sees a lot of awareness for the situation on the globe, particularly in emerging markets where people at hit directly the most by for example rising sea levels and hurricanes.

According to Masse, the IFC fulfils a crucial role as mediator between capital owners in Europe with vast pools of capital placed at meagre yield and in the emerging markets an immense need for finance to counter the impact of climate change through projects that can pay a good yield. Jean-Marie Masse is working to build a bridge between the two. For him, it is a win-win situation; “investors in Europe can get a good yield, and people in emerging markets can finance their projects”. To get the maximum impact, he is focusing on identifying which projects that best can be financed by which banks in what countries. The EGO fund is now one year into a 7-year journey. There is a need for more funds of the same sort to create a real investment opportunity for potential investors. The Amundi One fund hopefully works as a proof of concept to spark the development.

Participants at the Stockholm executive education seminar spoke of increased demand for green bonds from investors in their home countries. They all work for banks that want to go forward with sustainable investing activities and start emitting green bonds, but so far they haven’t known how to do it. The IFC-sponsored training was very appreciated as the set-up is quite practically oriented and deals with all essential aspects of green bonds.

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