 "We need an incentive structure and change of regulations: Ulrick Ross")
Financial institutions across the world are moving to sustainable financing and turning away projects seen as going against green norms. Ulrick Ross, managing director and global head of sustainable financing, HSBC, spoke to Jyoti Mukul on the trends in sustainable financing and how it is making a difference. Edited excerpts:
How has sustainable funding evolved?
We have seen a huge uptake in sustainable financing. The International Capital Market Association (ICMA) came up with a forum where we could write the rules for green bonds. We introduced voluntary guidelines. Since then, the market has gone from $11 billion in 2013 to almost $40 billion in 2014 and we hope to surpass that figure this year. There is a lot of innovation going on. Buyback arrangements, liability management, high-yield bonds and cover bonds are being introduced.
The next evolution in sustainable financing will come from expert investors embracing the more industrial companies that do not have a clean green profile to come to the market. But where use of proceeds is defined to be green, if a Shell or BP wants to come to the green bond market, they should be allowed. At the start, there was a reluctance to include these industries because of their profile, but today the robustness of the system is manifest. And people with expertise are welcoming industrial companies to a green future.
We are also speaking to governments for incentives so that we can quadruple the volume. We need government help like withholding tax exemption, or risk-weighted assets solutions measured differently, investment guidelines. Green bonds will not solve all the challenges a country has with current regulations, but it is a way to encourage a dialogue for bridging the gap between international demand with domestic standards.
Where would you place India and China in this regard? Do you see the market for sustainable funding picking up in India?
When green bonds were introduced, the question asked then was whether they were out of the western world. Now we see a strong pipeline in China and some movement in India. Sustainable financing has a huge role to play in India. You could see India becoming one of the biggest green bond markets. The Indian government has done a good job in encouraging companies to have a green agenda, but stepping up volumes will be a challenge.
The political stage has been set for COP 21 (the 2015 Paris Climate Conference), in Paris in December. On that basis, all governments have to come up with a narrative on how to deliver on the promise. Indian companies have been encouraged to adopt the market. We need an incentive structure and change of regulations-currency controls, hedging controls, removal of withholding tax, investment guidelines for insurance companies. The government has to think about the broader impact of policy.
Do you see more companies raising funds for their green projects or banks and financial institutions going into sustainable financing?
We have banks coming up with sustainable financing portfolios but we also see classical renewable companies adapting it. We are also seeing real estate companies. So sustainable financing will be applicable to both sectors.
What is HSBC’s plan for sustainable financing in India?
We are organising ourselves globally. We have a clear strategy for encouraging participation, both on the financing side and also businesses. India is one of those key areas where we are thinking what kind of capital we can commit for sustainability.
Is there a standard definition for sustainable projects followed globally? And how can projects be monitored to ensure funds are used for sustainable purposes?
The executive committee of the Green Bond Principles (GBP), which brings together a representative group of issuers, investors and intermediaries in the green bond market, with the support of the International Capital Market Association, has published the 2015 edition of the GBP, which are voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of this fast-growing market. What determines sustainable financing is the use of proceeds, management of proceeds, guidelines on how to allocate funds and reporting guidelines. Projects relating to renewable energy, energy efficiency and land use management fall under this category. Besides that, you have a social agenda — it could be education, health, gender equality — and then you have sustainable bonds, which are a mix of green and social bonds.
How would you compare the funding available for conventional energy with that for clean energy? What are the new trends in sustainable funding?
In the current format, the price is identical to normal bonds. We sell green bonds on better execution. There are other parameters besides pricing. But should the government provide incentives, then these will reflect in the price.
How has sustainable funding evolved?
We have seen a huge uptake in sustainable financing. The International Capital Market Association (ICMA) came up with a forum where we could write the rules for green bonds. We introduced voluntary guidelines. Since then, the market has gone from $11 billion in 2013 to almost $40 billion in 2014 and we hope to surpass that figure this year. There is a lot of innovation going on. Buyback arrangements, liability management, high-yield bonds and cover bonds are being introduced.
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There have been 37 currencies in which the green bonds have been introduced.
The next evolution in sustainable financing will come from expert investors embracing the more industrial companies that do not have a clean green profile to come to the market. But where use of proceeds is defined to be green, if a Shell or BP wants to come to the green bond market, they should be allowed. At the start, there was a reluctance to include these industries because of their profile, but today the robustness of the system is manifest. And people with expertise are welcoming industrial companies to a green future.
We are also speaking to governments for incentives so that we can quadruple the volume. We need government help like withholding tax exemption, or risk-weighted assets solutions measured differently, investment guidelines. Green bonds will not solve all the challenges a country has with current regulations, but it is a way to encourage a dialogue for bridging the gap between international demand with domestic standards.
Where would you place India and China in this regard? Do you see the market for sustainable funding picking up in India?
When green bonds were introduced, the question asked then was whether they were out of the western world. Now we see a strong pipeline in China and some movement in India. Sustainable financing has a huge role to play in India. You could see India becoming one of the biggest green bond markets. The Indian government has done a good job in encouraging companies to have a green agenda, but stepping up volumes will be a challenge.
The political stage has been set for COP 21 (the 2015 Paris Climate Conference), in Paris in December. On that basis, all governments have to come up with a narrative on how to deliver on the promise. Indian companies have been encouraged to adopt the market. We need an incentive structure and change of regulations-currency controls, hedging controls, removal of withholding tax, investment guidelines for insurance companies. The government has to think about the broader impact of policy.
Do you see more companies raising funds for their green projects or banks and financial institutions going into sustainable financing?
We have banks coming up with sustainable financing portfolios but we also see classical renewable companies adapting it. We are also seeing real estate companies. So sustainable financing will be applicable to both sectors.
What is HSBC’s plan for sustainable financing in India?
We are organising ourselves globally. We have a clear strategy for encouraging participation, both on the financing side and also businesses. India is one of those key areas where we are thinking what kind of capital we can commit for sustainability.
Is there a standard definition for sustainable projects followed globally? And how can projects be monitored to ensure funds are used for sustainable purposes?
The executive committee of the Green Bond Principles (GBP), which brings together a representative group of issuers, investors and intermediaries in the green bond market, with the support of the International Capital Market Association, has published the 2015 edition of the GBP, which are voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of this fast-growing market. What determines sustainable financing is the use of proceeds, management of proceeds, guidelines on how to allocate funds and reporting guidelines. Projects relating to renewable energy, energy efficiency and land use management fall under this category. Besides that, you have a social agenda — it could be education, health, gender equality — and then you have sustainable bonds, which are a mix of green and social bonds.
How would you compare the funding available for conventional energy with that for clean energy? What are the new trends in sustainable funding?
In the current format, the price is identical to normal bonds. We sell green bonds on better execution. There are other parameters besides pricing. But should the government provide incentives, then these will reflect in the price.