2018 Sovereign Debt Management Forum Breakout session 5   Thematic bonds

2018 Sovereign Debt Management Forum Breakout session 5 Thematic bonds



so good afternoon everyone and welcome to this panel discussion this panel discussion is about thematic bonds and by theme automatic bonds we are referring to green bonds and catastrophy bonds two completely different types of financial instruments one raises money green bonds and the other is not really a bond it's an insurance instrument as some of you may know green bonds are bonds that whose proceeds are earmarked to finance environment-friendly products whereas catastrophy bonds as I mentioned are issued in order to help countries or entities buy protection against natural disasters etc so it's a risk transfer instrument so my name is Farah Hussain and I work for the World Bank Treasury obviously and my department is the client services department what that means is that we work with our clients to identify financing and risk management challenges and help them implement new and innovative financial solutions to help them meet those challenges each of us are an expert on a specific topic I work primarily with green bonds and I have my colleagues here at V Abigail Baca and Antonio Davila who work on disaster risk the financing so they'll also be helping with this panel discussion with you some of your questions so today's in today's panel discussion we are going to talk about you know how debt managers are using these instruments and you know what are the strategies they can adopt and how these instruments can actually impact the strategies that they have the medium term debt management strategies etc and in order to help me with this discussion have three very distinguished speakers first of all I have Robert Zima who's the director of public debt management at the Ministry of Finance of Poland and then I have Jose Andres olivera's who is a director of the Directorate of financial markets management in the Ministry of Economy and finance in Peru and I have Christopher coming Kerr who heads the sustainable finance research at the investment bank SEP and provides sustainable finance advisory to corporates investors and the official sector so what we're gonna do first is we're going to go through presentations by each of these speakers and then after that I'll throw up in the floor for questions from you and I'll also be asking them questions so without further ado I'd like to ask Robert to start with his presentation the green bond market has been growing tremendously but the sovereign sovereigns have really got into this market very recently in 2016 and Poland was actually the first country that issued a sovereign green bond so Robert without further ado if you could tell us more about the transaction through your presentation thank you thank you thank you for actually you already said what I wanted to begin with so that I'm not there is no coincidence with I'm the first speaker during this session because Poland was the first country to issue the sovereign green bonds and I wanted to briefly show you how we did it well we were not and this was not the obvious candidate to be the first to open the sovereign green bond market and but as it turned out it was a very successful project and I will show you the presentation few slides and then I'm fine at the end I will also make some some practical comments on it and that process so our first thing we had to do was to prepare the framework the green bond framework and it was it was prepared in its according to green bond principles published by it might that time and we also hired the third party advisor it was sustained oolitic s– and the whole process was not only not only the verification of the framework but the preparation itself and everything we we did at the time was done in cooperation with Wolf Dam and we the framework is based on the four four pillars four major elements we wanted to include first of course is the use of proceeds so what the funds will be spent on and then how we select the projects and how we evaluate if they are very confirm with the Greenmount framework and then the management of procedures more or less that's a technical technical thing on our side and how we actually do it because we have opened a separate and separate dedicated account where only the green bonds proceeds are transferred and deposited and they are withdrawn from the account only when the payment for a specific project is done from the state budget and the last last pillar was the reporting and reporting is the toughest part of course we we are able to show exactly what we have spent money on exactly which project for example if this is say clean transportation pillar so for example renovation of some right out railway tracks we can say exactly the kilometer 122 2 kilometer 150 or whatever was changed this and this amount of money was spent from this day to this date this is all very clear but then then there was a problem to actually say how much co2 reduction was done because of that and this is also the case the situation similar in case of our other projects other pillars so in the first report what we did we reported actually I skipped some slides already speaking about the reporting and but this is the the most now for us the most important and most complicated complicated fix so let me just get back to the the presentation and I will speak about reporting and in a minute so eligible sectors we have six eligible sectors in our framework you know for which the green bond proceeds can be and be used you know energy sustainable agricultural operations afforestation national park clean transportation and reclamation of heaps we also have in our framework ineligible sectors to be to be clear absolutely clear with the investors that the funds will not be said is spent on the project which might which might not really not which are not really in line with the grain boundary suppose so we made clear that we will not spend on those it might be it's it was that's implicitly clear but we prefer to be to be on a safe side here and to mention all of those to make the comfort make the investors even more comfortable with our offering and I think in this particular bond segment the investors confidence and comfort is much more important than in regular bonds sectors so very briefly how we select the products it was at the very beginning at the very beginning I mean and five years ago when we first thought about sovereign green bonds we were very skeptical we simply said no it's not doable first because we were not able to earmark the funds according to public finance law we had at that time in Poland we had to change it changing the bill and public finance law is not not an easy task but it was the first obstacle we have to overcome then the second well that managers are not well at least in Poland are not expert on environmental finance or environmental policies you know climate changing research etc so so we needed we needed X knowledge and expertise of other ministers so we had to convince them that yes this additional effort is really worth it but fortunately we have in the Ministry department which is coordinating the budget preparation process with other ministries like Ministry of Energy of environment of Agriculture culture so this dedicated Department they basically know everything what they are spending money on so it it really helped because we already knew we had the list of the projects which might be a little eligible under green point framework available at the Ministry of Finance so it it was a massive massive step forward in the whole in the whole process so so and around this we built the whole selection process so basically we have this department we know whatever and say green ministers are spending money on we know the projects if there are any depths if it's really green we just consult with the with the Ministry and then we I mean the public that we reconcile we've sustained elite excited we hired sustainability for the first reporting and every project was also verified by them that the project does meet the green green bond our framework that's also principles let's move to our first first issuance it was done in December 2016 5 year bond seven hundred and fifty fifty million pricing was in line with our regular euro bonds it wasn't there was no price benefit no it was priced exactly it's our break our regular green bond with our regular euro bonds at that time so we didn't we didn't expect any say at the pricing advantage at the time and although some banks were advocating showing us that potential benefit may be up to five up to ten basis points it didn't materialize and I don't think it will anytime soon because in the case of the our second bond it was again the same case we paid the new issue premium as if if we issued a regular a regular euro bond at that time of course the benefits for us as a dead manager is a further diversification of the investor base there are dedicated accounts we can that can buy only only green bouncer or ESG bound so so the allocation the allocation here was key and you know in in this case our first bond 61% of the of the bonds were allocated to dedicated green accounts the geographical diversification was quite similar to our to our regular euro bonds maybe with higher participation of Benelux and our dicks so this is what what we might be expecting at that time keep quickly to the second green bond the second was priced in February I actually was last day of January 2018 and was longer pricing as I said against again in line with our curve and allocation to green accounts was 41% it did so not as high as in the case of the first bond but still but still I think in line of our expectations the demand was most massive when we compared it with our of our regular euro bonds so 3.25 billion and the issuance was 1 billion and she was up sighs because we were targeting at the beginning 5 to 500 to 750 given the book of 3.25 we increase it to 1 billion and geographical distribution as even as you can see it's even more granular and in the first case so I'm watching the count of can countdown timer in front of me so let me move to what I promise to say a few words about so the reporting we've published and so far one report it's about the first boundary we issued according to the framework we shall publish the reports within 12 months after issuance and we publish the one obviously in December 2017 as you can see the majority of the of the funds were green one proceeds one were spent on three sectors so it's green transportation ennoble energy and agriculture sustainable agricultural operations organic farming some subsidies to organic farming etc and in the framework we promised to present environmental impact as much as we can so whenever we have a data on what sector we have a date I would probably have a data we will show everything with that and but we also we know we are aware but it is not it's not it's not perfect so we are still in the process of thinking how to improve it so the first thing we are now in the process of establishing a working group within the ministries of the specialists and also to including some external expert to prepare a methodology dedicated methodology to if any data are not yet something is not yet counted by the by the Ministry of Environment or the minister of energy energy so this group is supposed to prepare the methodology and we are probably within for the next at the second but for the following reports we will be able to show so more and more data and actual environmental is a key for investors and it was also this thinking's also confirmed by the Moody's assessment we had in June 2016 Moody's verified above our bounds they have a methodology very Sanctum gb2 so very good assessment it's it was not the second highest it wasn't the highest exactly because of the of the not fully fully and full reporting I think I think I'll stop here answer any questions if you have thank you Robert what you were mentioning in the first slide is you know some of the requirements for a green bond so when you issue a green bond you issue it just like any other normal bond but then you have some additional requirements wherein you have to put framework together and basically the framework shows or tells investors how you are issuing the green bond right and the international standards basically the green bond principles tell you that you know you have to meet you know four specific requirements and in the sense that you have to explain you know how your projects are green you know what is the criteria and how you are selecting those projects and how you will be earmarking the funds or the proceeds of the green bond you know for those eligible projects and how you are going to manage them and track the proceeds of the project and then finally you have to report back to investors on those projects so you were talking about all those processes how you went through so it would be very interesting to hear you know how these inter-ministerial you know collaborations worked but before we and also you know you said that you did not expect any pricing benefits and yet you issued the green bonds so it would also be interesting to hear what your motivations were but before we go that let's hear from Chris coming cur of upset you know what they are outlook of the green bond market market is sev actually for some of you may know that the World Bank issued the first labeled green bond in 2008 and said was the investment bank that worked with the World Bank to develop the green bond product so we are very privileged to have Chris here with us today with such a distinguished audience as well and if I could just have my slides then we can get right onto the presentation because what you will see is that thank you for that note here it is here's the first green bond first labeled green bond for mainstream institutional investors and and we're celebrating together a decade of green bonds this November you can see that actually we placed it with a number of Swedish investors that actually wanted to have their names associated with the trends action this is actually something that we see quite frequently in the green bond market investors actually want to publicize the fact that they're doing this so in any case it's a privilege to be talking at this conference today and you've done so much and the IFC as well and now working on sustainable development bonds so this is this is great to see but what has happened in the market since then well if we just sort of jump forward to 2010 you can see on the left-hand side here this is green bond issuance on an annual basis but broken out by who is issuing these these green bonds and so you can see that the market has indeed grown in this almost exponential way what is happening this year is we're on track for we've had about 120 billion dollars of issuance and and our view is we're on track for another very good year it doesn't look like it's going to double again nor nor should we necessarily want that to happen I mean more green bonds are probably are probably a really good thing they're also sustainability bonds they're social bonds there are a lot of things happening in this market but we think that if we have a really strong issuance in November in December we could probably exceed 173 billion dollars of issuance there are a couple of of names that have come out into the market recently that have published very ambitious green bond programs we just saw a very large Chinese bank publish public have approval from the PBOC for over ten billion of issuance Hong Kong has also exactly a 12 billion program so there there's plenty plenty in the pipeline but what I wanted to draw your attention to much more is the right-hand chart there which takes the left-hand chart and splits it out by a percentage share and you can see really in dark blue there well first of all the SSA segment is still an important part of the market it's about a third of the market today but a market that started from Supernationals as you can see there has given way over time to a very prominent corporate bond market we split corporate bonds for this purposes between financials and non-financial corporates and it's it's grown every year it's gotten it's gotten more interesting in terms of who's issuing I sometimes like to say that corporates all the way from Apple all the way to Vasa cronin have have issued across the alphabet Vasa cronin was the first corporate ring bond issuer in Sweden and they we just helped them to launch the first green commercial paper so that was one of the last parts of the debt capital markets that hadn't been touched by this this this green framework if you will we plenty of other structures in there you can see that most of the market I would say eighty-five perhaps 90% of the market is use of proceeds green bonds as well at what Poland issued with the World Bank has issued but you do have this acid level green bond market that has emerged as well these are project bonds there are securitizations Fannie Mae is the largest green bond issuer on the planet basically and the largest last year they put out 27 billion dollars of green mortgage-backed securities so you have a diversification of instruments in this market you have more exotic or shall I say more geographically specific instruments you have China you have green show China you have green covered bonds which have emerged strongly this year from the banking sector and you've got other types of structured products so it's quite a diverse market very similar to the overall bond market in terms of who's issuing I would also note of course in green this is the topic of conversation here it's the emergence of sovereigns as a as a class of green bond issuer there you can see that were were on target for around 30 billion dollars of of sovereign green bond issuance accumulative this year so far I've cataloged about 17 billion there have been eight countries since since Poland France has the largest sovereign green bond out there they keep on tapping it I think is anyone here from Ireland from Ireland the the latest green bond issuer the other week so there have been eight and a handful of emerging markets Green bond friends that I think the World Bank and IFC is I've worked with we've got Indonesia Fiji Indonesia I think is agreeing Nigeria so that's that's it's not just an OECD economy aspect I since it said this the topic is also about fee Matic bonds I think it's worth paying attention a little bit to what other themes are this use of proceeds concept being applied to so you can see the green bond principles established there in 2014 that the World Bank is a member of the ExCom I represent se B on the executive committee it's a it's a very diverse community we have a very comprehensive discussions about almost every aspect of the market how can we improve the green integrity of this market what can we do to monitor what's happening in the market and be responsive and provides some guidance the of course these days is hard to talk about a green bond market as one singular entity there's a regulated green bond market it's China China has done an extraordinary job in as you know greening the financial system there there's a 14 principal cross financial system framework in place and green bonds are a fundamental part of that we've seen about 30 billion dollars of green bond issuance from Chinese domiciled entities on a moving 12 12 month basis right so just if you take one year of cumulative issuance it sticks around thirty billion dollars and so but you do have other themes and here you can see last year in the executive committee of the green bond principles we put out social bond principles and sustainability bond guidelines and you can see what's happened here is that those two other types of thematic bonds have taken off in issuance really last year and have continued very strongly this year we're probably going to have double as much social bond and sustainability bond issuance this years last year and that may also be a feature in the market perhaps leveling out a little bit this year if you were trying to take stock of what other opportunities are out there how to go about doing that investors the demand just continues to increase and we do see a very good diversification across issuer types including these theme bonds there are other theme bonds out there there are sustainable development bonds the World Bank is a pioneer in that space communicating around specific SDGs sustainable cities water that's quite that's been very popular with investors to be able to highlight a specific SDG that they want to show that they're funding so we also have some some blue bonds we have some coral reef bonds adaptation bonds so there there are a number of other themes out there this is a picture of the green bond market if you visualize it on the Bloomberg terminal you can look at it on a yield to maturity perspective I wouldn't pay too much attention to the yield figures because they're a mix of currencies lots of different currencies in this chart but each dot is a bond right so it's an interesting chart to look at there are a couple of of ones labeled there I like to think that there's actually very simplistic takeaway from from this picture if you put it in front of a child you know the child would recognize that it's a very colorful chart and of course it's color-coded by sector of issuer the most granular level of Bicks level four and so that's an interesting takeaway that so many different sectors of the economy are finding that they have green use of proceeds on their balance sheets that's that's what's happened here you have issuers from the forestry and paper sector all the way to consumer electronics seeing that they have yes renewable energy on their on their balance sheets they've got perhaps a green building we've seen a number of different real estate issuers but also the Mexico Airport Trust for instance financing a Green Airport we can discuss you know that that and and other different green bond transactions like that we see a lot of issuers finding a green building and including that in their framework that's a growing area we also see a lot of sustainable transportation electric vehicle deployment low carbon transit etc light rail we see another category growing very quickly to water sustainable water and water management but if you just go back quickly you can see that they're actually a couple of yield curves that have been built across that chart and the blue one there that those are malaysian issuers and and maybe you'd want to say a few words about what's happening there that's green so cook you've also got a couple of others and the market is quite long dated in corporates and governments out to the 30 year mark if you were to look at the municipal market it's out to a hundred years there's a century bond from DC water out there and or earth stead has a perpetual you know it's it's it's it's quite a mix currencies is also quite diverse and I'll just sort of give you a view of what's happening with currencies it can be interesting to look at the green share of all bond issuance in a currency and here you can see one stands out perhaps that Swedish kronor when in our home currency we've had over six percent of all sec issuance that's government issuance that's foreign domiciled entities issuing in sec is is in green format and this year was in the first half of the year was over sixteen percent so that's a very high level and we can discuss why that might be it's also a very small currency so it's easier to get to a high level of percentage and a small currency right but you can see for US dollars that it's scraping it's about to get to the 0.1% mark euros is more at 1% of all euro issuance is green but if you look at specific sectors like European utilities issuance that's closer to 20% is green so you get a diversity some sometimes you see Aussie dollars go go through the roof perhaps people find interesting funding arbitrage funding opportunities in certain currencies and they go after that I suppose until it goes away and so why are why is the green bond market growing in the last few minutes here I'll just give you a few thoughts about how we approach trying to understand this market and the growth of this market and if you're gonna take away one thing from my presentation I'd very much like it to be that we don't think it's just one aspect that's driving the growth of this market it's actually we would argue quite a few different forces that are that are putting pressure on investors to look for more sustainable assets and its beneficiaries that are putting pressure on asset owners who are putting pressure on asset managers who are looking to issuers for information on use of proceeds to feedback along that chain so it's economic forces cost down curves in the renewable energy sector its policy related forces the European Commission is very much focused on sustainable finance these days I think many people know about what's happening there it can also be green bonds specific policies forces countries putting in place specific policies to support or incentivize that so what we would argue of course environmental and biophysical stress that's impossible to ignore the IPCC just came out with a with a frankly astounding report on on the state of the environmental and biophysical situation but it's quite a few things and actually some of these forces act together they feed on each other or they they put pressure on other ones so this is kind of our framework of thinking about it and I just conclude really with talking about what the ratings agencies are doing I don't know do we have anybody from SP or Moody's here ah okay from from which firm okay well perhaps you'd like to speak to this chart more than me but I just you know I I did want to flag that we heard about some of the products that ratings agencies are offering for green bonds but there is a larger discussion going on about the integration of ESG factors into fixed income markets more broadly this is a fascinating study it's it's I'm not trying to flatter you I'm just I'm just saying this is a very important study that investors are paying attention to you know you've gone through a lot it's a look-back study right you've gone through a lot of ratings actions and you found where environment and climb risks our material and sometimes they they factor in to the ratings decision and sometimes they are the factor that drives the ratings decision so fantastic perhaps you'd like to offer a comment on that after the next slide and I'm sorry then the next slides Moody's but with good balance you know this this is a study that again just came out from Moody's looking sort of at that rated rated universe and they've identified over two trillion dollars of rated debt where environment risks are already ratings relevant or will be in the coming years I think it's in the moderate risk sector that sovereign issuers appear but but but they are looking at this so the reason I bring this up is because this is very much on the radar screen of investors investors are reading this stuff they're asking questions about it they're trying to figure out who's exposed to environment and climate related risks and for us green bond is we know we're a green bond issuer we're a green bond investor and an underwriter we know that investors see the green bond as a way to signal that there is some type of a discussion being had at the parent level entity about these factors about downside risk and about business opportunity positioning so I'll end on that remark and see the last ten seconds to the chair thank you thank you Chris you know as you mentioned you know there are a lot of investors out there who are very very interested in you know SR I'm focused investments or ESG focused investments and and the green bond offers them an opportunity to to invest in this type of projects that their beneficiaries are asking for or asking them to them to do and that is one of the reasons why we're seeing such a proliferation of green bonds despite very little sign or some sign I guess of pricing benefit of green bonds but from green we'll move over to cat so earlier this year the World Bank launched a one billion-dollar catastrophe bond to cover the four member nations of 1.3 billion dollar catastrophe bonds to cover the four member nations of the Pacific Alliance trade bloc in Latin America and Peru was one of those four countries and we'd like Jose to tell us all about that transaction thank you hello everyone I want to start saying a disclaimer my apologies for my bad english pronunciation I will try to speak the best as possible so say it Thanks were run for the invitation it is a pleasure to to be here I would like to start this presentation about the Pacific Alliance cut born talking about the Pacific experience of Peruvian case in Peruvian case the risk management framework framework for natural disasters in Peru is managed basically through traditional instruments called retention instruments for example create contingency lines fiscal stabilization funds as you should we know we have savings of the last supercycle of commodities in Latin America and we use that funds to cover to hedge some natural disasters and obviously we have budget reallocations no on the other on the other hand now we have transfer instruments because we did at the beginning of the of this year were first catastrophic bond with the Pacific Alliance no with Mexico Chile Colombia obviously Peru the traditional instruments were Jews basically for natural disasters with high frequency and low impact and now we are thinking these cut bands for disasters with low frequency but high impact why we choose cut born in the Pacific Alliance because why we choose an earthquake event for the cut bone because obviously in Latin America and specifically in the Pacific Alliance Alliance countries we have comment event of natural disaster no earthquake event so the idea is try to reach this natural disaster through insurance contract with in this case which sent with World Bank through a transferring the risk the disaster risk through a bond market instrument the cut one in this case is one of several instruments just to cover potential loss caused by a civil earthquake no issuing cut bond with the countries of the Pacific Alliance reduce premiums and struck two in coastal that's very important for us maybe it's important to say that in Peru the depth strategy is very committed in increasing and improving liquidity of local depth capital markets during the last years we were very successful increasing the portion of local currency of Solace in total the portfolio so we we have a trade-off when we are thinking issue to issue cut born in in foreign currency basically in dollar currency no but I can we can include that kind of instruments in our table strategy but we have a good problem for outstanding in this kind of instruments we don't have many financing meet in our table strategy but we need to hedge this kind of natural disasters like an earthquake recently two years ago we have an important event of natural disaster the fluid the flooding in Peru call phenomenal Nino and for example we need for a direct construction of infrastructure in Peru around six billion dollar equivalent insulated in the next three years obviously we have a sources of financing to this kind of disasters traditional sources but a the this instrument permit us diversified our our debt our instruments for natural disaster for a contingency risks the captain opera tivity as you can see Pacific Alliance countries sign an insurance contract and they pay an insurance premium to the World Bank then the world bank transfer risk for international investors issuing cut bond no and bond coupon include the premium paid back by the Pacific Alliance countries so if during the hospital underweight of fuels with a magnitude equal or greater than definite World Bank will pay the country the Hetch amount that comes from initial money paid by investors so the risk for investor is that they can loss the nominal the face the value of that bond maybe I would like to say some characteristics of the Pacific Alliance cut bond we issued this bond this instrument on February of this year we had a high demand around 2.5 billion dollars from more than 45 global investor bestows accounts and we are located many countries tranches peru allocated two hundred million dollars Chile five hundred million dollars Colombia four hundred million dollars and Mexico two tranches 160 million dollars and one hundred million dollars because of the tranches had different triggers as I will be explained in the next slides it's very important the amount we allocated 1.3 billion dollars and is the largest cut bond executed by the IBRD of the worgen group now the most important deal in Latin America of a cut 1 and the second in the history of the cut bonds it's very important to say that a Mexico did many deals of this kind of instruments cut bonds before this deal now they they like to innovate in the capital markets in the specific case of Peru the principal characteristics are the insurer entity entity basically obviously Republic of Peru the insurer the the IBRD verb and the insured risk earthquake event the coverage period the one has three years the insurer amount two hundred million dollars in the Peruvian case the payment function a this payment function has three levels one level for each year it pays 30% of a face value of the bond in the first year seventy percent in the second year and 100 percent in the year three now the internal rate of the one was a six percent and the trigger type is cut in the grid the final coupon was 175 a basis point beloved the IPTS in a fierce moment and the final patient 200 million dollars obviously the it was three times the amount around six hundred million dollars it's important explained that we have to define in a first moment boxes along the national territory it's very important to define these boxes because of a each country and each place in the same country to have different levels of triggers okay for example we can see in the slide that we have an earthquake around six point two degrees of magnitude no with epicenter in the red point so we have treaty years for that box no the Trier want if the earth weight is equal or greater than say seven degrees in the register scale Warwick pay pays 30% off insure amount of 200 million dollars in the case of Peru and we have obviously if the earth weight is greater or equal than 7.3 degrees they pay 70% and the trailer trees if the earthquake is greater or equal than seven point five degrees no 100% of insured amount so this is a very important instrument for us and it was a real milestone for us issued this bond at the beginning of February as I mention before the trigger design is cutting the grid no each box has a sign and earthquake magnitude trigger for each pane and function 3 per box in the case of Peru and the hatch is activated when an earthquake occurs in the box place and death of epicenter with equal or greater magnitude and triggers maybe I would like to say that after the deal some block journalists called me by phone to talk about this deal I said him recently that he it was a real master for us that benefits for us in case of natural disasters they were very very very very happy with the transaction plan but after two days they publish mr. Haas olivarez the director of financial market management is betting the fiscal resources on natural disasters No so it's very important to educate our politics our block journalists to continue with this kind of instruments we have a small portion of our total debt portfolio our total budget in this kind of instruments for example the premium in the budget it's only forty million dollars and it's our first bond but we we need to educate about this kind of instruments and we consider that it's a very important instrument in the future to cover natural disasters no as someone mentioned after the deal to Ali's management management is all you can do your bets well thank you very much [Applause] thank you very much Jose so it's very interesting that you mentioned that you use a variety of traditional instruments as well as this new instrument in order to transfer the risk of natural disasters so it's not just about using one big innovative risk transfer instrument but but a variety in order to cover different types of risks that's what Peru is doing so I'm going to open the floor for Q&A and since I am the moderator here I would like to ask the first question if you don't mind and my question will be to to Robert so it's you know as I mentioned before it's very interesting that you mentioned the price benefits that you were not expecting any and yet you know you were motivated to issue green bonds so what exactly was the motivation behind that what so a couple of reasons behind it were one you've seen the chart shown by Chris showing how the market will grow so obviously we want to be part of this market this is directly linked to our debt management strategy how we approach different different market segments the second this is the explicit goal of our debt management strategy to broaden the investor base so since this community's growing massively we decided to go ahead with this with this bond and and the third I think reason it was not so much related to our debt management strategy it was a different on a different layer let's say it's it was to start and we succeeded and to start the discussion let's say about about the centrum instrument within within the country to motivate local governments or other companies including the state-owned big state-owned company energy sectors and hours maybe tool to get interested in this distorted so and it it's it happened there are still discussions we also met with with many of those institutions and showed them what we did how we did it of course this is a completely different story in case of corporate issuance or the sovereign issuance but each was from other issues inside the country will follow and and 61% diversification is is excellent right and also or in terms of over over subscription you know it was very high as well for both of the Polish bonds you mentioned that reporting was particularly challenging so and we understand that you know someone has to take the lead when it comes to issuing the green bond and it's usually the debt management officers you know it's usually the Treasury that does that but then you have to work very closely with the environmental ministries so how was your experience with that because in many of the countries especially the emerging market countries that you know we've worked in we've seen that there's the coordination between the different ministries is very very difficult so the beginning it was it was quite tough actually because you you approach to various ministries and you want something from them you want them to do additional work and they don't see it why and what would for so so it was it was difficult at the beginning but as I said we have this dedicated department inside the Ministry of Finance with truck sex and exactly the expenditures of Minister of Energy of an inch of environment of of Agriculture etc so it helped helped a lot and after the first issuance when it was very successful and there was a massive coverage in the press etc and you know Prime Minister was bragging about it so and suddenly all of them want to be a part of this project so it's now now much much simpler signalling and the demonstration you know so all of the emerging market countries that we are working with we are we are actually encouraging them to set up the this multi-departmental working groups Green born working groups or steering committees with you know focal points from each of the main ministries is that something that Poland did well in the in the middle of establishing such a such a working group now and we hope it should be I think to make it to make some really framework how it works because so far it was a kind of let's say those relationships basically we're asking them for for datagroup providing data now we want it to be you know that's a constant exercise a permanent permanent tracking of projects funds environmental impact regardless of when we do the the issuance thank you and Chris so you know if there is so much demand why are we not seeing you know tighter pricing green bonds right so we usually get onto this topic and any green bond panel but I mean I think it's worthwhile going back a little bit to the beginning and and how this instrument was designed and that you know the main design feature there was to appeal to mainstream investor institutional investor capital it's really the fiduciary mandates that this this is designed to target I think that's one of the main reasons why it has been successful in expanding okay not into the trillion we're at half a trillion dollars of cumulative issuance now and the reason is because you know as much as fixed income investors might want to invest in renewable energy project equity they're not going to do that they're they're gonna invest in bonds and and fixed income instruments and it's it's about giving a an opportunity for the sixty trillion dollars of fixed income managers out there are ninety eight percent of which are managed on the fiduciary basis an opportunity to fund green projects and activities which is very hard for them to do otherwise I mean that yes they can by pure-play renewable energy company bonds that that's a that's a pretty small universe so when you look at you know questions about where are people getting material price benefits or not I I'm not sure that it's first of all it's an important question to ask is a key question to ask but I really don't think that's why people go about issuing green bonds and you just we just heard it very eloquently before it's there are a number of other reasons why issuers go about putting in place a green framework a lot of them have to do with communication and dialogue I think again that was part of the original the original plan there was to be able to communicate with investors to have a dialogue with investors around topics like climate related risk opportunities and I think what we've seen there is a pretty subtle benefit a very very subtle it flies below the radar screen but Christopher Flensburg who's our our head of sustainable finance who worked with the World Bank ten years ago he talks a lot about mobilizing human capital and this is one thing that we really need in to deal with well to finance the low-carbon transition it's going to take people it's going to take innovation it's going to take ideas and the green bond if you argue everything else against it one thing is certainly true of mobilizes human capital it really does you need to you connects the funding side of an organization to the project side it creates that line of communication and then that line of communication extends out to investors and it's on the roadshow it's part of the ongoing communication with investors new investors that's I think that's also one of the places where investor based diversification comes from you have a lot of dedicated green investors SCB is both a dedicated green investor we have a green bond fund that retail investors and institutional investors say I want to invest in that green bond fund so it only invests in green bonds and then we invest out of our liquidity portfolio we invest out of our mainstream portfolios and the reason we're able to do that is because the in most cases green bonds are the credit risk is the same there it's a use of proceeds ond and so the pricing you know the arguments for a pricing differential are are based on that on that fact that the credit risk is the same and so it's it's quite hard to argue for a meaningful pricing differential having said that with a lot of oversubscription with a lot of demand yes we see better execution that that is pretty routine you know pricing at the tighter end of guidance sometimes a new issue premium and in certain markets you can see a green IAM you see that in some places where their green bonds are subsidized regulated markets there's one country out there in particular so it's it's I think that's that's sort of the canvas of what we're discussing here what about secondary market liquidity how are you seeing it so and that that's a different part of the question we've been talking mostly about primary primary issuance and what happens there in the secondary market this one has to remember that it grew from a pretty small place for a long time it was a small market now we're getting into the half a trillion you know we're getting sovereign issuers that come we have repeat issuers coming to market the liquidity has always been there on the on the bid side you know if you want to sell a green bond you will find investors they don't trade much in the past you have a lot of buy-and-hold investors in this market so there can be the illusion sometimes of liquidity but look I mean if you're on the Bloomberg terminal go go to imager right just just go into fi W and then go into imager and you can see the dealer runs on all the all the green bonds that are out there sr CH green advertised for Bloomberg here but you can do that you can see the green bond universe and then go to imager and you can see how many quotes there are on by the dealers on green bonds and the the most the you know almost all dealers are quoting certain green bonds like the French sovereign some large utility bonds and you can see 20 25 dealer they're green specific dealer runs but a lot of this is new in the last two years we've seen a proliferation of indices right and so we can now look at what does the Bloomberg MSCI green bond index how does it perform this last year it has outperformed its its reference index I wouldn't read too much into that it's a different sectoral composition but with more development more maturity of the market we're seeing more market infrastructure come into place the ratings agencies the the the indices and the ETF's now seeing passive investment opportunities investment banks sell-side coverage so getting more liquid I would say yeah your motivation for buying this disaster risk insurance for earthquakes rather than floods because you mentioned that a couple of years ago you had a massive flood but you decided to go for earthquake rather than life well the main motivation is basically diversify the kind of instruments in this case transfer instruments for natural disasters as I mentioned before we have an strategy a transparent very commitment strategy with fiscal establish fiscal rules in our multi annual macroeconomic framework so in this way we have a commitment for example with rating agencies to have depth GDP ratio below 30 percent of GDP so when we choose this kind of instruments we are not issuing in the international markets we are not increasing the depth stock of the Republic of Peru so it's a win-win situation because we continue manage our the GDP ratio able of our commitments with rating agencies we are going each week to local markets to increasing the portion of solids in total debt portfolio so we don't have to issue in dollar bonds for this kind of instruments obviously we have a cost we have a budget expenses no approve in the law of Peru in the in depth as law but we think that it's necessary for us obviously it's important to say that now we are including in the in the law new framework for a other type other kind of natural disasters for example you mentioned before floating no is it were it event that event has an important have an important impact in our economy so we speak in the next years maybe in the future when we get our target of solarization in local currency we we have a percentage of total debt portfolio in local currency around 60% we love our peers in the Pacific Alliance for example we we have a target around 7 between 70 and 80 percent of total debt portfolio maybe when we get that target in the future it will be the possibility to issue a direct bond a direct catastrophic bond in the international markets we hope that deal will be local currency for us and what was the impact of this issuance on your the fiscal impact we will have any fiscal impact because of I mentioned before that premium amount was in the budget low approved the last year and it's a small small amount only for a million dollars so we don't have any fiscal impact but obviously as you know we have a important fiscal impact when natural disaster secure like floating now in that a case for example three years ago our fiscal Stabilization Fund no savings of the last Protocol of commodities was around nine point two billion dollars in the asset side of our balance sheet and but because of flooding we were juicing that funds and now that phone has a six point four billion dollars so it has reduced you in the last two years for that reason it's important that kind of instruments and you know rating agencies like SNP are now also looking at the fiscal impact of natural disasters right on on countries how they impact the creditworthiness of of countries so this type of risk transfer you know transactions or insurances is important yes could well we don't we don't have a crystal ball for natural disasters obviously but for example in the case of Peru natural disasters is important but I do a parenthesis we are the only country in the Pacific Allah that rating agencies have not affected in its writing great no great writing neither for example because of we have strong economic fundamentals as you know I reserve leading economic growth low inflation low control risk and now we have a more liquid market local market for once but obviously like prevention instrument it's very important for us a work with this kind of instruments in the future now in the future thank you and now the the floor is open for you to ask questions please use the mics on your tables stall the questions thank you please I want to find out again I didn't understand easily from the guy from Peru the consequences of this issues from that analysis I want to know how is it taking into consideration you know dentists or stability analysis or not thank you she's not an an issue the World Bank is the the part that issued a bond we have insurance contract but it's a very small insurance contract it's a very low very small budget in our law only forty million dollars so we don't see any imperfect Olympic in our the portfolio or in our fiscal deficit too obviously recently during the last two weeks for example we reduce our forecasts for fiscal deficit for this year the last forecast was three point five percent of GDP now is 3 percent of GDP please use your mic follow up on that push it so and then of the day depending on the previous or historic impacts of a particular disaster that can even influence in terms of program that we're paying and also have implications in terms to your fiscal so what are the factors which you take into consideration for me well of course a you have risen this is an natural disaster very common in the countries of Pacific Alliance we have a lot of data to create models to evaluate the probabilities during the last years we we were very lucky with natural disasters only flu flu any cleaner but they don't affected or they don't have many didn't have many impact in our fiscal deficit obviously for example in 2016 the impact of ruling in the depth in the GDP was almost 1% in that year now so then we we growth around 2.5 percent now it's very difficult to to include the impact in our forecast of economic growth know we have many stakeholders who who do who are doing for cuts about the economic growth of Peru for example recently we change it for example for this year the the economic growth for 2000 ting at a four percent level for this year the last level was three point five percent but for example IMF calculated for point two percent for the year it's very difficult to to include that matrix of natural disasters in our forecast and in in our fiscal deficit but it's a contingency that we have to manage with this kind of estimate Chris you mentioned that China has a rather well regulated system for for green bonds so if you could tell us a little bit more about what China has been doing and what was the motivation behind it um first out of respect I'd like to offer anybody from China the opportunity to comment before yes sir would you like to say a word yes China a company he showed a lot of the groom band but China command haven't grown bounding China is doing a lot of things and make Paulo state to encourage company to protect environment so if the company the company issue bound to finance they are the environment apart actor project we will encourage the their behavior and the central bank the people bank also how some policies to okay they're they're more more easy condition to issue pal thank you I think that in cap you encapsulate the state of play very well I'll just offer a few other observations I think that if you it's it's interesting to look in the statistics you can see the share of issuance you know in 2015 what happened was actually a little bit before this I think we had the five year plan which brought in the theme of ecological civilization and I think it was dr. maroon in the PBOC who started looking at how much investment capital it would require to finance the five-year plan associated with green economic development and the the some was was quite large I was honored to be a member of the g20 green finance study group when I worked for the OECD and there that was co-chaired by China and by the PBOC and the Bank of England in in 2015 and this is the first time I think that green finance really made an appearance at the g20 in that in that format and you can look at the synthesis report from the green finance Study Group a lot of that language made its way into the communique that was issued by finance ministers and central bank governors that year and it's it's it's interesting to look at the the genesis there because a lot of it came from a domestic analysis of what is the role of the financial sector how can it contribute to green finance a green finance system and I think sir what you're also alluding to was the the 14 principle across many different ministries that that examine how a green financial system can be created this is unique we I'm not aware of other countries that have really gone across financial system like that the European Commission has that ambition it seems I'm not sure if there's anyone here from the EC or wants to talk about that but under the sustainable finance action plan which is very much the focus of a lot of policymaker attention in Europe right now there is there are similar ambitions to look at a taxonomy how do what how do you define what counts as sustainable investments or green investments China already has that in place there is a proposal for an EU green bond standard linked to the taxonomy but the taxonomy is wider than that it's about sustainable finance across asset classes it's about green equities green funds it's about indices so there's a working group looking at benchmark indices where we actually have a member on the technical expert group which is working to design the you green bond standard the taxonomy and there is an aspect also as the gentleman mentioned on disclosures underway now so climate related financial disclosures and that's a theme that has I think been very much in in in my mind at least but the Financial Stability Board put forward the Task Force on climate related financial disclosures also in 2015 that was a pretty big year for all of us yet the Paris agreement yet the UN sustainable development goals you had the China presidency of the g20 with green finance is a big theme and so I think you know that's that's sort of where the conversation is now there are plenty of other countries that have been looking at what type of incentives to put in place the United Nations Environment Program has this great report which looks at how policymakers have been encoding sustainable finance into the DNA really of the financial system in different ways sometimes focused at the banking sector sometimes focus that securities sometimes focused you know more at the risk level the the bunk to Falls the the Bank of England the the Dutch Central Bank are all members of this new network for greening the financial system so China is a great case study I think about how how others are approaching this topic and also I think the Chinese government's desire to take a leadership position in in terms of you know climate actions and climate solutions drove much of this and they went from zero to thirty six billion dollars of issuances in one year so which is a massive feat and really drove the emerging market green bond issuances really kick-started it we have a question to do Robert so first I suppose that congratulation fall for your experiment with the green bonds and suppose that it was a very important challenge to coordinate with different ministry and to select the project and also and to obtain the certification then one the report that you have to deliver but one question is regarding the project that you selected it was a project that you have already planed to execute or it it was a new project that you have with these green bonds available to a to to implement this is a very good question the projects were already in the budget because since the sovereign green bonds within the legal framework we're basically financing the needs of the state budget so the projects were already there and the bonds used to kind of say and in the vast majority is a refinancing that c2 so so some some of the projects have already been done some expenditures made and it's like three-quarters of the first issuance was to cover the expenditures done earlier in the year or actually even a year before in the case of the second bond it was issued at the beginning of this year 2018 and it predominantly finances the projects that were included in the budget act for 2018 so as they are moving forward we were simply disbursing the funds from this dedicated green account and financing those those but direct budgetary expenditures but but first there were projects then the financing question for Jose why did you would do it through the world bag and not directly with an insurance or insurance market was there any benefit in doing that yeah benefits for example from the writing of warrant obviously but it's a mix of factors because of you have the triggers that depends of each country you will have another benefit that I mentioned before because you don't have an important impact in the dev stock in the GDP ratio and in the solarization process too because we don't have to issue two hundred million dollars only we have to it's not a small but it's only forty million dollars in the budget expenses yeah Danish TMO so probably being part of Scandinavia you know there's a lot of green initiatives so why don't these governments issue more green bonds you might ask I think one of the reasons for smaller issuers is that it's the main problem is that it probably will hurt liquidity by splitting the market into many bonds with different you know market segments and that's one of the main arguments I guess so I think I have perhaps two questions one is of course in the cap on you you issue the bond and you have that insurance embedded but you could also just buy the insurance outright as a derivative basically so I think my question to Christopher is why is there no derivatives Green derivatives which could overcome the problem with splitting the dance and losing that liquidity element which everybody is scared of losing it's an excellent question thank you thank you for that and a lot of people I think it's on a lot of people's mind and this is not just for for sovereign demos I think it's also for corporates smaller corporates think about that too I I'm not sure that there is a definitive answer yet to offer it's still important to bear in mind that the markets ten years old and we're only starting to get to bond market levels of issuance you know the type of amounts that a fixed income portfolio manager will will actually pay attention to I mean I'm trivializing it a little bit but I think one of the ways that we've seen government's approach that tackle that issue is to try and make the green bond just like any other bond within the debt issuance program that I think that's the approach of a journalist has all its it was publicized from the beginning to sort of yet yeah they have a really big program right so um it's it's a that's part of it too but we've also seen other issuers that have different that issuance needs and and programs trying to make the green bond just as similar as any other bond and that's that's the way the rest of the market tries to do it to try and make it almost indistinguishable and you can actually see this in in the statistics if you look at who's investing in green bonds you find yeah sure dedicated green investors and that's one of the reasons why people do it to get the that green investor base but you have plenty of non green investors I'm a one study that I've looked at has of all the outstanding issues through to mid 2017 about forty percent are held by dedicated green investors however that's defined and sixty percent is held by others you know so why are they holding the green bonds well because they come in a format benchmark size maturity format some a currency format a pricing format that is sort of almost indistinguishable from others so I don't know if you know the your you have two parts to your question right the second one is is there a financial engineering approach that can be worked on love to have that conversation in in great depth but that's exactly what we need now in the green boom are we need harmonization across impact reporting methodologies and the I FIS are leading on that the Nordic public sector issuers have also come out with a harmonization approach for how to report on water impact transport impact from the green bond space renewable energy so we need work on that and we need more innovation on the financial engineering side what are the techniques that we can learn from the regular bond market and apply it the green bond market we've only just seen the first green commercial paper we've only seen the first green structured note a bank took the French sovereign and then I guess that a zero-coupon or some structuring and linked it to an index so there's some of that happening but it's a great question okay if there are no other questions then I would like to thank our speakers for this very interesting discussion and I look forward to hearing more from you those of you who are you know interested in issuing either of these types of bonds we would like to hear from you and we would like to see how we can help and with that I will end today's discussions here and there is a reception after this sorry yeah so the reception is in the lobby of the present or determine where we have breakfast so from here just go directly to the I'll take the elevator down on the to the lobby first level and then our colleagues will meet you up there to guide you to the area thank you thank you very much

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