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How The $1 Trillion Green Bond Market Works - YouTube
Channel: CNBC
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When Rob Fernandez analyzes
potential investments for
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clients, he looks at what
exactly it means for an
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investment to be green.
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We won't just buy a green
labelled bond for clients just
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because it says it's green.
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More and more investors are
interested in putting their
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money to work in a way that will
help combat the climate crisis.
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And green bonds are the poster
child of this kind of financing.
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Environmental, social, and
governance issues are here and
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it matters.
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And some big household names are
getting into this space, like
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Apple, Pepsi, the New York MTA.
Plus, a handful of massive
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banks. Not to mention
governments around the world,
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like China, Russia, the EU and
and more. This kind of bond
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issuance may top $650 billion in
2021. That's about eight to 10%
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of all the bonds being issued
around the world.
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They're a growing part of the
marketplace. They're going to
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continue to grow. And I think
that's going to be a major part
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of the bond market.
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So, there's a whole new bond
market within the bond market.
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Bonds as we know them work like
this: An issuer, most often a
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company or a government, raises
money by offering bonds to
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investors. They're basically
IOUs, an exchange for getting
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money up front, when you sell
the bond, you pay the bond
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holder back over a certain
amount of time with interest.
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Issuers use these bonds to raise
money to invest in their
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business, employees,
infrastructure, anything you
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name it.But green bonds are
different.
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The fundamental differences that
it's about what it's financing,
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first and foremost.
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Money raised from these are
earmarked for projects that are
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positive for the environment.
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The one key difference is that
the issuer makes a non-binding
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voluntary commitment to earmark
the proceeds and use them for
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specific
environmentally-friendly
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projects. So, it could be
renewable energy, energy
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efficient buildings, clean
transportation, clean water, but
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from a structure standpoint,
they tend to be the same as the
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traditional bonds that issuer
would bring to market, minus the
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green commitment.
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The market here is bigger than
just green bonds.
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So, we saw last year about $490
billion of green, social and
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sustainability bonds combined.
This year, we're expecting about
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$650 billion across those three
categories.
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And that's up 32% from 2020.
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So, it's really it just keeps
going.
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Sustainable bonds break out into
three categories: Green, social,
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and sustainability.
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Social bonds would be used
primarily for social purposes.
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It could be affordable housing,
or micro finance.
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And the sustainability bond
category here basically means a
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bond meets both green and social
standards of issuance. The
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biggest slice of the pie goes to
green bonds with an expected
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$375 billion of issuance in
2021.
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In 2020, green bonds reached
about $1 trillion USD at the end
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of 2019.
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And issuance is growing.
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So it's a huge diverse mix.
Banks, corporates and
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governments. Anyone issuing or
the ability to issue a bond is
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issuing, especially when they
have the eligible assets to do
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so.
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Most issuances so far have been
considered investment grade.
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That means independent rating
agencies say those issuers are
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most likely to repay their
debts. The other side of the
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bond market is more risky, often
called high yield bonds or even
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junk bonds. As for the buyers...
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The buyers are the big pensions,
the big asset managers. They are
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the guys that really are putting
pressure around the need for
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more green investments. Retail
investors are having a chance to
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invest in muni green bonds, and
that's not a common practice
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that's happening globally.
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I think that's going to be a
major part of the bond market
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where the retail investor can
get some participation in that.
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When it comes to
accountability...
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To date, it's been largely, you
know, sort of a best practice,
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document-driven market. But at
this point, it's been a
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regulatory light market for the
most part. The green bond
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principles, which are sort of a
best practice document that was
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put out by the International
Capital Market Association.
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For a green labeled bond, if the
issuer is complying with the
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principles, the green bond
principles, then there's certain
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parameters, certain guidelines
they have to follow.
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There's four core requirements
that these bonds must meet, but
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it's a non-binding voluntary
commitment. First is use of
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proceeds. It's basically the
legal document that details how
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the money raised will be used
for green projects. And to
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determine what's green, there's
what's called a taxonomy.
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The taxonomy's main objective is
to help set the course on what
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is green. You know, think of it
as a dictionary or catalog of
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what we mean by green.
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The other core components
include process for project
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valuation and selection,
management of proceeds, and
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reporting. They're all
interconnected. And essentially,
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it advises issuers to keep
up-to-date information on how
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the money is being used and the
project's environmental impact.
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How are you going to manage the
proceeds during the time of the
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bond, you're going to use a
tracking system or you're going
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to ring-fence it, the proceeds?
And of course, how will you
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report on those is really the
fundamentals on what the green
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bond principles is trying to lay
out.
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All of this can be subject to
second party opinions, external
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reviews, and even verifications
and certifications.
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It's not one of the four key
principles, but it's like it's
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essentially a fifth and many
issuers are doing it. And then
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they'll oftentimes will bring an
external reviewer in to provide
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an opinion on the credentials of
the offering and whether it
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aligns with either the green
bond principles.
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And that's what investors
actually rely on. They rely on
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that verification that second
party opinion, or certification
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of the green bond.
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Think of those stamps you may
see on coffee or paper towels,
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even ice cream, that are meant
to signify to buyers that
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whatever they're buying is
ethical or sustainable.
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When we pick up a product in the
supermarket, and we make a
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decision on whether we buy the
same product, but of a different
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brand, if one has been, you
know, stamped by WWF or
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Rainforest Alliance, we have a
tendency to go, "I trust that
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label." It is a marketing
component that comes with an
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assurance behind it that you can
buy this product and know that
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the due diligence has been done.
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But issuers don't have to do
this.
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Well, investors in the U.S.
market are gonna buy muni bonds,
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whether they're green, or
whether they're purple, or
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whether they're pink. There is
no guarantee what is being put
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out actually is green.
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Some muni bonds are getting that
external review.
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And so for example, like the New
York MTA, they've issued green
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bonds, and they've received a
second party opinion.
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They definitely wanted that
extra credibility that it was
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somebody else credible,
authoritative voice saying that
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this was green, not the MTA.
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If the issuer decides to use all
the money raised for something
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else, there's no regulation in
place to punish them.
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Typically, we haven't seen sort
of legal repercussions and bond
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documents that say if the funds
aren't used for specific
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purposes, that it will be an
event of default. So it's really
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been, you know, what sort of the
reputational impact there could
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be.
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It's why the rules of the game
becomes so important and making
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sure we have the right standard
frameworks and verifications
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happening.
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Yeah, what's next for the
sustainable green bond market? I
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do think we're gonna see
continue to issuance.
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Plus, the market is evolving to
include sustainability-linked
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loans or bonds.
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The interest rate is typically
tied to the achievement of some
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sort of sustainability target,
the coupon could step up by 25
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basis points, for example, if a
targets not hit some point into
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into the life of the bond.
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It's almost as they're setting
themselves up that they could
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have a financial penalty, should
they not achieve their goals.
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So, there's only been about $15
to $20 billion of
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sustainability-linked bonds to
date, but the vast majority of
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that has been in the last six
months or so. So, a lot of
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growth potential there, just
still very early stages to kind
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of size the market.
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And we'll also see a rise in
different labeled products
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Like blue bonds or gender bonds
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Blue bonds have been issued as a
way to look at marine projects
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or ocean or water projects.
We've seen some gender bonds.
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This is really looking at
diversifying gender on boards or
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in the workplace.
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There was a big U.S. Bank last
year that came to market with a
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social bond they called a racial
equity bond. You could see the
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green, you know, the green label
being used by issuers to support
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the infrastructure spending from
the Biden administration plan.
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And therefore green bonds serves
as a extremely useful tool in
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moving large amounts of capital
towards those projects, and
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encourages, obviously this need
to think about building out the
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infrastructure that is going to
prepare the United States for
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the impacts of climate.
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The only thing that's constant
is change. And, so when you se
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this new wave of green bonds
and these topics arise on th
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environmental social governanc
side, it's great. It's great t
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see that the growth is there an
people are actually payin
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attention to these details
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