Sustainability and the government bond market

Dominique Barker: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape with a view on addressing current issues in a concise format to help you navigate and take action. I’m your host, Dominique Barker. Please join me as we explore today’s most pressing matters with special guests that will give you some new perspective and help you make sense of what really matters.

Christina Cho: Investors are looking for impact right. They’re going more towards this, quote unquote, ESG integration, where they’re embedding ESG risks of the credits that they’re buying into their fundamental credit analysis.

Dominique Barker: On today’s episode, I’m speaking with Christina Cho. She’s managing director Debt Capital Markets, Government and Finance. She’s based in New York. We’re pleased to welcome her to the sustainability agenda. Good morning, Christine. How are you doing?

Christina Cho: Yeah, great. Dominique, thanks for having me.

Dominique Barker: Great. Now, you work a lot with SSAs. Can you explain to your audience? Because I certainly am not overly familiar with the term and I spend a lot of time in finance. Can you just.. What is the SSA market?

Christina Cho: Yeah, that’s very fair. It sounds niche, but actually, SSA, it stands for sovereign, supranational and agencies. So we’re talking about everything from governments to supranational bodies like the World Bank or the European Investment Bank to public agencies like Export Development Canada. And so they are obviously massive issuers of debt. And I am fortunate enough to cover them as my client. So I’m primarily responsible for helping advise them on execution strategies and trades so that they can actually raise this debt in the capital markets.

Dominique Barker: Okay, great. And I understand from our previous discussions, the ESG or sustainability is really important to this audience. Can you describe why and maybe just talk about sustainability and ESG in the context of your clients and the SSAs?

Christina Cho: Yeah, of course. So sustainable bond markets broadly are, they’re basically when you raise money, so you raise debt from the capital markets and you use that money either for specific projects which can have green or social benefits, or you raise money and you tie your cost of funding to your own environmental or social objectives or in reaching those objectives. It’s a really useful funding tool for sovereign supers and agencies, one, because they have public mandates. So they do tend to have, you know, obviously environmental social objectives and or projects that they can fund with those goals. And on the other side, they don’t raise equity. They don’t have other sources of funding. They have their taxpayers, they have government funding, and they have the ability to raise debt. So it’s one of the main ways that they can get involved in the sustainable financial markets.

Dominique Barker: So it sounds like politics is important. How do your clients think about the factors that are important and how does politics play a role?

Christina Cho: So I cover basically Treasury specialists and debt management specialists, so public institutions. So they are tasked with executing the strategy of the institution or the government, whatever the case may be. So it is ultimately a political decision whether or not they issue a bond, which is related to sustainability, because it takes effort to do it. So it’s a non negligible amount of effort and operational burden that they have to bear, that they need the blessing of their political masters, let’s say. And since the onset of the pandemic, governments and public agencies have been raising historically high levels of debt in order to fund public programmes and investments in order to alleviate the negative social effects of the crisis. And on top of that, citizens are obviously looking pretty keenly at their governments, what they’re doing to alleviate also this climate crisis that we find ourselves in. So in the face of this public pressure, governments and political agencies, you have certainly given this mandate to quite a few of their debt management offices.

Dominique Barker: Ok, can you just discuss where you think the market is headed? Are you seeing additional demand? Are you seeing new products or are you seeing geographic trends? Can you talk about some of those trends that you’re seeing today in the market?

Christina Cho: Well, yeah, governments and public institutions, public agencies, supernaturals are deeply, deeply associated with and working with the working body groups that govern the sustainable bond markets. They are very much involved in how these markets are developing. And on their part, you know, there’s the trend towards looking more at impact over what we call output. So not just what the money is being spent on, but looking more at how effective was this spending? What are the actual impacts achieved? So that’s definitely a trend in the market which that ties into something we call sustainability linked bonds. So as I mentioned, those bonds which tie the coupons or, you know, the financial aspects of the bond instrument to the performance of the issuer according to certain KPIs. So that’s definitely one of the major trends. And then just one trend in general is that more and more sovereigns are issuing sustainable debt. It’s mainly green. It’s pretty much all green. Even Canada is looking at publishing their green bond framework sometime, I think, in the second half of this year. And so has the U.K. Debt Management Office published a green bond framework. Chile and Mexico, I believe, are the only ones so far to issue debt related to social objectives, so geographically it’s a bit different.

Dominique Barker: And just to make sure that our audience understands so green bonds is environmental, correct?

Christina Cho: Mhmm, Mhm.

Dominique Barker: Yeah. So can you give some examples of some of the proceeds that are being used for social bonds? For what purpose? What would be an example of where those dollars go?

Christina Cho: The examples cited in the social bond principles, which is one of these voluntary industry governance bodies. Working groups include things like socio economic advancement and empowerment. So employment generation supporting SMEs, they can be social housing, the provision of basic and essential infrastructure like sanitation, clean drinking water, electricity and things related to health and education as well. Those are kind of the most oft cited examples.

Dominique Barker: Mm hmm. And in terms of measuring impact, sustainable development goals, have you seen those?

Christina Cho: Yeah, definitely. So the Sustainable Development Goals, I hope people are familiar because there’s been a big push on the sustainable development goals in the recent years. You know, many sovereigns, the Lat-Am ones in particular, for instance, Mexico and Uruguay, have the NDP come in and actually mark up their budget line items to see which line items are contributing to the progression of the country towards achieving the sustainable development goals, very much in line with, you know, green and social objectives. So you can also have sustainable development goals once. Indeed. Yeah.

Dominique Barker: OK. And from your perspective, the standards, are they getting harder to achieve? Maybe you can just talk a little bit about that.

Christina Cho: Investors are looking for impact. They’re going more towards this, quote unquote, ESG integration, where they’re embedding ESG risks of the credits that they’re buying into their fundamental credit analysis. But then, of course, you know, major investors like PIMCO and BlackRock, they have also stakeholders and their own investors. And those investors are demanding to see what benefits, what impacts their money ultimately has helped to achieve. So, you know, measuring that impact, you know, how many people are being given access to clean water, how many environmental projects have been been paid, and what has been the effect on biodiversity in the region? How many people are receiving better access to health care or subsidised access to health care, etc.? So the impact is ultimately important for end investors as well as the citizenry. I think it’s a great way for governments in particular to communicate to the citizens who are providing all this public pressure, what they’re actually doing with the funds that the taxpayers are supporting.

Dominique Barker: Christina, one more question for you. What are you seeing in terms of pricing, in terms of, I mean, what some people call the greeneium and I don’t know what they call it for social bonds, but is there an advantage to issuing these type of bonds?

Christina Cho: Yes. So for issuers, there has been in recent times a certain premium paid by investors to buy the sort of debt because the demand far outstrips the supply. That has been pretty consistently demonstrated in the corporate markets as well. But for sovereigns in particular, you have, for instance, the Federal Republic of Germany that issues on purpose to maintain the market liquidity of the Bund, a conventional bond and a green bond with exactly the same financial characteristics. And that green bond has traded tighter than the conventional bonds. So the German government has achieved some amount of savings by issuing a green labelled instrument.

Dominique Barker: So it sounds like the takeaway from today is that SSA issuers really reflect the priorities of the public in government policy. They’re extremely effective at promoting the sustainable bond markets as they’re naturally seen as leaders. Sounds like Cristina, we should all be keen to push our governments to link financing to sustainability and sustainable outcomes. Thank you, Cristina, for taking the time to join the show today. And thank you, listeners, for tuning in. Please join us next time as we tackle some of sustainability’s biggest questions, providing different perspectives to help you move forward. I’m your host, Dominique Barker, and this is The Sustainability Agenda.

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