Challenge
How can financial institutions gain investor confidence in their sustainability bonds?
Sustainable debt issuance is an attractive tool to help finance the transition to a Net Zero future. At the same time, its popularity is growing among investors who want to achieve social and environmental goals, alongside financial returns. Green, social, sustainable, and sustainability-linked bond issuance (GSS+ bonds) is expected to grow by 5-17% during 2023 alone.
This rise in popularity has been mirrored by a rise in scrutiny of such bonds. Investors also want to know if their capital will lead to sustainable outcomes. International standards on post-issuance reporting have been made mandatory, but issuers wanting to differentiate themselves should assess and report the potential impact of a bond before it goes to market.
One of Asia’s most prominent debt issuers, the Hong Kong Mortgage Corporation (HKMC), did just that. HKMC sought to bring to market a best-in-class transaction for its first infrastructure loan-backed securities issuance, which featured a dedicated sustainability tranche. HKMC and its sustainable finance adviser, ING Bank, recognised the value of a pre-issuance impact report for prospective investors to quantify the positive environmental and social impact in order to determine the appropriate pricing. Together with the Carbon Trust, they sought to define and assess the social and environmental impact metrics of assets within the sustainability tranche. In doing so, they hoped to bolster the sustainability credentials of the issuance and attract a wider capital base.
SOLUTION
Building a robust approach to assessing the social and environmental benefits of assets
HKMC’s securitised bond issuance was executed through a special purpose vehicle, Bauhinia ILBS 1 Limited. The issuance comprised 35 project finance and infrastructure transactions across different geographies and sectors. The sustainability tranche was backed by seven sustainable assets across the education, information and communication technologies (ICT), and renewables sectors, including wind, solar and hydropower.
To help potential investors consider the environmental and social impacts of the assets, we:
Collected existing data on HKMC’s environmental and social assets identified in the sustainability tranche. We helped HKMC collect relevant input factors, such as annual electricity generated, by requesting data from borrowers. Any data gaps were filled in using desktop research and third-party sources.
Assessed which impact metrics were most appropriate and valuable based on data availability, accuracy and relevance. Impact metrics varied across assets: educational assets featured impact metrics such as the percentage of female students, while the metrics for ICT assets related to connectivity for underserved communities.
Defined a calculation method with which HKMC can consistently calculate the environmental impact of its green assets and the social impact of its social assets. This will help HKMC approach future loan agreements and post-issuance reporting requirements.
Developed a pre-issuance report and presented it to HKMC and ING for their input.
While pre-issuance impact reporting remains voluntary, it is viewed as best practice and welcomed by investors. Discover HKMC's published pre-issuance report here.
Impact
Greater transparency on the potential impact of investments
The more transparent issuers are about a transaction, the more attractive the transaction becomes to investors. By publishing a pre-issuance report, HKMC and ING were able to bolster investor confidence in the bond’s sustainability tranche. This has enabled HKMC to:
Attract more investors to Bauhinia 1. It allowed prospective investors to quantify the appropriate pricing premium (‘greenium’). In this case, the sustainability tranche saw a 'greenium’ of 10 basis points.
Build trust among investors and future clients. By providing pre-issuance impact data and assessments, HKMC meets growing investor calls for transparent information and leads by example.
Minimise greenwashing risks by providing robust calculations to back the report. This enhances investor confidence in the bond's proceeds.
Save time during post-issuance reporting. Identifying the assessment criteria and impact metrics can be tedious. Through pre-issuance disclosures, HKMC’s future reporting requirements will become more straightforward and consistent.
