Increasing numbers have looked to the capital markets as a result of the recent Covid-19 crisis, in what may have been a welcome realization or perhaps just survival instinct. In the space of just a few months, social bond issues have soared with $22.5 billion issued in the first half of 2020 vs. $7.5 billion in the first half of 2019, while the figure is expected to further pick up the pace going forward. The Green & Sustainable Hub at Natixis’ Corporate & Investment Banking arm was set up in 2017 and is spearheading this much-needed offensive. Julien Duquenne, executive director, and Thomas Garnier, associate at the Hub talk us through the various stages involved in setting up these financial instruments that are now working to address these new challenges of a changing world.
How do you define social bonds, particularly with regard to the current health context?
Thomas Garnier: “Social bonds are bonds where proceeds are earmarked to support operations with social goals, and involve selection and reporting criteria. This can be social housing, access to education and social infrastructure, and support to disadvantaged groups, as well as the health theme. These bond issues – similar to standard bond debt – can be used to support business sectors and groups that have been most affected by the health crisis, while also displaying social investments goals. Social bonds are a promising way to address the consequences of the Covid-19 pandemic for both issuers and investors.”
How does the Green & Sustainable Hub rank on the green and social bond market?
Thomas Garnier: “Natixis got involved this market very quickly, and we were already active when the market was developing as we helped it grow. As an investment bank, our job is to include environment and/or social aspects in our financial considerations, like in traditional financial products. Over the past three years, our 15-strong team led by Orith Azoulay has been at the center of discussions with the bank’s various business lines. The Hub comprises:
- a center of expertise, which we could compare to the nervous system that is tasked with fundamental research into social and environmental challenges,
- a team to structure and originate relevant financing i.e. bonds, loans, securitization, etc.,
- a team tasked with engineering innovative investment solutions on environmental and social themes for our investor clients,
- a syndication team devoted to investors committed to a responsible strategy.”
How does the Green & Sustainable Hub design its products?
Julien Duquenne: “We have been involved in the development a number of market standards such as ICMA’s Green Bond Principles, and the Loan Market Association’s Green & Sustainability Linked Loan Principles work on the lending business. The Hub is a real innovation toolkit, a truly operational center of expertise that can address issues of funding, financing for very varied client categories i.e. sovereigns, government agencies, multinational banks, banks and commercial companies. This means we can co-originate and co-structure, coming up with financing solutions with all types of formats by tying the bank’s teams up with various categories of players, while also following market standards, particularly the EU Taxonomy, a classification system used as a foundation to build future sustainable investment regulation, as well as the new European greenlabel.
Do the same principles apply to social bonds?
Julien Duquenne: “Environmental and social themes have been closely linked right from the outset, and we see them in the same way. Initially green was all about climate questions, and this theme was attractive for a huge number of investors. With the Covid-19 crisis, we have seen a huge jump in demand for social themes. These themes have actually been around for much longer, but did not attract the same interest. By way of reminder, we were involved in the launch of the first social bond for Danone two years ago. At the time, we could see that the market was emerging when we met clients to pitch the deal, but it was struggling to really take off. At the same time, investments in green bonds were increasing considerably. The pandemic led to massive financing needs, particularly for governments and development banks. By way of example, Unédic launched two social bond issues each worth €4 billion before the summer, with proceeds intend to tackle the effects of Covid-19. Natixis was sole structurer and placement agent for these issues.”
So Natixis is very committed to this change…
Julien Duquenne: “Yes, Natixis is extremely active on the green & social bonds front and in working groups that seek to enhance their governance. In the spring of this year, with needs soaring, helicopter money – emergency schemes – were set up. We were ready to step in and take the initiative to put forward ideas. Natixis was involved in defining standards. Right from the start, with the Groupe BPCE retail networks, we launched a social bond to promote regional development. We are now involved in structuring the largest social bond issues on the market, such as the recent deal for Unédic.”
How can you ensure – for you and your investor clients – that these financial instruments are secure and how do you avoid the emergence of potential controversy?
T.G. and J.D.: “We draw on all our team’s resources to make sure we always aim higher, not just in terms of impact for all the beneficiaries, but also by implementing performance measurement systems to drive the development of a virtuous loop, so that investment naturally flows towards these green or social projects. For example at Corporate & Investment Banking, the Green Weighting Factor, our in-house capital allocation and governance mechanism, has been used to score the climate impact of our financing business since 2019. We are also particularly careful to consistently apply best practices and market standards in order to maintain the environmental and/or social integrity of the products we develop with our clients.”
So you work together with your clients to develop these measurements?
Julien Duquenne: “Yes, we also ‘challenge’ our clients with the aim of aligning interests and setting the path to follow the right governance. We are very involved as regards the internal governance at these organizations, with the aim of helping them understand what investors are really looking for i.e. true accountability. As a structurer, we often actually help foster communication within the company, for example as we ask the financial department and the sustainable development department to sit down together and develop a responsible financial instrument together and develop the related strategies. We work closely with them to develop their framework i.e.a document specific to the issuer that presents governance on the social and environmental aspects of the issue to the market, in keeping with the Green/Social Bond Principles. For example we worked closely with the CADES* teams for its inaugural, largest single social bond ever, which we just successfully closed for a total of close to €5 billion.”
*Caisse d’amortissement de la dette sociale, French public administrative agency created for the purpose of repaying social debt
Do you think that there will be a second wave of “health-related” bond issues as a result of the Covid-19 pandemic?
Julien Duquenne: “The pandemic quickened the trend that was already under way. Demand for Covid 19 social bonds was very high at the start of the crisis. A number of stakeholders, both public and private sector, responded quickly to the emergency. Several hundred billion dollars were raised worldwide, but the market has been much calmer since the summer, as a lot of needs that required an immediate response have now been covered. But there will probably be a second round of Covid-19 social bonds aimed at addressing the long-term social challenges resulting from the crisis: this is a very concrete product that developed quickly and complies with the main market principles required, while also tackling the challenges of the health crisis over various timeframes.”
Direct support for the economy, funding for part-time working job retention schemes, and emergency health infrastructure – when we look at the initiatives taken, is it safe to say that green and social bonds are changing the industry?
T.G. and J.D.: “There is not much time left to try to deal with the current climate, social and environmental issues. Everything is connected. Rolling out an issue program that complies with the criteria mentioned above to finance green and social projects with a positive impact helps enhance these players’ strategies on these themes, while also increasing their accountability i.e. their ability to report on how they have achieved these goals. Natixis set this at the heart of its strategy in 2018, and this helps us extend the range of matters we discuss with our clients on these areas, which really sets us apart. As sole structurer for Unédic’s program (alongside several other names on the social bond market), we have a strong position on this growing market.”