The world of finance is a black box to me. I don't have that money gene. But it is an area that is starting to play an increasing role in the world of climate. The podcast I published two weeks ago with David Harris about how the investment world is shifting towards sustainable finance, went down really well, so I decided to have a follow-up
In this episode I talked to Shrey Kohli, Head of Debt Capital Markets and Funds at London Stock Exchange Group and we discussed Green Bonds. Many people are familiar with shares but will possibly know less about bonds (I certainly fell into that bucket before this episode). Bond markets are far bigger than shares. In fact, you normally see 14 -15 trillion dollars of bond issued annually, and that far exceeds the amount of capital that you see raised in equity markets.
Now we're seeing the rise of Green Bonds. - these are bonds which link the issuers financial activity to their sustainable strategy thereby funding sustainable activities. Over $500bn of Green Bonds were issued in 2020 and that number is increasing year on year.
This was a fascinating episode, and I learned loads. I hope you do too.
If you have any comments/suggestions or questions for the podcast - feel free to leave me a voice message over on my SpeakPipe page, head on over to the Climate 21 Podcast Forum, or just send it to me as a direct message on Twitter/LinkedIn. Audio messages will get played (unless you specifically ask me not to).
I'd like to sincerely thank this podcast's generous supporters:
And remember you too can Support the Podcast - it is really easy and hugely important as it will enable me to continue to create more excellent Climate Confident episodes like this one.
If you have any comments/suggestions or questions for the podcast - get in touch via direct message on Twitter/LinkedIn.
If you liked this show, please don't forget to rate and/or review it. It makes a big difference to help new people discover the show.
Music credit - Intro and Outro music for this podcast was composed, played, and produced by my daughter Luna Juniper
Thanks for listening, and remember, stay healthy, stay safe, stay sane!
From a base of, you know, 40 billion of issuance in 2014, you're now seeing over $500 billion of green bonds issued last year in 2020. So it's an increasing part of global debt markets.Tom Raftery:
Good morning, good afternoon or good evening wherever you are in the world. This is the climate 21 podcast, the number one podcast showcasing best practices and climate emissions reductions. And I'm your host, global Vice President for SAP. Tom Raftery. Climate 21 is the name of an initiative by SAP to allow our customers calculate, report and reduce their greenhouse gas emissions. In this climate 21 podcast, I would showcase best practices and thought leadership by SAP, by our customers, by our partners and by our competitors if their game in climate emissions reductions. Don't forget to subscribe to this podcast in your podcast app of choice to be sure you don't miss any episodes. Hi, everyone. Welcome to the climate 21 podcast. My name is Tom Raftery with SAP and with me on the podcast today I have my special guest, Shri Shri, would you like to introduce yourself?Shrey Kohli:
Thanks very much, Tom for having me. So my name is Shrey Kohli, I head up debt capital markets at the London Stock Exchange. I'm sure a number of your listeners are familiar with the London Stock Exchange is one of the world's most international markets. And in my role, I very much work with issuers, whether they be companies, countries, municipalities, amongst others, raise financing in capital markets through the medium of bonds. And we normally see you know northwards of $500 billion annually, issued on the London Stock exchange's markets, from 1500 issues from over 70 countries. I live in London, I've been based in London for the last 12 years, but I grew up in India. So sustainability is as much a professional issue as much as a personal issue for me. And very much. So forward to the conversation today.Tom Raftery:
Super, thank you Shrey. Most people who listen to this will have heard of the London London Stock Exchange, obviously. And obviously most people listening to this will be familiar with the concept of shares, for example, and how they work through exchanges, like the London Stock Exchange. But let's take a step back, because maybe not everyone listening will be as familiar with the concept of bonds, because they're not as they're not as talked about, I think, can you for people who might be unaware, can you just outline? What is a bond? What's the difference between a bond and a share? And why would I want one?Shrey Kohli:
Sure, absolutely. Absolutely. So when you when you think of a share, you think of equity. And by equity, you essentially mean ownership. So a share gives you effectively a right to vote, according to your proportion of shares that you hold in an organization, right. But it also means that you take the risk of the organization with you. So you're exposed to the business prospects of the company, the ups and downs. And if the company, you know defaults, then it's ultimately as the owner, your neck is on the line. Whereas a bond is the easiest way to think of a bond is a borrowing, or in the old days an IOU, it is effectively an entity which is looking for principle to be lent to it, and pays an interest on that principle to you as the creditor over the lifetime of the issuance. Now, that normally means that if the company is in a situation of default, then you as a creditor, get first rights to the default waterfall ahead of the shareholders. So there's a seniority when it comes to your ability to reclaim your capital. But you know, it's associated with the fact that it's a lower risk products where you are getting an interest rather than getting a an appreciation of the shareholding. And most people don't know, bonds are normally listed on exchanges in the same way shares are. The reason being is because, you know, when bonds were invented back in the days when the railroads were expanding in the mid 1800s, which is an interesting metaphor to where sustainable finance is now actually, investors were looking for good disclosure, you know, the right matters, information about financials, the right transparency and material changes and exchanges in short that so now, you know, most bonds investors would ask are listed on an internationally recognized exchange and dlse One of them.Tom Raftery:
Okay. And by definition, then I suppose bonds are less risky, but at the same time the yield from them is probably lower than the potential yield from shares. Would that be fair?Shrey Kohli:
Yeah, that's true. You can have very different types of bonds. So when you get into the detail, you can have senior bonds, you can have secured bonds, you can have mezzanine bonds, you know, different tranches with respect to the risk waterfall, but ultimately, you know, what an investor wishes to get is a risk adjusted return for the type of paper that they hold. And you know, equity is ownership, whereas bonds the relationship is very much you are a lender to the entity that is issued the bond to you.Tom Raftery:
Okay, okay. And why are we talking about bonds? What have they got to do with climate?Shrey Kohli:
Well its a it's a good question. And I think it's in sort of conventional circles, this is well known. But what's less well understood is that, you know, you normally see 14 $15 trillion of bond issued, issued annually, that far exceeds the amount of capital that you see raised in equity markets. And bond markets, as I said, have existed for a long period of time. But I would say over the last 15 years, you've increasingly seen, sustainable finance become a key part of bond markets. And by that, I mean, you've increasingly seen companies raise capital through instruments that they call green bonds, social bonds, sustainability bonds, linking their financing activity, to their sustainable strategy. And this isn't an element of the market, which has existed for a long time, the first green Bond was issued back in 2007. So it's it's a market, which is about 1415 years old, in its in its teenager age, you may, you may think of it, but it has increased in terms of its size. Since 2014, since global principles were established by the market on, you know, what is a green bond? The market has grown by over 50% on an annual basis. And you know, from a base of, you know, 40 billion of issuance in 2014, you're now seeing over $500 billion of green bonds issued last year and 2020. So it's an increasing part of global debt markets.Tom Raftery:
Okay, and why would a company choose this way to raise money?Shrey Kohli:
Yeah, right. I mean, to take a step back, it's probably useful to understand what is a green bond in the first place. I mean, it's when people think of bonds, they think of certificates being given to them. And this isn't a green piece of paper, so to speak, you know, a green bond, as you would imagine, does what it says, on the tin, a green bond, the proceeds that you raise from that bond are used to finance or refinance in certain cases, your activities, which are related to green projects, green investments, or green eligible activities. Now, you may think of this as climate change mitigation activities. So I investments in renewables, investments in energy efficient building, adaptation activities, biodiversity, resilience, water and waste management, pollution control. But the idea of a green bond is that the funding that you raise doesn't go to your general balance sheet, it goes to those projects, which are green eligible, and is in line with the global principles which have been set up by the market. So the reason why companies raise green bonds is to articulate that sustainable financing strategies to investors and then be able to crowd in investment to fund those activities, which, as you know, are non trivial if we're supposed to meet the goals of the Paris Agreement and, you know, a 1.5 degree or two degree future,Tom Raftery:
okay, and how do the bond holders know that the bonds are, you know, worthwhile, that, you know, the organization taking or the organization, you're taking the money is actually doing what they say they're going to do with that money.Shrey Kohli:
Right. And it's a very valid question. And I think it's something that the market has worked on. So as the green bond market has developed, I think a key moment for the market was in 2014, where the Global Green bond principles were established. Now, these are voluntary market based standards, which specify through four pillars. What makes a bond green, right and a few of them we've already talked about out. One is the use of proceeds, where are the proceeds being used. And to make that clear, a company has to articulate through its bond documentation or a framework, what projects are eligible for the use of proceeds for that particular bond. So it has to make clear to investors, you know, these are the specific projects for the specific users that I am raising capital through green bonds. Behind that it's a project selection criteria. So you know, you can't just pick projects out from the air, you need to fit them to certain categories. And there's a lot of work being done in markets to, you know, define these categories over time in the EU, where we are based, there's a lot of work being done on the green taxonomy, and a number of taxonomies across the world which specify, you know, those projects, which are or sectors which are agreed. But that's not enough, you have to report on the allocation of the proceeds for the lifetime of the bond, which is where exchanges come in, you know, where we require those companies where, which, which lists green bonds to make the reporting public available to investors, so investors know where their capital has been allocated. And also, you need to have the right management procedures within the company to manage those proceeds, this can sit on your general balance sheet, it has to sit on a segregated account, you'd have the right structures to manage the allocation of the funding projects. And these principles have very much been accepted by markets over time. I think, you know, since 2014, we're now moving to a point a time where regulators are considering whether these principles should be enshrined in regulation. But the good thing is that, you know, markets have generally worked, there is a reason why we've gone from $40 billion official and six years ago, the $500 billion of pain bonds issued last year and over a trillion dollars of green bonds outstanding, it's because generally the instruments work, and the right level of transparency is provided through the checks and balances, through entities like exchanges.Tom Raftery:
Okay, and that was, I'm glad to hear you say the checks and balances, because, you know, any of these things are only as good as the quality of the reporting standards. And, you know, to that point, how rigorous are the reporting standards that companies have to adhere to?Shrey Kohli:
Yeah, absolutely. So on dlse, I run the LSE sustainable bond market. And, you know, whilst I don't have ESG in my diet, I hope that's because, you know, it's core to what we do. You know, this is a market of over 280 pounds from, you know, 70 bond issuers globally, right, from Fiji to San Francisco and Chile. So, you know, all timezones if you could realistically, consider the LSE was the first exchange to set up, you know, dedicated segments for green bonds. And that has expanded over time. And as a market, the LSE is known to be a very international market. So we've seen, you know, issuances from the likes of China, India, Asia Pacific, the Middle East, on our markets, all these issuances are required to maintain to the same standards that we set. So we require that each bond that it meets to our market, which is marketed as a green bond meets the global principles of which we check through the bond documentation on the green framework reports at least annually on the use of proceeds of these bonds and makes that disclosure public. And thirdly, and you know, this is this is pretty important, over the lifetime of the bond is is very clear about the use of proceeds of the instrument. And, you know, we women, we checked if issues are reporting annually. And we go through an exercise where if an issue hasn't reported annually, which has happened in very few instances, we contact the company and request them as to when that reporting will be done. And more often than not very quickly. It's resolved with documentation being made public. And that's the system of checks and balances, you know, that we operate.Tom Raftery:
Okay. So there are a number of parties involved in this as yourselves in the London Stock Exchange group, there's companies who may wish to go on some kind of project to reduce their emissions and or need some funding to do so. And then there's the investors who are looking to invest in green and sustainable projects and make a return on that. Is that a good summation of the stakeholders?Shrey Kohli:
Yeah, I would sort of name a few others as well. So, there would be advisors who help the issuer structure the bond in a credible manner. This could be a bank and investment from you know, previous speakers who have appeared on this podcast actually do that function within the the market and there are also specialist providers called Second Opinion providers. Now these are consultancies of businesses with ESG specialism which verify that a bond or a green bond meets the international principles, it's said that it's aligned. So there's a form of independent independent verification which exists in the markets as well, there firms such as Cicero, sustainalytics, amongst others, who who perform this function. And you know, on the LSE sustainable market for most bonds, green bonds, which admit we do require an independent verification, which is an added layer of check checks. And look, the market is used, you know, by pretty widespread of issuers. Initially, it was mostly the super nationals, the likes of the World Bank, the inter American Development Bank, the Asian Development Bank, the IFC, amongst others, research really pioneered the use of green bonds, it has extended into areas such as utilities, power companies, the grid, where the transition to more renewable sources of energy, I think is, is clear, but not trivial. I mean, the investments that we need for the grid, for example, to get renewable energy to our houses is, is quite a capital intensive task. And that's why a number of companies have have raised capital to clean bonds, and increasingly a number of banks as well. So in the UK, you've seen banks such as Barclays, Barclays or NatWest group are Standard Chartered based bonds, which from fund their green lending initiatives, or increasingly, their projects, which have a social aspect to it as well, because as the market has grown, it's not just about green bonds. Now, you could easily use this instrument to fund access to basic infrastructure or employment, where, you know, particular target populations which are in need of particular areas of investment. So it's it's it's a, it's a, it's a burgeoning market. I mean, some people call it a sort of a Cambrian explosion of sustainable finance, within global markets, which I think is healthy, because it does channel capital to sustainable outcomes.Tom Raftery:
Okay. And I mean, you've said a couple of times now that the market has grown from, I think you said 40bn 6 years ago in 2014 to last year over 500 billion. That means there's obviously a market for this, if you pardon the redundancy or the use of the word market. But literally, there's a market for it, there's an appetite for it, I suppose, is probably a better way of putting it.Shrey Kohli:
That's, that's correct. I mean, I don't think we would have seen an appetite and to make a market worked on as you know, you know, you require both supply and demand, it's not just it does, it just doesn't work if you know, if a company says I would like to raise money for for green financing. You know, investors ultimately have to buy what the company is seeking to issue,Tom Raftery:
it has to be attractive to them.Shrey Kohli:
Absolutely. And, you know, a lot of the push towards sustainable finance, as has been talked about in your previous podcast has been driven by the investor community, which very much cares about, you know, the resilience of the businesses that they invest in for the future, and what they're doing to transition to a low carbon world. I must say, though, that, you know, 500 billion does sound like a very large number. But you know, last year, we saw $14 trillion of bonds issued in the market. So whilst it's a growing percentage of issuance, it is still you know, below double digits in terms of percentage numbers. And that really is the challenge or, you know, we would like that all financing, which has been grazed in markets has a sustainable tilt to it. And there is a next step of the evolution, I think of green bond markets, which is required, which is something that we're working very closely with the markets to move towards.Tom Raftery:
Okay, so, what's that next step?Shrey Kohli:
So I think, you know, I, I tried to summarize the issue in terms of size of issuance, but there's another way of thinking about it. Which is, you know, what's the problem that we faced it and the problem summarized by sort of two words, or or one number is 51 billion, which is the tons of carbon dioxide equivalent that we're adding to our planet each year. And the fact that we need to not only reduce that we need to reverse it to a point that we're at net zero. So that, you know, in the future we're on a pathway which is mine till one and a half degrees or two degrees so we reduce the impact that our activities have had on our world and the future future generations. And like I said, you know, the market is sub sectors from issues from the public sector, sovereign supranational governments, municipalities, utilities very well. But a few of the sectors which are missing from the market include sectors such as heavy industries, cement, Agriculture, Transportation, you know, those sectors, which are critical in terms of reducing our greenhouse gas footprint. And I don't think that's because of lack of trained, I think it's just because you know, the way that this market has developed, you know, investors have quite, genuinely asked, you know, what's the link between a green bond and your overall sustainability strategy? Right. So let's, you know, try and solidify this win example. So let's say you're an airport, and you wish to fund investments for green efficient buildings, because you have a big footprint in terms of your space. Now, that's possible for green bond. But the question that investors can rightly ask is, you know, how do your energy efficient buildings tie into your broader strategy being the sustainable business in the future? And that's not just true of airports or airlines, you know, as the same question that could be asked to industry in energy, or in paper and pulp. Right, you could be funding catbacks for projects, which are green eligible. But what does that mean for your business? Right. So I think there's a genuine interest in the market from the sectors that we've talked about on President within the green bond market to be more active within sustainable finance. But there needs to be a path for them to get done. And that needs to be a genuine linkage between their sustainability strategies, and the way that they fund themselves in the future. So that's the problem that we're really trying to solve.Tom Raftery:
Okay. And is it just the London Stock Exchange group? Or are there other exchanges doing this as well?Shrey Kohli:
I mean, there's, there's a whole raft of actors in the markets for whom this issue is, is incredibly important. So in the landscape of actors that you laid out, obviously, you know, there's a strong investor voice to this through initiatives like, you know, climate action 100 Plus, or the transition pathway initiative, or the institutional investor group on climate change. On the issue side, obviously, you know, those sectors, which are, which are within, you know, let's say, higher carbon footprint sectors are increasingly realizing the need for them to transition that strategies. There is an industry forum, which is run through the international capital markets Association, which is last year released a handbook on what they call what is climate transition finance, which is finance to fund the time of transition in the way that we were just talking about. And there are other exchanges globally as well. I mean, I think across the world, there is a very strong interest in helping business facilitate that the move to low carbon models. So it's not just the London Stock Exchange, although I would like to say that, you know, we have our foot firmly through the door first, and hoping that our peers Also follow us through that door. Okay.Tom Raftery:
Okay. When we were prepping for this call, Shrey, w talked about how, basically this is interesting, because i gives companies an incentive and nothing happens, you know for with all the goodwill in th world, Nothing happens withou the incentive to do so. So think this is a huge, hugel positive step in the in th fight against climate changeShrey Kohli:
Yeah, that's, that's quite right. I mean, I would frame it in two ways. I think there needs to be an incentive, the so called coward, but there also needs to be the stake. Because, you know, markets need to function in a fair, transparent, efficient manner. And, you know, that's what exchanges at the end of the day try and do. So what's the incentive? I think, you know, the, the incentive of issuing an instrument, which is a green bond, a social bond, or some new innovations, which are in the market, which linked let's say, your key performance indicators, like, what's your greenhouse gas footprint now and what is it in 10 years, or if you're an energy company, what's the mix of your renewable energy production facilities to you know, those that use fossil fuels, and tie that to financing by linking it to the payment that you make the investors through the bond, so if you meet those targets, you maintain the same level of coupon that you pay to investors, but if you fail to hit those targets, you actually pay a penalty. Because you know, you haven't lived up to your promise and effectively your credit is now less worthy than it was before. So a lot of innovations are happening on the market, which are, I think useful in terms of guiding people towards the the incentives, which are the ability to articulate your ESG strategy, the ability to strengthen the longer term assessment of your company and your credit, because, effectively your ESG strategy is your financial strategy, and the link between ESG and financial performance is now becoming stronger and stronger, and to be able to bring in new investors into your sector. Whereas the stick is if you don't do so, a number of investors may not invest in you in the future. But from a regulatory or a governance perspective, you are required to have, you know, mandatory requirements around what disclosures you make. And that's the point, as you said earlier in the conversation, Tom, where, you know, the importance is the quality of data, which is being delivered from companies to their investors. And I think more important before companies from highly emitting sectors, what is your carbon pathway? What are your net zero targets? are the objectives? Are they science based? And are you being held accountable to that? And these standards, I think, help help make that happen?Tom Raftery:
Super. Shrey, e're coming towards the end of he podcast. Now, is there any uestion I haven't asked you hat you kind of wish I had? Or s there any topic we've not ddressed that you think it's mportant for people to be aware f?Shrey Kohli:
Well, I think just to ground some of the di cussion that we've had in in re lity, one of the things that we ve done at the London Stock Ex hange is set up a segment for wh t we call our climate tr nsition team bonds. So these al ow companies from those se tors which haven't been ac ive within the green bond ma ket to issue instruments, wh ch may be sustainability li ked, or may be use of pr ceeds to fund their st ategies. They need to be as a co pany aligned to the Paris Ag eement, they need to set sc ence based targets, they need to publish their key financial an non financial climate me rics through frameworks like th TCF D, the taskforce for cl mate related financial di closure. And I think we're in reasingly now seeing co panies like in sectors like oi and gas, access the market th ough transition bonds, I me n, we launched this segment in February, we've already seen an issue from the gas sector use it to fund the retrofitting of it legacy gas pipelines to more en rgy efficient technology. So we certainly think that it is ve y powerful to link su tainability outcomes to what yo 're doing in the real ec nomy. And that's what at its co e, the reason that show for su tainable finances. And what I' like to really just make cl ar to your listeners is, you kn w, this is happening today. So as an investor, if you're ho ding stock in companies or ho ding assets and companies in yo r portfolio, you can very mu h go to an exchange website or their website to see what th ir sustainability strategy is and a number of investor re ations. professionals at th se businesses are answering th t very question. So we really wi h to be a key part of that ch nge in the future and as a ma ket use our convening power. I ean, everyone knows who the Lo don Stock Exchange is, wi hout knowing what the London St ck Exchange group does. Use th t to, you know, create po itive outcomes in the future.Tom Raftery:
Excellent, excellent. Shrey, That's been really great. If people want to know more about yourself Shrey, r about the London Stock Exchan e group, or about green bonds, or any of the things we discus ed on the podcast today. Wh re would you have me direct thShrey Kohli:
you can certainly find me on LinkedIn. Please feel free to send me a message. You can also go to WWW dot London Stock Exchange .com front slash s b m, that's s for sustainable b for bond, M for market, an find out more about th sustainable bond market, whic is our home for sustainabl finance instruments on the LSETom Raftery:
Great Shrey. That' been fantastic. Thanks a millio for coming on the podcast todayShrey Kohli:
Thank you, Tom for having me. It's great to be on.Tom Raftery:
Okay, we've come to the end of the show. Thanks, everyone for listening. If you'd like to know more about climate 21 Feel free to drop me an email to Tom Raftery at SAP comm or connect with me on LinkedIn or Twitter. If you liked the show, please don't forget to subscribe to it in your podcast application of choice to get new episodes as soon as they're published. Also, please don't forget to rate and review the podcast. It really does help newbies To find the show. Thanks. Catch you all next time.