At the end of January, Citi launched a €500 million green bond – its first green bond – and in February Bank of America launched a $500 million social bond – its first social bond and indeed the first social bond from a US bank. Both were oversubscribed and priced tighter than expected.
Citi’s green bond is important for many reasons, not least because it shows there is enough green infrastructure and project lending being done to put it together. But also – it is American. Other than by Bank of America and Morgan Stanley, there just hasn’t been enough green bond issuance by US banks.
We need large US investors other than CalPERS and church pension funds to get more comfortable with green investing. Seeing familiar Wall Street names issue bonds helps that cause. Having another US bank join the green bond foray will also hopefully nudge JPMorgan to follow – its absence from the green bond market is becoming an elephant in the room.
BofA’s social bond was also a great step in the right direction for sustainable finance. The bond’s proceeds will finance affordable housing and loans to community development financial institutions that are already on BofA’s radar, so it is not new money going to these goals per se.
What it does do, however, is provide an example of how banks can carve up their balance sheets into sustainability focused lending that is large enough to then put out to eager sustainable investors.
It is a step in the right direction as large investors seek big pools of loans that reach communities in need in order to start tackling the United Nations Sustainable Development Goals (SDGs). We need these $500 million-plus bonds in order for social investments to become mainstream.
It is not hard to see that social bonds for affordable housing could lead banks to start carving out loans to minority-owned institutions or to women-owned businesses.
This kind of carving up of loan books will also result in greater transparency, so we should also start to get greater clarity around where banks are lending.
This last point is crucial. There needs to be more insight into whether bank lending is skewed towards cities, towards larger businesses, towards certain demographics and genders or away from green companies. We know that bank lending drives growth. How do we ensure we are supporting everyone? Only when the data shows it to be so.
BofA’s social bond also inspired the question of whether or not it is possible for groups of small banks to come together to issue a bond collectively. Groups where membership requires transparency and reporting include the Global Alliance for Banking on Values, which now has 55 members and 10 years under its belt, and the Global Banking Alliance for Women.
Both alliances are clearly well run and tap into banks that collectively might have a large enough pool of socially focused loans to create a bond. That allows members to take advantage of the positive pricing that such bonds receive.
Dragging their feet
Social and green lending, and ethical and responsible banking are positives for all banks, so one has to wonder why some institutions are dragging their feet. It is possible they are nervous about the levels of reporting and any reputational risk they might incur by putting themselves ‘out there’, but it seems that banks that are engaged perform better.
There is some evidence, although still weak, that banks that issue sustainable bonds find their traditional bonds benefiting from a halo effect. A survey published in February by Banca Etica’s Cultural Foundation shows that from 2007 to 2017 ethical and sustainable banks gave three times more returns than the systemic banks, with an annual profitability average (in terms of return on equity) of 3.98% compared with 1.23%.
Banks are beginning to understand these benefits. In February, another 12 banks endorsed the UN Environment Programme Finance Initiative’s principles for responsible banking. That takes the total to 49.
Sumitomo Mitsui, Itaú Unibanco and CaixaBank joined the coalition of banks that are committed to align their strategy, portfolio and business practices with the SDGs and the Paris Climate Agreement.
The principles are out for global public consultation until May and will become available for signature in September, during the UN General Assembly.