When Euromoney checks in with Raja Palaniappan, chief executive of Origin Markets, to discuss the latest in digitalization of debt capital markets, the conversation soon turns, as they always do in the run up to COP26, to sustainable finance.
He offers an intriguing insight.
Origin’s first product was its marketplace platform, which has been growing fast and now connects 20 bank dealers in the medium-term note (MTN) and private-placement markets with borrowers willing to publish indicated terms at which they would be ready to issue.
The early days of 2015 and 2016 were dominated by sovereign supranational and agency (SSA) frequent issuers and banks; now corporate borrowers are coming on board.
Private placements typically work by reverse enquiry, with dealers receiving demand from investors to buy a certain maturity, structure and currency of asset, usually from a high-quality issuer, and then looking for one willing to sell the desired liability.
If an investor wants a particular tenor but can only buy from an issuer with a certain minimum credit rating – say at least single-A – domiciled in a qualifying jurisdiction – perhaps the eurozone or the OECD – there’s no point wasting time on pre-trade negotiations with borrowers that don’t meet those criteria.
“On our marketplace, dealers can look through static data for each of the close-to-100 borrowers on our system and see those parameters. They are essentially traditional credit metrics,” Palaniappan tells Euromoney.
Dedicated space
Origin has just overhauled its database, so now each issuer’s profile also includes a dedicated space for them to upload an ESG framework that can specify what themes (green, social, etc) and what standards and principles (International Capital Market Association, or others) an issuer aligns to, as well as specific use of proceeds.
“We are moving to give equivalent priority to sustainability metrics,” Palaniappan explains. “We are taking these from issuers’ green frameworks to display to dealers and investors which UN sustainable development goals these metrics address, which frameworks they follow, and who’s reviewed and verified those frameworks.”
Just as investors are restricted to only buying assets above a certain ratings threshold, so they will be restricted on ESG criteria. This is not a niche
Issuers have been populating their profiles, and Origin Marketplace is elevating these parameters to the main search interface so that a dealer can search for issuers across both credit and ESG metrics at the same time.
Palaniappan says that this process should be completed in the next month or so.
It is revealing that a DCM marketplace should now give equivalent priority to ESG metrics as to credit metrics. Even among SSAs, not every issuer has announced a green framework. But tides in capital markets sometimes shift fast; right now, they are racing on the wave of green issuance.
Palaniappan says: “Going forward, just as investors are restricted to only buying assets above a certain ratings threshold, so they will be restricted on ESG criteria. This is not a niche. Everything now has an ESG element to it.”
Definitions
Asset managers see rising end-customer demand for products that promise their money will be invested in saving the planet. But regulators are wary of mis-selling and are threatening to crack down on greenwashing. By what definition are the underlying investments in a debt or equity fund actually green?
Palaniappan outlines this move to Euromoney in the days after the EU sold a record-breaking green bond on October 12 that drew €135 billion of investor orders for a €12 billion 15-year transaction, eclipsing the UK's green gilt that attracted £100 billion of orders for a £10 billion deal in late September.
Both were debut green offerings but, while both borrowers have their own green frameworks that share many of Icma’s green-bond principles, their taxonomies are not yet written. All around the capital markets, participants are already crying out for greater standardization in sustainability reporting.
Palaniappan says: “It may be that investors will not look to invest just in labelled green bonds, but they will only be able to invest in credits committed to adhering to green frameworks, or in specific project areas that investors care about. This is now driving investment decisions.”
Not every borrower has a green framework yet. But as they evaluate the debt capital markets landscape and their ability to issue against peers, everyone will probably have to have one before long.
