Green Project Bond: Connecting investors and businesses together through green investments
The Green Project Bond from Goldman Sachs has the potential to drastically transform fund-raising in infrastructure development. It meets the investment needs of institutional investors, which prefer long-term fixed interest rates, and is significant in a societal sense as it allows environmentally-aware investments.We interviewed Toru Inoue, who leads the Green Project Bond at the investment bank, and Kazuhiro Takeuchi, Representative Director, President, and CEO at Japan Renewable Energy Corp., one of Japan's largest renewable energy companies and a recipient of investment from Goldman Sachs.
This article originally appeared in the Nikkei ad section on Sep. 23, 2017 and has been translated from Japanese.
What kind of bond is the Project Bond?
Inoue: The Green Project Bond is issued to procure project based funding from capital markets investors, instead of the traditional route of borrowing in the bank market. We have been involved in the development of new financial instruments over the years, but in the early 2000s, we started to become conscious of their societal impact. How should we contribute to the world through investments? This perspective was vital with regard to future financial instruments, and we believe that this is exactly what is required for our business to survive long into the future.
The specific theme that emerged at the time was investments in infrastructure development. Previously, it was common for banks to finance the development of infrastructure such as roads and power plants. But it takes a long time to recover such investments. Since financing by banks is usually short-term, projects need frequent refinancing, and the interest rates are also subject to reset.
On the other hand, the mission of institutional investors, including pension fund managers and life insurance companies, is to invest their subscribers' funds over the long term in a consistent manner. Government bonds and electric power company bonds had been used to meet this requirement, but such funds have not been utilized effectively in infrastructure development. We thought that if we could design products that enabled long-term investment at fixed interest rates, those products could meet the needs of investors.
Tell us about your renewable energy initiatives.
Inoue: After the Great East Japan Earthquake in 2011, Japan became keenly aware of the need for clean energy. Therefore, we considered whether we could apply our business of connecting infrastructure development with capital markets to renewable energy as well. If we could accomplish this, it would make our business even more useful to society.
More than 40 years have already passed since Goldman Sachs advanced into the Japanese market. Amid Japan striving with all its resources to make the shift to renewable energy, contributing to the expansion of environmentally-friendly, clean energy is rewarding. In 2013, we worked with Japan Renewable Energy (JRE) to arrange the funding of the Namegata Solar Power Plant (Ibaraki Prefecture, in eastern Japan), the first project of the Green Project Bond in Japan. Since then, the Green Project Bonds have successfully financed 17 power generation facilities, including JRE's solar power plants at Iwadeyama and Osato (both in Miyagi Prefecture in northern Japan), and Hasaki (Ibaraki Prefecture).
Takeuchi: A company that generates renewable electricity, JRE was established in August 2012 with equity investment from Goldman Sachs. In July, a feed-in tariff system had just been introduced as the Japanese government strove to expand power generation using renewable energy.
Today, four years after its establishment, we operate solar power plants and wind power plants throughout the country, and we also plan to build biomass power plants in the near future.
An increasing number of companies are engaged in renewable power generation, but only a few such as ours handle three kinds of renewable energy—solar power, wind power, and biomass. We are also proud that JRE is the only firm to manage all processes, from project planning, through construction, to post-construction management.
What problems did you have developing the Green Project Bond?
Inoue: The Green Project Bond was the first of its kind in Japan. Green project bonds have already been successful in Europe and North America, but ours is the only green project bond globally that includes solar power generation. Another major characteristic of our bonds is that they are issued at the planning stage for solar power generation. In that sense, it took time for credit rating agencies and investors to understand our bond.
On the other hand, there exists technology to fairly accurately calculate solar power generation, and the Japanese government has also implemented a feed-in tariff system. Future cash flows can easily be predicted—even in comparison to retail facilities and office buildings, for example—which means that the business risk can be said to be low. We explained this point to the agencies and investors persistently, and they gradually came to understand. To date, purchasers of the Green Project Bond have included investors such as insurance firms and regional banks.
What is the benefit of doing business with Goldman Sachs?
Takeuchi: With its great reputation and international network, Goldman Sachs has already invested and financed renewable energy projects worldwide. We can promote our projects with the help of Goldman Sachs' professional financiers who have abundant experience and knowledge. This is one of our key advantages.
We were able to raise funds for the Namegata Solar Power Plant, which is JRE's first project of its kind and which leveraged Goldman's innovative Green Project Bond. This was also possible because of their excellent capabilities in product development.
What is your opinion about the benefits and importance of the Green Project Bond for investors?
Inoue: Among investors, there is high demand for investment products with long-term fixed interest rates. You cannot find too many products that yield better returns than government bonds and are also rated so their risks can easily be assessed.
In addition, a key point of the Green Project Bond is that it involves investments that are useful to society. An increasing number of green bonds, the proceeds of which are limited to funding renewable energy and other environmentally-aware projects, are issued in Japan. The rise of green bonds likely coincides with the growing interest of investors in incorporating environmental, social, and governance (ESG) factors into investment decisions. In equity investments, the amount of money going into ESG investments is also continuing to increase. Institutional investors are increasingly placing greater emphasis on environmental factors when making their investment decisions, which is a trend that has become evident in the area of bonds. The Green Project Bond is becoming popular among ESG-conscious investors because investing in the Bond demonstrates their proactive support of clean energy.
What are your future expectations for the Green Project Bond?
Takeuchi: JRE's goal is to lead efforts to create sustainability in society through the development of renewable energy. The company has announced a policy of increasing its total power generation capacity to 1,000 MW by 2020. Renewable energy is highly likely to become a key part of the infrastructure supporting not only Japanese society, but globally.
The next major issue to be addressed would be the method for fund-raising. If it takes hold, the Green Project Bond will expand the basis for financing. It is my belief that the Green Project Bond will play a major role in further popularizing renewable energy.
Inoue: Recently, we started to receive inquiries about the Japanese-developed Green Project Bond from Asia and other parts of the world. We think that it would be fantastic if we could in the future act as an intermediary between green projects and investors not only in Japan but globally.