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July 7, 2022updated 03 Aug 2022 9:52am

How a world-first green and social bond got off the ground

New World Development has continued its heavy use of green financing with the sale of the world’s first combined green and social corporate bond to tackle emissions and provide affordable housing. Capital Monitor speaks to CFO Edward Lau, about his social and cultural aims.

By Adrian Murdoch

Green and social bond
Edward Lau of New World Development has challenged established thinking in Hong Kong. (Photo courtesy of New World Development)
  • Hong Kong property group New World Development (NWD) has sold a $700m equivalent green and social two-tranche bond, the first from a corporate globally.
  • NWD signed its first green loan in March 2018 and has now raised HK$37bn ($4.7bn) in 13 transactions in a variety of formats and currencies.
  • Investor interest centred on the social bond, still something of a rarity in Asia, with proceeds likely to be spent on affordable housing, enterprise start-ups and cultural preservation.

Hong Kong has long been a byword for unsustainable living, with its vast swathes of air-conditioning units, but there are signs the Chinese territory is seeking to address climate change.

As well as, for example, the carbon-cutting efforts of urban farms sprouting from the top of office buildings, this week, the Climate Bonds Initiative (CBI), a non-profit organisation and debt certifier, in its annual report card on the Chinese territory noted that green debt volumes had quadrupled last year to $10.4bn. London-based CBI chief executive Sean Kidney said the spike in green funding inspired “huge optimism”.

And it’s not just about the quantity of these deals – there is now growing innovation when it comes to use of proceeds from such financing.

Landmark issue

On 10 June, Hong Kong property conglomerate New World Development (NWD) sold a US dollar-denominated green and social bond, making it the first corporate issuer in the world to sell one in any currency. It has followed in the footsteps of various local authorities, which have been issuing such securities since 2017.

NWD has long tied itself to sustainability, having raised HK$37bn ($4.7bn) in 13 transactions since March 2018, via green bonds in Hong Kong dollars, US dollars and yen; public and private sustainability-linked bonds; and green and sustainability-linked loans.

Around 20% of the company’s debt is now sustainability-linked in some way, says chief financial officer Edward Lau, and the intention is to do the same with most, if not all, of the rest.

This commitment to sustainability has not always been easy. Investor concerns over potential greenwashing have always loomed large over Hong Kong’s property market and developers.

An episode where NWD came under fire from analysts for its approach to sustainability underlines the kind of local obstacles and attitudes facing those looking to set examples of positive impact. In November 2019, the group donated three million square feet of farmland in Hong Kong’s New Territories to Light Be, a local social housing and tenant development, to build a 100-unit social housing project. Some local analysts angrily rejected the group’s ESG aims, arguing that the move had harmed shareholder interests.

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However, not only were these claims rejected by analysts from international banks, but NWD’s share price rose 2% on the news.

Lau says the proceeds need to be allocated within the next 24 months and broad themes are set out in the group’s latest sustainable finance framework, which was updated in May and approved by third-party opinion provider Sustainalytics.

Social aims of a social bond

But NWD has not yet disclosed specific projects for either tranche of the bond, though it plans to do so. Lau does, however, discuss his interest in a number of social projects, which give an indication of where the money might be spent. He has been with NWD since June 2020, having joined from Chinese investment group the Kaisa Group and before that spending time at Deutsche Bank and Barclays.

Affordable housing in Hong Kong is one of the first issues that Lau raises, saying he wants to tackle the six-year waiting lists for social housing.

NWD also invests in early-stage enterprises, he says. It founded the Eureka Nova incubator in 2017 to support start-ups working in artificial intelligence, robotics, sustainability, proptech (property technology) and fintech, and has invested in 109 companies.

Lau is also interested in cultural preservation and related projects, such as the revitalisation of the State Theatre, a Grade I historic site in North Point on Hong Kong Island that NWD acquired for HK$4.8bn in October 2020.

Such moves are a rarity in the territory, where new developments – be they residential buildings, office blocks or shopping malls – are king and there are relatively few signs of ‘old Hong Kong’, in the main urban centres at least.

Green goals

In terms of the proceeds for the green bond, the priority in the group’s sustainable finance framework is to continue to develop or retrofit buildings to regional and international green building standards. These include Beam Plus, one of the city’s most widely used voluntary green building labelling schemes, but also the internationally recognised Leed standards. Both cover both commercial and residential property.

By the end of last year, the group had 31 Beam Plus building certificates, with 25 of them rated very good/gold or higher, and 32 LEED building certificates with 31 of those rated gold or higher. The group has 26 completed properties in Hong Kong and three under construction, and 40 projects across ten cities in mainland China.

These projects form part of the group’s New World Sustainability Vision 2030 programme, set up in 2020 to achieve certain aims across a number of metrics, such as reducing energy usage and emissions (see chart below), and cutting down workplace injuries as well as increasing volunteering hours.

All are tied into four United Nations Sustainable Development Goals (SDGs): 3, 4, 11 and 17, referring to Good health and Well-being, Quality Education, Sustainable Cities and Communities, and Partnerships for the Goal. But not, interestingly, SDG 13: Climate Action.

All of these metrics are publicly available and updated annually – the group has published a sustainability report every year since 2015, and it also releases an interim sustainability report. And since last year the remuneration of the chief executive and employees has been linked to these goals.

While ESG-linked pay is a rising trend in certain geographies and sectors – among some asset managers and banks, for instance – it is relatively rare in Asia. A May report from PwC showed that only 16% of companies in the region linked board remuneration to ESG performance versus, for example, 60% of FTSE companies in the UK.

“If you don’t build [metrics] into the key performance indicators, it’s tough for you to have regular checks to make sure you’re on track to hit your 2030 goals,” says Lau, who says twice a year makes sense.

Pricing and demand

The two-tranche bond came as a $200m five-year 5.875% social bond and a $500m green perpetual bond – not callable for the first three years – at 6.15%.

At their peak, books were oversubscribed nearly five times, despite the bond being unrated. That led to the green portion being upsized from its initial $300m and pricing on both tranches tightening significantly from the price guidance. The social bond went out with initial guidance of 325 basis points over US Treasuries plus before settling at 290 basis points over, while the green bond went out initially at 6.55%.

Many of the questions on the bond’s roadshow were on the social side because NWD's green efforts are already well-known, says Alvin Yeo, Hong Kong-based head of green and sustainable finance for Asia at UBS, one of the bookrunners on the deal and one of the green structuring advisers. “NWD has projects in green buildings and renewable energy, so it was easy for investors to understand how the money is being used there.”

More than 100 institutional investors participated in each tranche, says NWD, made up mostly of local asset managers, private banks and family offices.

It would, it seems, do no harm for social and environmental impact to have more individuals like Lau, who are willing to challenge established thinking in Hong Kong – and the corporate world in general.

Capital Monitor is hosting the Webinar series, Making Sense of Net Zero. Find out more information on NSMG.live.

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