Sustainable Finance: Switzerland’s Largest Green Bond
September 30, 2024
Topics
In recent years, the importance of sustainability in the financial and real estate sectors has increased significantly both nationally and internationally:
- In 2023, the total volume of sustainable financial investments in Switzerland alone amounted to CHF 1,660 billion, according to a market study (see graph below).
- This development offers the Swiss financial center a tremendous opportunity to position itself as a leading hub for sustainable finance, as confirmed by the Swiss State Secretariat for International Finance (SIF).
- In this context, on December 16, 2022, the Swiss Federal Council adopted the Sustainable Finance Report Switzerland. It includes 15 measures from 2022 to 2025 to further strengthen the position of the Swiss financial center as a pioneer.
Innovative financial instruments for the real estate sector
But how does implementing sustainable finance actually look in practice, especially in the real estate industry? An innovative financial instrument to realize this is the so-called Green Bond, which is specifically designed to finance projects with a positive environmental impact. The publication of the EU Regulation for Green Bonds (EuGBS) on November 30, 2023 underscored the relevance of this financial instrument, while also aiming to combat greenwashing.
Real estate companies like PSP Swiss Property have already taken steps to contribute to these goals by holistically transforming their real estate portfolio into a sustainable one through the classification of "Green Buildings", which serve as (backed up) financing instruments. This transformation to a 100% Green Bond portfolio follows the Green Bond Principles (GBP) of ICMA and was implemented with the help of Wüest Partner’s ESG rating, which comprehensively assesses properties’ sustainability performance in all ESG areas.
How can a transformation succeed?
To explore the comprehensive process of integrating Green Bonds into the financing strategy in more detail, we conducted an in-depth interview with Patrick Thäler, Head of Capital Markets & Sustainability at PSP Swiss Property, which restructured and accredited its portfolio using the Green Bond Framework. This provided detailed insights to identify the success factors of this green financial instrument in the Swiss sustainable finance market and strengthen it further.
André Bittner: Mr. Thäler, from your perspective, what are the specific advantages of Green Bonds for PSP compared to traditional financing instruments? Why did you choose Green Bonds and were there alternatives?
Patrick Thäler: Let’s go back a bit. We are a Swiss company that has been active with bond issuances in the capital market in recent years. Until 2015, our financing was about two-thirds in loans and one-third in bonds. During the negative interest rate period, financing through bonds was often more attractive than loans. Accordingly, we repeatedly tapped into the bond market. With the growing volumes of sustainable bonds, we wanted to ensure that PSP maintains excellent access to the capital market. The transition of all outstanding bonds to Green Bonds was a logical consequence, reflecting the long-term sustainable investments in our high-quality portfolio.
AB: You already mentioned the motivation behind the decision to switch PSP's portfolio completely to Green Bonds. Was this decision primarily driven by internal convictions, or was there also external pressure from customer demand or investors?
PT: We have been following the trend toward sustainable finance for a long time, but the idea of having different types of bonds (green and non-green) outstanding did not convince us. We generally value simplicity in PSP’s structure, so a complete one-time switch of all outstanding bonds was the right path.
It is important to note that such a process is only possible if you are a company that has been investing sustainably for years, has a clear structure, and is intrinsically convinced of the sustainability concept. We wanted to ensure market access. There was no external pressure regarding Green Bonds; it is more of an instrument than a driver for sustainability practices. It essentially reflects the operational business activities in financing. We implement what we are convinced of as a company.
AB: Could you elaborate on the process of reclassifying to a comprehensive Green Bond Framework? How have the issued Green Bonds been received by the market?
PT: Technically, the purpose of all bonds was changed to financing and refinancing the green asset portfolio. A major advantage during the entire process was that we had great support from both external and internal partners. We could count on a great deal of expertise in all departments, be it management, construction, sustainability, accounting, legal and, of course, sustainability, to name but a few. Since the reclassification, we have only issued Green Bonds, which have placed very successfully on the market. In the last six months, we have been present on the market three times and have always been able to position ourselves below the yield curve on these issues. Thanks to our favorable spread curves, we could place the new issues at interest rates in the low double-digit basis point range more favorably than the bonds already traded.
AB: So, did you expect to benefit from a “greenium” and more favorable financing conditions from the beginning?
PT: It has always been important for us to be perceived as an attractive issuer and thus ensure market access. With additional demand for Green Bonds from investors, bonds can be issued slightly cheaper for us. The effective price difference between already issued bonds and Green Bonds (so-called "greenium") is difficult to define since bonds in Switzerland are traded in low volumes and mostly held until maturity. With regular bond issuances and an outstanding bond portfolio of around CHF 2 billion, even a few basis points of price advantage are material.
AB: Talking innovation and taking action: how was the experience of transforming your portfolio to be 100% Green Bond? Were there any notable details, challenges, or hurdles along the way?
PT: The process was quite streamlined for a project of this scale, which we can attribute to reliable internal and external project partners.
AB: Do you think Green Bonds have become more attractive in recent years? Do you see a potential trend reversal in the near future?
PT: In Switzerland, there is still healthy demand, although we see a certain market saturation from the European side. We believe that successful management of our own business and the trust of the market are fundamental prerequisites for effectively offering such sustainable products. The overall concept must be convincing.
AB: How did Wüest Partner's ESG rating help to implement the Green Bond Framework? How does it differ from other ratings or certifications in your opinion?
We started gathering information and exchanging ideas with second-party opinion providers early on and found that such a process is much easier to implement and demonstrate with certified properties. We deliberately refrain from using certifications like BREEAM, SNBS, LEED, etc., because it is also a cost factor. When looking for a suitable solution, Wüest Partner's ESG rating proved to be ideal. Since Wüest Partner already has many data points through their valuation activities and an excellent reputation in the industry, it was a logical choice for us.
It was the right product at the right time in the right place. Having such a rating was advantageous, but there were also obstacles, as the second-party providers first had to be trained on the methodology and evaluation criteria to make a clear statement. What is particularly exciting for us in the future is the next version of the Wüest Partner ESG rating, as it is GRESB accredited and can accelerate additional synergies even further.
AB: "Sustainable Controlling" is the fourth principle in the international ICMA Green Bond Framework (GBF), which you also followed. How does PSP ensure that the financing from the Green Bonds actually contributes to achieving sustainability goals and complies with ESG guidelines? What measures are taken to monitor and ensure the effectiveness of fund utilization?
PT: First of all, it should be noted that PSP has been pursuing a long-term strategy that is reflected in the GBF. We used the existing reduction path we had already defined earlier and adjusted and implemented the GBF accordingly. We have been publishing sustainability reports for 10 years and were one of the first to have consumption figures audited with limited assurance voluntarily. With the GBF, we have further committed ourselves to sustainability. If we do not adhere to the reduction path we have set, it can negatively impact the Green Bonds and cause reputational damage. Therefore, we want to avoid reclassifying the bonds. What has effectively changed with the introduction of the GBF is the increase in transparency and commitment.
AB: At an EU level, we also see activities around Green Bonds. The introduction of the EU Green Bond Standard (EuGBS) requires that at least 85% of the funds raised by the bond flow into economic activities that must comply with the EU taxonomy. Do you believe this standard is sufficient to minimize the risk of greenwashing effectively, or do you see the need for stricter guidelines or additional measures to further strengthen the credibility and effectiveness of green financial products in Switzerland?
PT: Regarding European standards, we note that they always take some time to become relevant in Switzerland, but eventually do so through the internationally connected capital market. It is always difficult to find a good balance between regulation and self-responsibility. The European Union tends to regulate as much as possible. As a real estate company operating only in Switzerland, we certainly have advantages in terms of the complexity of the business compared to internationally active companies. Compared to traditional financial indicators, however, sustainability reporting as a whole is still in the early stages, and I assume and hope that a lot can still be standardized.
AB: Let's move away from bonds for a moment and focus on equity. In your 2023 annual report, you mention that PSP aims to act as a pioneer in Switzerland by adopting the Green Equity Principles issued by the World Federation of Exchanges (WEF) and seeks accreditation. Can you elaborate on the reasons for this and how exactly you plan to achieve it?
PT: Since we have also converted our loans into sustainability-linked loans, all our debt is now tied to sustainability goals. Therefore, it makes sense to label the last missing part – equity – when looking at the balance sheet. The Green Equity Principles of the World Federation of Exchanges serve as a basis here. Currently, companies are evaluated by various firms and receive a rating, but still lack full transparency and comparability. We have received ratings ranging from D- to AAA. The Green Equity Principles make sense to me because they are administered and endorsed by the stock exchange and can therefore carry different weight.
AB: Thank you very much, Mr. Thäler, for this fascinating conversation and your insights into the world of Green Bonds. I am excited and confident about the future of Sustainable Finance and Green Bonds in the Swiss financial market.
PT: My pleasure, thank you very much.