BONDS 14 Oct 2019 ‘Blockchain’ set to shape future of green bonds
Banks and investors as starting to awaken to the benefits that can derive from the use of blockchain technologies in bond issues, including green bonds. BBVA and Spanish insurance company Mapfre partnered early this year to arrange the issue of a pioneering blockchain sustainable bond. The technology allows to cut costs, increase efficiency and ensure full transparency.
Twelve years ago, the World Bank issued the world’s first-ever green bond (bonds issued to fund sustainable projects, such as renewable energies or waste management infrastructures). Today, their popularity is rising fast. Although they still account for a fraction of the value of the overall bond market, issuers are choosing this type of sustainable debt securities because of the positive impact they have on society.
To be granted green bond status, an issue needs to undergo a series of audits and comply with the so-called ‘Green Bond Principles’. Current technological and digital tools are allowing to significantly simplify and expedite the otherwise complex arrangements, thus contributing to drive their popularity. Indeed, the use of ‘blockchain’ and Distributed Ledger Technologies (DLT) allows storing information in a completely secure and fully traceable, immutable manner, simplifying the transaction and increasing the transparency thereof.
The use of DLTs in the issue of green bonds by banking and other institutions is the focus of Blockchain: Gateway for sustainability linked bonds, a report by UK lender HSBC, which shines the spotlight on two of the standout features of this type of operations: sustainability and technology. The use of blockchain and encryption algorithms can help boost confidence in the bond market, and HSBC underscores the opportunity that this technology represents for the green bond market and its complete digitization. The value, according to the report, is particularly relevant in three key stages of the issue: structuring, and distribution; transfer of ownership, payment and settlement; and proving the relevant impact of the investment project.
According to the HSBC report, there are two main benefits of using blockchain for green bond issues: efficiency and credibility. Thanks to blockchain, securities are more efficient because they save costs, time, and prevent third party meddling. The foundation of the green bond structuring and negotiation is a smart contract, capable of automating all complex steps and of creating competitive advantages for issuers and investors. Also, thanks to the technology’s built-in encryption features, the transfer of value and the token-based issue virtually fraud-proof.
The other great benefit, credibility, is essential for establishing relationships of trust between issuers and investors. With help of Big Data and the Internet of Things, it is possible to monitor the environmental project’s evolution, and its impact, in real time. Payments and other tasks agreed in the issue of the bond are carried out automatically. These aspects are a result of the transparency that blockchain offers.
BBVA, a pioneer in the issue of blockchain green bonds
The HSBC report devotes a section to the green bond issued by BBVA and Mapfre, the first time a debt security issue was arranged and negotiated on a blockchain platform. The issue was carried out last February and BBVA acted as issuer and Mapfre’s insurance company as investor. The report highlights the technological and sustainable value of the transaction. Mapfre invested €35 million through a private placement, devoted to sustainable projects in a 6-year term, at a 5-year euro swap rate.
The project was qualified as green in accordance as per the Second Party Opinion, issued by international certification agency DNV GL. The negotiation and the bond issue procedure were developed through BBVA’s internal platform.
Thanks to the use of BBVA’s proprietary DLT technology, the process was carried out in a total digital manner. The arrangement, negotiation and issue were all undertaken from the platform itself. The same platform that guarantees the immutability of the agreements and that the agreed terms are complied with, while opening the possibility for investors to choose among a myriad of options to configure their product.