Sustainable Finance With A Creative Link: Q&A With Sumitomo Mitsui Banking Corp’s Aaron Franklin

Aaron Franklin, Head of Sustainable Finance at Sumitomo Mitsui Banking Corp, discusses the hows and whys of green investments.

Global Finance: Green and social bonds are familiar products. What are sustainability-linked bonds (SLBs)? How do they differ?

Aaron Franklin: The two big categories in sustainable finance are the use-of-proceeds approach, which encompasses green and social bonds, where you say, “I intend to allocate money to these types of [sustainable] activities,” and a sustainability-linked approach, where something changes in the actual financing terms based on sustainability performance, such as the margin in a loan or the coupon in a bond. Think of SLBs as the company betting that it’s going to hit its goal and saying, “If I don’t, I’m going to pay you more interest.”

GF: So, there’s an accountability mechanism for the results?

Franklin: Correct. It’s a way for a company to show that it’s serious about hitting that target—and for investors to be able to say, “We’re supporting achievement of that target by buying this bond that has this impact,” although no one wants the penalty to be paid out. Investors usually don’t like the idea of benefiting from poor sustainability performance.

GF: Are there sustainable finance products beyond debt instruments—e.g., “green” deposit accounts?

Franklin: Absolutely. Not everyone is spending $500 million such that they can do a benchmark green bond. We [Sumitomo Mitsui] offer a green deposit instrument, as do other banks, where we allocate these deposits specifically toward sustainable loans.

GF: Are there significant differences between regions?

Franklin: Each geography has its own priorities and imperatives. Europe has been very forward on its political aspirations to decarbonize, to get to net-zero by 2050; while the US, even with the change in administration, takes a less activist governmental approach. In Japan, they’re driving toward net-zero, moving away from coal—so there’s a heavy focus on renewables. China is a colossus. There is a desire [there] to harmonize so that Chinese green bonds are viewed like those from the US or Europe.

GF: What about different industries?

Franklin: Part of the maturation in the market is understanding that different sectors and subsectors should be evaluated separately. Software companies have a [carbon] footprint, but it is not as large as manufacturing companies, while electronics manufacturers face different challenges than semiconductor manufacturers. Each sector has its own set of concerns.

GF: You worked on the first blue bond. Tell us about it.

Franklin: I was involved with the Seychelles sovereign blue bond, which was about protecting fisheries. However, it wasn’t only about the ocean but about people, as well—like financing the police boats that would be patrolling the waters—and the industry you were going to develop on the land so people would have jobs when you told them to stop fishing. Blue bonds focus on water resources, whether oceans or other types of waterways. Largely, though, blue bonds are seen as a subset of use-of-proceeds bonds.

GF: What will creativity bring? Are yellow or orange bonds next?

Franklin: There’s going to be constant innovation—which means advisers will have to say more than, “Here’s how the last three deals got done.” Instead, they must work to make things more tailored and bespoke to solve problems using these new structures.