A conversation with Council of Europe Development Bank

RICHARD KELLY: Hello, and thank you, for joining us, once again, for the next edition of our 5 by 10 issuers podcast series. I'm Rich Kelly, the head of global strategy at TD Securities. I'm-- one, it's wonderful to be joined today by Christine Peters, Vice President at Capital Markets at TD Securities, Dublin. As well as Arturo Seco Prosencio, deputy CFO and Head of Funding Treasury and ALM at the Council of Europe Development Bank. We've continued to see significant volatility around markets. We've all continued to try and adjust our lives around that. We've seen a plethora of outlooks, as we're looking out over the next 12 months, in terms of what may be the key drivers and risks and opportunities. And so we wanted to have a discussion with a number of the major issuers to look and see how they're thinking about navigating a lot of that uncertainty, as we move through here. So today, we wanted to take a deeper dive with the Council of Europe Development Bank, looking at their priorities and goals for that upcoming year. And with that, I'll hand things over to Christine Peters to introduce our guest.

CHRISTINE PETERS: Thank you, Rich, and thanks in particular to Arturo for taking the time to speak with us today. As Rich mentioned, Arturo is the deputy CFO and Head of Treasury Funding and ALM at the Council of Europe Development Bank, a multilateral Development Bank with an exclusively social mandate for its 42 member states. One of Arturo's many responsibilities is managing the approximate 4 to 5 billion euro of annual debt, raised by CEB across various markets each year, and we're delighted to get his thoughts as we head into next year. Arturo, to start off with, and as we look away from COVID and towards the future, and in your opinion, what are the biggest risks facing capital markets on a 12 month view?

ARTURO SECO PROSENCIO: Hello Christine. Hello Richard. Thank you very much for this invitation. Well, there's still some uncertainty regarding the recovery. Pandemic risk we have inferred in the last few weeks, with some countries announcing at least partial lockdowns, as COVID numbers increased again. Even if we accept the COVID-19 pandemic is receding, it has highlighted the need for social investment in health education, housing inclusion of the most vulnerable, as well as job creation and preservation. Therefore, I believe important efforts in those areas will be a priority in the coming years. In that sense, it remains to be seen if new waves can be contained, or if there will be an impact on economic activity, which certainly would have an impact on all market again. As we are entering the economic recovery path for the pandemic, we see important economic challenges, as the risk of inflation is permanent or temporary nature, and its impact on monetary policies. This is a very important risk factor for capital markets, which will of course, raising incomes volatility or at least potentially raise significant volatility. Since we are witnessing an uneven global recovery, the economic and monetary policy scenarios are going to have a different speeds in different geographical areas, which will be a challenge for capital market participants, after a long period of extremely accessible liquidity. Next year, Central Banks have role in terms of communication, forecasting, and policy implementation would be a decision making focal point for any capital market participant. The spreads widening, it will need to be closely monitored, and very likely, markets will be less homogeneous for issuers in terms of funding cost, than in previous years. In that sense, the basis of movement would be key when aiming to diversify funding sources. All in all, I would say that monetary policy and potential volatility will eventually translate in the need for greater flexibility than in previous years, when accessing the market.

RICHARD KELLY: Thanks, Arturo, and I think you've done a very good job looking at those big risks that are out there, that we're trying to navigate, and you obviously have to layer your funding plans around that. And so I guess from a high level, what are the biggest opportunities you see for your institution over the next 12 months, when you think about that those funding opportunities?

ARTURO SECO PROSENCIO: Well, as you know, the city mandate is to strengthen social cohesion in Europe. For doing so, and to participate in sustainable development of our societies, we need to combine the social, environmental, and economic dimensions. With the pandemic and the ongoing effort to create an ever greener economy? ESG is now mainstream, and will create opportunities on both sides of the balance sheet for institutional support. When thinking about our own funding, we accept the premise that investors become more sophisticated and we see a tendency, that the focus is turning to a more holistic analysis of the overall ESG compliance and activity of issuers. Such at the CB, with our exclusively social mandate, we have an ESG component in all activities. Including our role in investment portfolios. This ESG approach is the reason for our very strong ESG ratings, and also positions the CB very well for investors, that are assessing ESG activities on a fundamental level. I clearly see the ESG market awareness as one of the main areas where the institution will continue to optimize its efforts, not only for the next 12 months, but for the years to come. In fact, we have recently announced our Paris Alignment Framework, which includes a roadmap to progressively incorporate into the bank's operations our commitment to align lending activities with the Paris Agreement on climate change. Other than ESG aspects, we will focus on diversification and timing of transactions. Because diversification always is one of the main objectives of our policy strategy.

RICHARD KELLY: That's great. I guess, maybe, if we delved a bit more into that, and looked under the hood. As you look at the specific projects that you have funded in there, Is there anything that really stands out to you that you wanted to kind of provide-- you think is worth flagging to people a bit more? Is there anything that you're seeing that what we've seen over the last two years is particularly impacting how you're going about your funding strategy over the next year?

ARTURO SECO PROSENCIO: Yes, of course. Well, actually, with the pandemic situation, we saw an increase of loan requests from member countries related to the health sector, but also related to job-site preservation. With a strong demand for social financing on the lending side, our funding volume has steadily increased over the last years. We had a long term funding volume of 4.5 billion euros in '20 it went to 5.5 billion euros in 2021, and the funding volume will be higher in 2022. With a potential volume up to 6.5 billion, which should stabilize afterwards. With this higher funding volumes, we've been able to further strengthen our presence in our core markets, which are the euro and the US dollar, and the markets where we regularly issue benchmark transactions. We have also established a regular presence in both currencies for social inclusion bonds. Well, the markets we have done an important diversification effort. Having issued a sterling, an Australian dollar, but also issued in markets where our access is less regular. Such as the New Zealand dollar, the Canadian dollar, the Norwegian krone, or the Turkish lira. For 2022 having up to $6.5 billion long term issuance volume, we will have the capacity to further build curves in the markets where we had a regular presence over the years, but it will also provide the opportunity to maintain a diversification objective, which is very important, as I mentioned before, and it's a key element of our strategy. Social inclusion board issuance will also remain a priority for next year.

RICHARD KELLY: Thanks, I wanted to maybe take a somewhat personal question, maybe not too personal, but I think the one thing we're all kind of craving is more human contact, and yet the one thing we're all afraid of is human contact in this age of COVID. I wonder where do you see business travel heading? Obviously, it's a key part of how you get out and market, and how you speak to investors. What do you see on the horizon in terms of how you balance that hybrid approach, work from home, traveling and actually having those face to face meetings in terms of how it impacts your business?

ARTURO SECO PROSENCIO: It is not a personal question. So I'm happy to answer it. Yes, I believe the approach will be a more hybrid. Having said that, there will certainly still be a place for in-person meetings between conferences or roadshows. After all, this is a people's business, people meetings cannot fully replace a face to face meeting with building trust and long lasting networks. However, we have experienced the new found meetings on computer, and those meetings can be very efficient, organized. It can be organized without no planning or traveling time. And Furthermore, these computer meetings reduce the travel activity, and also help reduce the institution's carbon footprint.

RICHARD KELLY: Thanks for that. And I think for a last question, I want to go back, you talked before about all the great work you've been doing where it comes to climate change. And I think one of the areas that we have seen stratospheric growth throughout COVID has been on the ESG front. You've had significant support, you've given to two member countries to recover from COVID, and then on top of that, a leader when it comes to the social bond market, with things like your social inclusion bond framework. Do you anticipate now, a significant increase in the amount of SIB projects, assets, and the funding that has to come back on it? If you're looking both, at the next year and on the horizon, do you still see significant growth, yourself in terms of what that's going to do in your portfolio?

ARTURO SECO PROSENCIO: And the will first thing we need to take into account is that or social inclusion bond which funds already had a very important increase in 2020. Since given the very exceptional circumstances we almost tripled or certainly grew [INAUDIBLE] about issuance when compared to the previous year. In 2021 we doubled the amount we issued in 2019, and we have the objective of maintaining this year's social inclusion board issuance volume within our company strategy. In other words, the total volume of social inclusion bonds, have been progressively increasing over the last three years, and now we should at least, maintain the volumes that we will achieve in 2021, which are slightly lower than 2022, given the exceptional circumstances that we lived through the pandemic situation. In terms of social inclusion bond framework, it already includes projects financed from four high social impact sectors, that we chose for that framework, those are social housing, education, support for micro, small, and medium sized enterprises, and health. Health was actually incorporated in the framework in record time. When we decide to issue our COVID-19 response [INAUDIBLE]. When the confined situation started in 2020. At the end of the day, the volume for social inclusion bond issuance will be dependent on how many projects from these four sectors are being financed by all lending activities.

CHRISTINE PETERS: Great. Well, Thank you, Arturo, for your time and very insightful thoughts today. I think it's safe to say we're looking forward to seeing what 2022 holds for CEB, especially with your higher funding volumes. Thanks again.

ARTURO SECO PROSENCIO: Thank you very much, it's been a pleasure for me, and I reiterate my thanks for this invitation.

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