Feature | ESG
action bonds that help companies clean up their operations. Italian gas company Snam, for example, raised $500m earlier in the year through such a product to reduce its methane emissions.
Other options include social bonds where $14bn (£11.3bn) was raised last year to fund access to health care, education and afford- able housing. Sustainable bonds are a hybrid that fund environment and socially focused projects, with $17bn (£13.8bn) put to work through these products in 2018. “Green bonds are just one of many differ- ent flavours,” says Scott Freedman, a fixed income manager at Newton Investment Management, adding that this could include conventional debt. “In certain instances, companies issue a pseudo-green bond in that it is specific project-focused, but they don’t call it ause the name green bond.”
IT’S NOT EASY BEING GREEN The reporting and verification needed before launching a green bond increases the cost of such an issuance. So choosing to sell a conventional bond instead of debt that is labelled green could mean that more of the proceeds are spent on the intended project.
“It can be costly and time consuming, and which is probably why some issuers don’t issue green bonds,” Freedman says. “They have to go through extra regulation, pay a third-party agency to rate their bonds, com- mit to ongoing reporting and ensure that they have access to capital elsewhere.” On the investor side of the deal, one of the biggest issues is the risk of greenwashing. The lack of a universal definition of what makes a green bond a green bond is a well- publicised problem. Indeed, in 2018 the Climate Bond Initiative identified almost $25bn (£20.3bn) worth of green bonds that it believes were green in name only. “People are looking for these products, but we are not entirely sure that they are what they say they are,” says Anna Rudgard, con- sultant in fixed income manager research Aon.
Inconsistent ESG ranking systems add to
the problem. You need to do your home- work and look at what makes the debt green, as Freedman discovered when he examined a bond that a German wind farm turbine specialist was issuing. “Apart from saying “green” on the prospectus, nothing was mentioned in the presentation about the greenness of the bond,” he says. “It was just ticking a box-ticking exercise and that company has since defaulted.” So the credit analysis is just as important as assessing the green credentials of a bond, because you still run the risk of buying something that could be obsolete before the debt is repaid. If you find a bond that looks as if it will do what it says on the tin, and you are happy with its credit profile, the next challenge is to confident that the proceeds of a green product will be used as advertised in the sales pitch.
As welcome as these principles are, they are not legally enforceable, so “it is difficult to know concretely that every green bond is a green bond”, Rudgard says.
Other criticisms include that the principles do not define what a green asset is. It also does not provide guidance on if energy effi- ciency projects should be included. Not eve- ryone would agree with coal-fired power plants issuing a green bond to implement energy-efficient measures.
One of the most interesting developments in the market is a club of central banks working to integrate ESG factors into their operations. They are also setting a roadmap to expand green lending.
“The market is going through a process of innovation,” says Felipe Gordillo at BNP Paribas Asset Management, especially when it comes to establishing a definition of sustainable debt.
We are managing our clients’ capital
and we are not mandated to accept a lower return just because it is a green bond. Scott Freedman, Newton Investment Management
Mexico City Airport Trust, for example, issued a green bond to build an airport, but a new government halted its construction. What happened to the proceeds of the bond? Have they been used for a green purpose? “We need to be comfortable that green bond issuers are doing what they say they will do with the proceeds,” Rudgard adds. The good news is that various institutions and organisations are working on improv- ing standards and setting definitions. The European Commission has tabled a definition that it hopes will bring clarity throughout the EU, while the ICMA Green Bond Principles were published in 2014 to strengthen the integrity of the market. Here the definition of a green bond is artic- ulated through four principles: use of pro- ceeds,
project evaluation and selection, management of proceeds and reporting. 36 | portfolio institutional | October 2019 | issue 87
The improvements that Freedman would like to see include the proceeds of such assets being ringfenced and compulsory project reporting.
The lack of transparency and a universal definition means that Candriam is yet to launch a pure green bond fund. “There are a few things that need to be done before we can embrace green bonds,” David Czupryna, head of ESG client portfolio management at Candriam, says, adding that existing standards leave investors exposed to greenwashing. With this in mind he says that green bonds are not the best way of building a sustaina- ble bond portfolio. “They are part of it, for sure, but the green bond market is not diversified enough yet to be the base for a global fixed income portfolio.” The green debt market is driven by sover- eigns and quasi-sovereigns with only a few
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