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“Green bonds are just one of many different flavours,” says Scott Freedman, a fixed income manager at Newton Investment Man- agement, 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 a 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 such a specialised debt product 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, commit 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 may be 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, a con- sultant in fixed income manager research at Aon. Inconsistent ESG ranking systems add to the problem. You need to do your homework and look at what makes the debt green, as Freedman discovered when he examined a bond that a German wind farm turbine specialist was launching. “Apart from saying “green” on the prospectus, nothing was mentioned in the presen- tation about the greenness of the bond,” he says. “It was just a box- ticking exercise and that company has since defaulted.” So the credit analysis is just as important as assessing the green creden- tials of a bond, because you still run the risk of buying something that could be obsolete before it reaches the original maturing date. If you find a bond that looks like it will do what it says on the tin, and you are happy with its credit profile, the next challenge is to be confident that the proceeds will be used as advertised in the sales pitch. Mexico City Airport Trust, for example, issued green bonds to build an airport, but a new government halted its construction leaving a question mark over what happened to the bonds’ proceeds. “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 work- ing on improving 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
24 February 2020 portfolio institutional roundtable: ESG and fixed income
There are a few things that need to be done before we can embrace green bonds. David Czupryna, Candriam
Principles were published in 2014 to strengthen the integrity of the market. Here the definition of a green bond is articulated through four principles: use of proceeds, project evaluation and selection, management of proceeds, and reporting. As welcome as these principles are, they are not legally enforcea- ble, so “it is difficult to know concretely that every green bond is a green bond”, Rudgard says.
Other criticisms include the principles not defining what a green asset is. It also does not provide guidance on what types of compa- nies should be allowed to tap the market. Not everyone would see the logic in coal-fired power plants issuing green debt to fund an energy efficiency project.
One of the most interesting developments in the market is that a club of central banks are 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. 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 manage- ment at Candriam, says, adding that existing standards leave investors exposed to greenwashing. For Czupryna, green bonds are not the best way of building a sus- tainable 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,” he says.
The green debt market is driven by sovereigns and quasi-sover-
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