Green Bonds: the Way Forward

The revised 2015 GBP launched at an International Capital Markets Association (ICMA) event in London on March 27. Further information on the GBP and changes introduced by the 2015 revision is available here.

Once the amendments and clarifications to the GBP were presented, a panel moderated by ICMA’s senior director, Nicholas Pfaff, discussed the updates from a variety of industry perspectives. The panel comprised:

  • Marie Ge?rard, vice president, sustainable development performance and management at France’s GDF SUEZ global energy group.
  • Manuel Lewin, head of responsible investment with Zurich Insurance Group.
  • Christopher Flensborg, head of sustainable products and product development for Swedish financial group SEB.

Revision Reviewed

Reflecting on the most important change under the revised GBP, Flensborg identified it not as any specific written item, but rather the way that stakeholders from across the spectrum – issuers, investors and underwriters – had come together in a group to co-operate in deciding future direction. “This is the most significant achievement, because it means that we can speed up the process and address the changes in the future,” he said. “Those so far have been fairly moderate.”

Zurich’s Lewin cited three changes he found particularly significant. The first – in the second section of the GBP – is an unconditional requirement for the issuer to state their environmental sustainability objectives.

“From an investor’s perspective, it’s extremely valuable to hear in the words of the issuer,” he said. “Learning how the projects to be financed will contribute to better environmental outcomes will say a lot about the way the institution thinks, their business model, their operating procedures and how this interrelates with environmental outcomes. While this is a subtle change, it is an important one.”

Lewin’s second key change was around impact reporting. He noted that ultimately the GBP is about achievable environmental outcomes. Most investors choose green bonds to support better environmental outcomes, so gaining a clearer picture of what those are is important. “What the subtle update of wording has done is to set up something akin to a minimum standard,” he said. “Being transparent on which projects have received funding once the money has been committed is now a requirement.”

Assurance was third. There is now more systematic mention across each section of the GBP that transparency and assurance is highly encouraged. “It is also clearer what the different types of assurance are, whether they are second opinions or ratings,” Lewin said. “This is important as more of the auxiliary services that have built up around green bonds come to market offering very different types of assurance – so it needs to be clear what these are and what exactly they provide.”

Avoiding ‘Greenwash’

Transparency was an issue regularly mentioned at the event, with a cross-section of participants keen to avoid ‘greenwashing’. This is where finance generated by green bonds are used, mistakenly or otherwise, to fund projects not specifically designed to have environmental stability objectives. Pure play companies – large corporations in the renewable energy or recycling businesses, for example – issue green bonds. But how do investors know that the funds are being used specifically on a green project, rather than for other purposes within the corporation?

“With pure play bonds, even though we have a clear idea that wind is green and small hydra is green, 30 or 40 years ago we would have said that large hydra is green,” said Flensborg. “Now we know there are some complications there that need to be assessed. On top of this, we know that most companies have exposures that are not green. A solar plant might run a fleet of helicopters, issue a share buy back, or offer big bonuses. One of the risks of the green bond market is headline risk. It’s not that companies can’t do these things, they just shouldn’t be done through green bonds.”

An issue that the industry faces here is, if the burden of proof is on the issuer to be transparent that proceeds are being spent on green projects, who actually defines what constitutes ‘green’? “During the consultation for the 2015 GBP, it was concluded that it’s not the place of the GBP to opine in detail what is green and what isn’t, beyond the broad categories stated,” added Lewin. “The GBP is not the place to state with final authority that this is green and this isn’t.”

Back on the pure play bond topic, several market drivers should steer issuers away from the types of headline risk mentioned. “We are creating a system that is providing more capital for renewables and energy efficiency,” said Flensborg. “Pure play companies will get access to more capital for their products – we are providing an infrastructure for them – so it should be in their interests to support the system on a broader scale. The best way to do that is to allow strategies to be implemented, which is done with clear lines.”

A New Market

Corporates recently entered the green bond market as issuers, joining multilateral development banks already operating in this area. GDF SUEZ’s Ge?rard welcomed the opportunity for corporates to issue green bonds, but expressed concerns about the potential burdens posed by the expectations of investors.

“We have committed to reporting on each project financed with green bonds and we are confident in disclosing information on the impact reporting of the projects,” said Gérard. “Nevertheless, this is on top of all the other topics we deal with, such as business development and input variation. Then there are the certification requirements, a further added burden. We have to be careful on what is – or will be – requested from issuers.”

The conversation between the original multilateral issuers and new corporate issues was described as a defining debate. “The market has been driven by multilateral development banks,” said Pfaff. “When we start discussing reporting, there is little issue in terms of how far they are willing to go. With corporate issuers, many other things also come into play.

“Cost is an important factor, but there is also management time and reputational issues, for example. Being able to have these two parties in our discussion is fundamental in reaching the right compromises to be brought into the GBP.”

“I hope that investors have been able to alleviate some of those fears over things that we are not actually asking for,” added Lewin. “We have come up with a sensible compromise that takes into account the differences between each size of issuer.”

Respective Responsibilities

The topic of misrepresentation of funds was discussed, and it was noted that there is again a differentiation between multilateral issuers and corporate issuers. With large portfolios, due to the way that planning and application works for multilaterals, they know which projects the money will go to and provide upfront estimates to investors of the likely environmental outcomes. For corporate issuers, reporting comes only at the end of the process once the money is invested.

“The first step is to seek a dialogue,” said Lewin. “As an investor, we fully acknowledge this is hard to do and we can’t expect everything to be perfect at the beginning. If the issuer does not immediately provide perfect impact reporting, this isn’t a reason for us not to sell a green bond – as long as there is willingness to learn, do more and credibly say that they are going in the right direction.

“If an issuer says that it wasn’t important to them, they never report where the money goes and never provide the investor with any idea of what the projects are that were financed, then we haven’t done our due diligence correctly.”

Gérard agreed that corporates are on a learning curve. “One of the GBP’s advantages is that issuers now embed environmental, social and governance (ESG) criteria in their annual reporting at a project level. Within GDF SUEZ, we used to do a first analysis based on sustainable environment criteria for each new investment project, but this is akin to a picture at the beginning of the project.

“Now it is quite different and we are more mature in the sense that, with an ESG, reporting has to be provided on an annual basis from the very beginning of an investment project.”

“One of the ancillary benefits of the GBP is that it brings this ESG aspect into the mainstream of corporate thinking and into a regular process,” agreed Pfaff.

Future Prospects

Panellists were positive about the GBP’s future and the green bond market generally. Lewin emphasised the potential for the market to grow in terms of incorporating more local currencies, more emerging markets, and more asset-backed bonds among other factors. “This will mean continuous work for the GBP, for the members, observers and the executive committee as it will have to evolve to capture these developments.”

Gérard agreed with this optimistic outlook for the market overall, but sounded a note of caution from an issuer perspective. “I remain a bit careful about what the requests will be for the issuers, in order not to kill them off.”

“We believe that transparency is the most important issue, and we do see the challenge that Marie [Ge?rard] describes,” concluded Flensborg. “Issuers need to have a chance to get into this market at a fairly low bar and then slowly find their way to their frameworks.

“Issuers that have been in the market for several years have a very good framework now. Newer issuers will need to find out how this actually brings value. If we make too strict requirements at the early phase we will close the door on a big part of the market.”


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Mark Carney Bank of England