It’s easy to be suspicious or sceptical of, frustrated by or disparaging towards any number of elements of the emerging green bond market. But at the macro level, if you support the climate-change mitigation agenda, a dollar of new money disbursed into the green economy is a dollar well spent towards the goal of achieving environmental sustainability. On that basis, the market deserves the support it’s receiving.
I attended some of the sessions of the first annual conference of the Green Bond Principles (GBP) last Friday in the grand setting of the EBRD’s London HQ. The event served, of course, as the launch pad for the revised 2015 principles. I ask in good conscience: was the event a wasted opportunity?
Sure, there was a nicely synchronised one-two in that the European Investment Bank, the biggest issuer of green bonds, timed the launch of its new reporting (including the critical area of impact reporting vis-à-vis projects allocated under its green bonds) to coincide with the occasion. The EIB is also aligning its climate bonds with the revised principles.
As for the revised principles, as the title suggests, they’re just that: an “incremental evolution”. There was no onerous re-writing or material tightening of standards. They do offer better clarity on what can be expected from issuers; add a high-level definition of green bonds; but generally tweaked what was already there.
They rightly honed in on the assurance piece to align issuers with key features of their green bonds (traceable management of proceeds via sub-accounts; clarity around how funded projects map to the relevant project categories etc) and updated the list of eligible project categories.
OK. So far so good. The subject of green bonds continues to generate a huge amount of interest – and noise – from within the GB ecosystem and beyond. Underlining that point, Friday’s conference auditorium was packed and pretty much anyone who was anyone in this highly en-vogue segment was there. I bumped into or spotted a ton of people I knew who were drawn to the event to observe, learn and mingle.
Given the small amount of actual issuance relative to overall primary bond market volumes, green bonds, as a theme, punches above its weight. But by the same token the market has come on by leaps and bounds since the beginning of 2014 and if the statements of intent by issuers and investors become reality, it has a bright future … yet…
While Friday’s event served to create a focal point from which to take stock of how far we’ve come in the market’s evolution, it also threw into sharp relief how much remains to be done.
I would have liked to have seen better representation in Friday’s sessions from the private sector, particularly utilities and companies in the brown energy, nuclear, metals and mining, aerospace/auto, mass-consumer, industrial or real estate sectors that cause intakes of breath of varying degrees whenever they’re mentioned in association with the green theme. Friday’s sessions were too weighted towards the SSA community.
Viewed through the lens of private sector involvement, to my “so far, so good” comment above I’d add: “is it, though”? Despite all of the pluses coming out of the new principles and the grand statements coming out of every corner of the market, I’m a little perplexed by the market’s unwillingness – or fear – to tighten standards to the point that they become rules.
Everyone speaks of the market needing firm standards on all sides to put it on a solid footing. But at the same time everyone seems visibly afraid of setting standards too high or making rules of the game too complicated or expensive for fear of killing the market. I was astounded that discussion at the conference still revolved around what green bonds actually are. This far into the market’s life-span, this issue should have been resolved.
If this market is going to be a sustainable and plentiful source of green capital, it has to stand on its own two feet. If market participants are afraid that common-sense rules threaten the market’s very existence, dare I say: let the market in its current guise wither and die and let the green capital-markets agenda evolve in some other way. I know the market is only embryonic but I’m not convinced by this softly-softly approach.
People tell me: if transparency criteria around project selection are too stringent, it’ll kill the market. If project reporting and impact measurement are too rigorous, it’ll kill the market. If base-line transparency is set too high, it’ll kill the market. If pure-play issuers tap the bond market but don’t tag issuance as green, they can’t be designated as green bonds because if they are it’ll kill the market – even with use of proceeds tests. If it’s that fragile …
Greenwashing
Participants need to work to ensure that the possibility for greenwashing, even inadvertent greenwashing, is minimised or expunged from the market. The lax or elastic standards the market is proposing won’t do. It’s not a question of dealing with cynical issuers; that probably mis-states the nature of the issue.
The issue is probably going to arise because, say, designated green projects become uneconomic due to any number of market or economic conditions and corporates opt not to fund them; corporates alter strategic direction or sell their renewable business; designated projects don’t ultimately provide the green impacts expected; the nature of uninvested green bond proceeds changes rendering them non-green. You can dream up any number of obstacles.
On the basis of some of the chatter at Friday’s conference – including on one of the formal panel sessions I listened to – greenwashing a live issue that is far from being put behind us. What are the sanctions for non-compliance? This is not addressed.
On the basis of the annual reporting the GBP allow for, I question whether that’s sufficient for a tradable bond market. If a bond falls foul of any of the principles, investors may have to wait a year before they find out. If you bought just after a prior reporting period, you will by definition have been greenwashed.
The GBP ExCom acknowledges there are no established standards for impact reporting on green projects and welcomes and encourages initiatives “including those by leading Green Bond issuers, to help establish a model for impact reporting that others can adopt and/or adapt to their needs”. OK but in the meantime you have to rely on voluntary non-standardised transparency? Or rely on environmental audits or second and third opinion providers – where by the way there is also a huge amount of latitude and lack of standardisation.
What price commitment?
If reporting and general care and maintenance of green bonds become too expensive and are a deterrent for potential GB issuers, that’s NOT a reason to set low standards. If it means that certain issuers won’t issue green bonds, so be it. Issuance has to be a concrete sign of commitment to the cause. The key question is: what price commitment?
And by the way, commitment swings both ways. It’s all well and good for investors to signal commitment but the sell-side has steered well clear of suggesting buyers should engage in burden-sharing around the costs of maintaining the green bond market.
Market participants tell me investors will never and should never be asked to forgo return. But I say why not? I know this is an unpopular sub-theme and bank originators and syndicators get quite vexed if you bring it up. But I don’t see why buy-side accounts that aren’t shy of shouting about their green credentials from the rooftops shouldn’t also pay to play for the greater good of the green economy.
Long story short, artificial support of the kind I fear the market is being subjected to at the moment will end up being a case of misplaced loyalty to a flawed iteration of a commendable cause.
Markets can’t and shouldn’t be allowed to derive their power from perpetual life-support.
