Green is the new black

IFR 2038 21 June to 27 June 2014
7 min read

I LIKE GREEN Bonds. That I like anything is probably a revelation to many, but it’s true. In saying so, I offer apologies to the many people who’ve emailed or spoken to me over the past few months begging me to apply what one impertinent soul called my “heavy filter of cynicism” and blast this new fad to kingdom come.

I’ve got to tell you: it was tempting but I just can’t find the emotional energy or any serious reason to be that negative about them. There are plenty of reasons to find a lot of things about the way the Green Bond discourse has evolved in the professional community rather irritating, but I’m not letting that cloud my judgement about the baseline topic.

And it is true that a lot of people have become fed up to the back teeth of this subject, particularly the righteous mock zeal with which some people – and institutions – are becoming martyrs and nailing their credibility and pretty much everything else they’ve got to the cause. But that’s par for the course for anything in vogue.

The notion of the capital markets funding and intermediating environmental solutions has got to be a good one

The basic notion of the capital markets funding and intermediating environmental and sustainable solutions has got to be a good one, right? If you buy the story of environmental damage and climate change eventually dooming us all and our planet with it, that much is surely uncontroversial. So let’s focus on the positive aspects of what the capital markets are doing:

  • Early this year, of course, we got the Green Bond Principles, drawn up by investment banks and which now have 26 signatories. (Where are the rest of you?)
  • Giving substance to the principles, the initiative has been institutionalised so we now have an ICMA governance framework as of April with an executive committee of investors (Blackrock, CalSTRS; Natixis AM/Mirova; Standish Mellon AM; TIAA-CREF; Zurich Insurance); issuers (EDF, EIB, GDF Suez; IFC; Unilever; World Bank) and underwriters (BofAML, Citi, CA-CIB, HSBC, JPM; SEB).
  • Many of the bonds we’ve seen have stamps of approval or are otherwise monitored by external certification bodies: Norway’s DNV GL did Unilever’s £250m Green Sustainability Bond and Arise’s SKr1.1bn senior secured Green Bond); while Vigeo, the French SRI/ESG consultants, provided the framework for the French issues – GDF Suez (€2.5bn); Region Ile-de-France (€600m); Unibail-Rodamco (€750m), EDF (€1.4bn) as well as Iberdrola (€750m).
  • In the US, the Leadership in Energy & Environmental Design certification programme developed by the non-profit US Green Building Council is overseeing Vornado Realty Trust’s US$450m recent offering – investments from the proceeds have to exceed the basic LEED certification and meet silver, gold or platinum standards.
  • CICERO (the Center for International Climate and Environmental Research), an independent research centre associated with the University of Oslo, has a mandate from SE Banken to provide second opinions on green project eligibility and robustness around environmental objectives.
  • And there’s the non-profit Climate Bonds Initiative, with its Climate Bond International Standards and Certification Scheme; and the Climate Bond Standards Board under the umbrella of which environmental NGOs engage with large institutional investors.

THAT’S ALL fine and dandy but the flourishing Green Bond ecosystem is also one of the problems. Everyone’s complaining about the lack of a single global standard, but I say you’ve got to start somewhere. This state of affairs may change over time as the market matures, but in many ways the Green Bond market is a horses for courses one and issuers will go to the body with the best fit.

Of course, fragmentation will create opportunities for green arbitrage where issuers can try and game the certification system and mis-market their credentials, but that’s a hazard of anything new.

When Green Bond issuance was restricted to government agencies and multilaterals and the funding of environmental projects under existing mandates, no-one really batted an eyelid. Issues that have emerged more recently from city, municipal and regional entities fall into this bracket, in that public scrutiny and transparency are perhaps easier to demand.

The notes of scepticism around the concept have all come about since it became corporatised and a string of energy and power utilities involved in nuclear and/or dirty energy generation; auto manufacturers, global consumer products companies and the like cottoned on.

FROM A PURE funding perspective, Green Bonds provide no intrinsic advantage; issuers don’t demand that investors forgo spread just because the bonds are green. But clearly, if one of the benefits of Green Bonds is that they engage the SRI money that has strict environmental or ethical mandates, that bid doesn’t just provide diversification for issuers; the participation of these pools of capital, over and above the standard institutional accounts targeted by underwriters, add to existing oversubscription levels which then leads to tighter pricing so provide funding advantages that way.

There are already a number of different types of Green Bond and the market will continue to grow and broaden as will permissible uses of proceeds – particularly if we get to the US$40bn issuance some are forecasting for this year. Every issue needs to come with a full set of key performance indicators. There need to be high levels of accountability, we need continuous reporting; independent monitoring and auditing are a must, while environmental impact factors need to be clear and regularly updated.

To prove this emerging market works, bonds that fall below minimum standards during their lifetime need to have their green certification publicly removed. That will make SRI funds forced sellers, but it’s a sine qua non. Bonds have and will come with varying shades of green and there will be differences of opinion among the consultant and NGO communities. Ultimately, it’s about transparency, transparency, transparency.

Investment banks, like other stakeholders, have jumped on the bandwagon and many have gone decidedly green in the front office. Want a quick way to plot the green bandwagon index: compare the number of heads of Green Bond origination or sustainable capital markets today with that same number a year from now.

Keith Mullin