Nick Herbert: We have opinions on the use of proceeds but the actual impact seems to be based on a lot of best wishes. I know there are some moves on reporting on impact but, in essence, isn’t the best way to monitor the greenness of any use of proceeds from a bond an assessment of the greenness of the issuer itself?
Jaspreet Duhra: Yes, absolutely. I think it’s a really, really important part of the process. As I said for the first point, we’ll look at the use of proceeds, but the other thing we’ll always look at is the sustainability profile of the issuer - we have ratings of 6,000 issuers as part of the ESG research that we do for investors. We’ll look to see what rating we’ve given the issuer. If it’s not our prime standard, which is where we think the issuer is doing a good job in terms of managing its sustainability impacts and challenges, then at that point we’ll probably again be reluctant to go forward with an opinion on the overall issuance.
Having a Green bond referenced to one or two use of proceeds is all well and good, but if 95% of your business is not working towards sustainability or sustainable development, it might actually be taking away from the benefits of your one or two Green bond projects. That’s not something that we want to be endorsing or putting our label on. I think it’s really important.
There is some issuance, for instance the Polish government’s bond, where the borrower’s track record on climate change and environmental issues is poor, both nationally and internationally. It was still able to issue a Green-labelled bond, but some investors understandably had a problem with it.
You get it on the corporate side as well, where oil and gas companies are issuing Green bonds. Again, we would probably stay away from those types of deals because we don’t think that they are working towards the kind of sustainable development we’d like to see.
Nick Herbert: I know that’s a view that many in the Green bond market don’t agree with.
Julie Becker: Well, I’m very sorry because I, indeed, do not share this point of view about the profile of the issuer of Green bonds. If we want to reach the Paris objectives, we clearly have to engage in a transition process. It won’t be a move from brown to green from one day to another, and that means we have to promote a step in the right direction - even from oil and gas companies or from a state. We need to support their attempts to move towards greener activities and to help develop a sustainable economy and a sustainable finance market.
As an exchange, our role is to promote transparency and to provide all the information investors need to make informed investment decisions. But clearly, after the investor has all the information he or she needs, a choice still needs to be made. The objective is to make everything transparent, to give investors maximum information they need to take an informed decision. That needs clear information; transparent, credible, comparable information. But it’s up to the investor to choose whether the Green bond issuer should have on top a sustainable profile acceptable to him or her.
Nick Herbert: We should be supporting the transition but how quickly, and to what extent, should we support it? The Poland deal, for instance; some people have expressed disappointment that their plans to increase the proportion of renewable energy is not ambitious enough.
Julie Becker: Yes, but I think it’s better to be not ambitious enough than not ambitious at all.
Tallat Hussain: I’ve been an environmental lawyer for 25 years so it’s not just that I have become pragmatic, but the reality is that when a market is starting, there is a need to make sure that flexibility exists within that market. That’s not to underplay environmental and social commitments and requirements, and all of the other aspects of potential bond issuance that we’re talking about in terms of sustainability. Nor is it to condone the turning of a blind eye to greenwashing. A free market makes choices.
Poland needed to start somewhere. There is a starting point for every market, every initiative and the application of policies. Transitioning into a market cannot mean overnight, fully formed regulatory infrastructure, procedures and buy-in. It is an iterative process as markets develop. Take the Middle East as an example; it’s the perfect place to put up solar panels but should we be saying that oil-based economies should not be delving into the renewable space and issuing Green bonds? It’s very Eurocentric to think that only the cleanest of all the European countries, and we’re not even including North America in all of this, should be the ones issuing Green bonds. That could be seen as a way of circumscribing the Green bond market in a prohibitive way, and this may have a knock-on effect for other forms of sustainability finance.
A lack of flexibility could also discourage companies from having the courage to issue Green bonds, yet Green bonds started as an innovation. A pedantic approach may stop sovereigns from having the courage to issue Green bonds for fear that the country’s environmental record or economic base would not be looked upon favourably to warrant or support issuing a Green bond. But this is where the market in a country can start. Sovereigns have the power to set an example and get a market started.
Nicholas Pfaff: The Green bond market was, to some extent, instigated to allow brown issuers to issue Green bonds. It was a case of how to enable transition from the beginning. I think it would be a mistake to go back on that.
Having said that, integrity and credibility in the market are fundamental for its further development. I think it is legitimate as the market develops, as we progress, to focus on the overall business model and focus on wider ESG tracking of the issuers. I think there is a path to that.
Certainly, with the GBP we have been increasingly emphasising the fact that you can’t just have one Green bond and that’s it, job done. The bond has to indicate your path to transition and how you’re looking overall at, not only, environmental risk but social risk as well. Clearly, there is an emphasis on a transition dynamic, which is very important to underline.
Irene Sanchez: First and foremost, a Green bond is a bond with a commitment on its use of proceeds. That’s one of the core pillars of the Green Bond Principles. However, this doesn’t mean that the ESG profile of the issuer is completely irrelevant to a sustainable buyer. For example, it’s important for an investor to judge whether a Green bond issued by an oil company is a one-off transaction or if it actually fits into the strategy of the company to transition to low-carbon operations. Has the company thought about it from a long-term perspective?
These considerations are very relevant to investors and they need to be to be communicated, either through the issuer’s own reporting or through the opinion of external reviewers. One doesn’t exclude the other, but a Green bond is built on transparency and accountability so we need to start from the process, the use of proceeds definition and reporting.
Jacob Michaelsen: I think there are a number of different discussions that are very interesting in their own right. But if you look a little bit further ahead, they’re actually coming together. At the GBP annual general meeting last year, one of the great things brought up there was the focus on strategic alignment - because that’s really the discussion that underlines the question, “Which kind of issuers can issue Green bonds?”
If you look at the Green bond frameworks that are being put together since then, the introductory section has grown longer and longer. There’s no need for this introduction to turn into a 10-page document, but it does illustrate the increased expectations in the market in terms of establishing the strategic foundation of the issuer. It gives the borrower a platform from which to communicate its broader strategic alignment;.
It’s very encouraging to hear about ICMA’s work on external reviewers because, in a time when we’re talking about standardisation and we have the European Commission’s action plan, clearly an area of the market where we can do a lot is within the space of second-party opinion providers or external reviewers. This is partly because there is a great need for it. Although essentially providing the same end-conclusion to the investors the different second-party opinion providers go about it in quite different ways. Also, since none of the major established second-party opinion providers are regulated it makes the discussion more straightforward than some of the others around standardisation in the market today.
Every newcomer’s approach to providing opinions is relevant, but how do we assess these different approaches? Maybe the analysis will result in shades of green or specific ratings, but whatever the outcome, there should be some consistency. If you get alignment, then we can come back to a pricing discussion. That’s when you can really start to find segments within the Green bond space.
If everyone accepts dark, medium and light shading, or an A, B, C rating, whatever it is, and if all the second-party opinion providers can show they are in step, then that means investors can choose the bonds to buy and sell. They can choose how green they want to be. Maybe then we can also see a pricing discussion in terms of the darkest green of issuers verses the lightest of the issuers. It’s tremendously interesting.
Julie Becker: I hear what Jacob is saying but, at the same time, we have to be careful not to kill the Green bond market. Even if the ESG profile of Green bond issuers might be very interesting and should be transparent and visible for investors, it still comes back to the initial question of how to support the development of the market.
What would help the faster development of the market is an improvement in the diversity of issuers. If the market depends on the activity of too few issuers, then there is a major problem with the depth and breadth of the market. We have to make sure that we don’t place too many demands on Green bond issuers so that they are put off from going green and engaging in this market.
From a positive perspective, our exchange has had a number of first-time issuers of Green bonds in the first quarter of 2018. That’s clearly a very positive development.
Nick Herbert: Johan, Vasakronan has recently updated its Green bond framework. At what point does it become prohibitive for an issuer to provide the amount of information required by the market?
Johan Fredriksson: To be fair, it’s not that big a thing for us because we wouldn’t be profitable as a company if we didn’t monitor our energy consumption. We’re doing it anyway, measuring energy consumption and waste. Everything that goes into a building or out from a building costs money, so we’re constantly monitoring it. For us, we already have the type of impact numbers suitable for the Green bond framework. It’s no additional work. We just put together a report saying, “our energy consumption has gone down by this much, water consumption by this much,” and so on. In other businesses, it might be more complicated of course. But for us, it’s a given.
Nick Herbert: So, for you, the collection of relevant data has an economic incentive as well?
Johan Fredriksson: Yes, we have updated our framework because we are getting better at collecting the data and the world is getting better at looking at this aspect of a company’s profile. Our first framework extended to just two pages and essentially consisted of a commitment to emit less carbon and use less energy. Now we have accommodated more elements of our commitment, our overall green and social profile, and the data to support the impact of our efforts. We plan to refresh the framework every four years.
Our first framework was relatively straightforward. As the first corporate issuer of a Green bond in 2013, we had the full attention of the banks, investors and the market. Our goal when we first began this environmental project in 2009 was to halve our energy consumption in 10 years. We managed to do that in eight years.
This time, the framework was a little bit more complex to put together, a bit more complicated and refined. It reflects the increasing sophistication in the market.
Nick Herbert: In terms of impact, potential investors could have looked at you as an issuer as opposed to purely an issuer of a Green bond where proceeds go towards an environmental project?
Johan Fredriksson: Yes.
Nick Herbert: Michael. How does S&P approach the whole issue of greenness? Is it the issuer or the bond?
Michael Wilkins: So far, we’ve focused on the environmental impact as well as the transparency and governance of the transaction. We look at both sides from the perspective of the Green Evaluation. We look at the mitigation aspect – in terms of the contribution that financing is making to reducing carbon emissions or improving pollution controls or better water management, whatever the particular environmental benefit may be. Then we do a relative ranking based on the pre-populated data in our tool.
We come up with a relative ranking and then we link that to the baseline of the country in which the projects are located. For example, if you have a renewable project in Sweden, it’s going to make less of an environmental contribution than if it were being built in China. This is because Sweden already has a decarbonised grid while China is heavily carbon-intensive. You have a relative ranking based on geography as well.
Then we apply a hierarchy approach. Here we give more adjustment upwards for types of technologies that are making a long-term systemic decarbonisation impact like renewables or energy efficiency, as opposed to other types of technologies, where the systemic long-term decarbonisation will be less evident like clean coal or coal to gas.
Where possible, we align the scoring that we have in our Green Evaluation with the 2°C target set in the Paris Agreement.
Our approach is unique. Ultimately, this is going to be – and is – an investor-driven market. Whether we get standardisation among the external reviewers will depend on how the policy and regulatory frameworks develop over time. If we look at what has happened in the credit markets, for example, we’ve seen that credit ratings are used for a number of purposes – one of which is to help banking regulation for capital adequacy purposes. If we move in that direction for green or sustainability in general, will we have policy and regulation that actually has an impact on capital requirements?
I know that’s been mooted by the European Commission. It’s hotly debated whether it’s a good thing or not. All I’m saying is that as we see the Green bond market develop, it will likely be heavily influenced by regulatory guidance.
Tallat Hussain: Having said that certification of players in the market is a good thing, I’m going to be a little bit contrarian about issuances. Recently, we have seen a pure-play green corporate with a very good ESG profile explain why it has successfully issued unlabelled green bonds. The company’s ESG profile has been verified by a reputable secondary opinion provider and the company also has a green rating from a ratings agency that is also considered reputable in the market.
Interestingly, is that although the company is pure green, it is not a labelled Green bond issuer. It has issued “green bonds”, but they aren’t labelled Green bonds. They are designed to align with the Green Bond Principles, but they are not certified against the Green Bond Principles. Some investors would not invest in such a green bond whereas others would. If the investor base seeks to have a labelled Green bond then even if the ESG profile of the company itself is extremely well-rated and also has a reputable second opinion that may not be enough. “How green is my bond” is a determination for investors seeking to invest along the green colour spectrum. As a result, whether certification for Green bonds will play a greater role remains to be seen.
Nick Herbert: Is that a concern to the development of the market? Mandates that say you can only invest in CBI certified bonds?
Tallat Hussain: I think there is an iceberg infographic created by the CBI – there are lots of green bonds below the surface of the labelled Green bond market, the visible labelled Green bond market. The unlabelled green bond market is about two to three times larger than the labelled Green bond market. One has to wonder about the significance of the label. Does an insistence on labelling actually reduce the size of the market? Arguably, just based on the exponential increase in the Green bond market over the past decade, perhaps not, historically, but as Green bonds are now a recognised asset place, this added layer of accountability and transparency, whether in the verification process or the bond itself, may be moving market participants in that direction.
To Nicholas’s point, I don’t know if the size of the market really matters either. But something that is important is the impact on the environment as a result of the market’s development. Ultimately it’s the development of this asset class (Green bonds) that drives more asset classes, things like Green loans. Loans, in turn, drive Green securitisations and other financial innovation for sustainability, and it is through this mechanism that “green” becomes part of the nomenclature of absolutely every corporate and financial transaction. In this very short period of time, in this decade of green bonds, I believe Green bonds have actually made a huge difference in addressing environmental issues.
Nick Herbert: Julie, are there any restrictions on what you include in your listing? Effectively, do you have a mandate to reject bonds that aren’t certified?
Julie Becker: No. We impose mandatory entry requirements to be displayed on our green exchange, based on best market practices (ie, GBP’s four components). That’s the reason why we monitor the fulfilment of the commitments made by the Green bond issuers. If they fail to provide us with a post-issuance report, then they will be sanctioned by being withdrawn from the green platform.
But so far, even with a 50% market share of all listed Green bonds on exchanges worldwide, we have not yet had to do that kind of thing. All displayed Green bond issuers on LGX are complying with their commitment to report post-issuance.
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