Distinctions based on "shades of green" are increasingly being used by ESG ratings firms as investors place greater importance on the certification and verification of green bonds to avoid allegations of greenwashing.
While these categories currently have little impact in terms of price, ESG investors are showing a clear preference for "dark green" bonds and are wary – and even sceptical – of "light green" and "medium green" labels, research by EDHEC Business School in France shows.
"The markets do not seem to care about the shades of green, in terms of pricing, however investors and owners are interested in the degree of greenness,” said Gianfranco Gianfrate, a professor of finance at EDHEC.
The research is part of a broader debate about the effectiveness of ESG labelling, which is at risk of becoming fragmented and tiered as new criteria such as the EU Green Bond Standard are introduced. The EU GBS is being viewed as a new "gold standard" for green bonds.
Maintaining quality is also a pressing issue as green bond issuance is booming. Some US$150.5bn of green bonds have been issued this year, down 11% from the same period of 2021. There was a record US$483.5bn of green bonds issued in 2021, according to Refinitiv data.
Researchers looked at ESG ratings firm Cicero’s second-party opinions on green bond frameworks and tried to match its dark, medium and light green classifications to a "greenium" by comparing the yields of matched conventional and green bonds and also examined whether funds that bought the deals had signed the UN’s Principles for Responsible Investment.
No yield premium was found for dark green or light and medium green bonds, but the ownership analysis found that funds that are seriously committed to integrating ESG and have signed the UN’s PRI are buying more dark green bonds than conventional bonds.
"The difference in the ownership is really important. It means that right now, there are institutional investors who are really doing some careful due diligence about the green bonds. Funds are selecting and paying attention to the green bonds that they are putting in their portfolios," Gianfrate said.
Firms that are PRI signatories also own relatively few light green or medium green bonds, which they are treating more like bonds for polluting companies.
"Investors are learning the distinction between dark green and light green and they are penalising light green bonds by attaching a higher yield to maturity in comparison with a brown bond. So over time, investors seem to treat light green bonds the same, or even worse, than a brown bond,” Gianfrate said.
This shows that investors are paying close attention to green bond assets to avoid greenwashing allegations and are penalising the companies that are using green bonds to finance projects that are marginally climate resilient and are issued more for marketing purposes.
Further developments are expected around the certification and verification of green bonds to maintain the quality and integrity of the product as green bonds continue to be the most widely-used ESG financing tool.
"There are too many ratings and certification providers and there are a lot of conflicts of interest. There will be some consolidation in certification and verification and some more serious regulation of the ratings agencies. That is very much needed,” Gianfrate said.