Where do green billions go?

A record-break­ing surge in green bonds is pre­dict­ed for 2021 as the invest­ment indus­try seeks to play a lead­ing role in tack­ling the cli­mate cri­sis.

Some pre­dic­tions envis­age $500 bil­lion in green debt being issued this year, near­ly dou­ble the amount in 2020.

Com­pa­nies and gov­ern­ments need fund­ing to sup­port their ener­gy tran­si­tion, enabling them to help fight ris­ing glob­al tem­per­a­tures and excess car­bon emis­sions.

Green bonds can help and their rel­a­tive sim­plic­i­ty com­pared to oth­er so-called eth­i­cal debt has attract­ed investors. It’s often eas­i­er to mea­sure the impact of a renew­able ener­gy project fund­ed by a green bond than the ben­e­fits of a social ini­tia­tive, for instance.

But are all green bonds used for green pur­pos­es or issued by green com­pa­nies and how do investors know where green bond pro­ceeds have been spent? 

Growing demand for green bonds

Investors have an insa­tiable appetite for green bonds, which means they offer an attrac­tive, and some­times cheap­er, way for nations or firms to raise mon­ey than with oth­er bonds.

This makes it tempt­ing for all types of enti­ties to issue green bonds, even those whose busi­ness mod­els con­tribute great­ly to glob­al emis­sions.

Some investors claim green­wash­ing, where an issuer over­states its green cre­den­tials, remains an issue, part­ly because there are no laws gov­ern­ing them. A glut of issuance could, there­fore, lead to a spec­trum of stan­dards.

The Inter­na­tion­al Cap­i­tal Mar­ket Asso­ci­a­tion (ICMA) launched its Green Bond Prin­ci­ples in 2014, a vol­un­tary set of stan­dards to help issuers out­line how the pro­ceeds will be used and mon­i­tored, and how progress will be com­mu­ni­cat­ed. 

Even if a green bond abides by ICMA prin­ci­ples though, investors must ensure any bond they invest in meets their own def­i­n­i­tion of a green invest­ment.

Assessing the whole investment picture

Bryn Jones, who runs the £2.1‑billion Rath­bone Eth­i­cal Bond Fund, thought to be the world’s largest eth­i­cal bond fund avail­able to retail investors, looks for adher­ence to ICMA prin­ci­ples, but also engages spe­cial­ist con­sul­tants to pro­vide what the indus­try calls a sec­ond-par­ty opin­ion, or SPO.

This assess­es the sus­tain­abil­i­ty cre­den­tials of the bond and can pro­vide ongo­ing mon­i­tor­ing. Impact reports pro­duced by issuers, which out­line how mon­ey has been spent and the impact it has had, are also key. UK-based util­i­ty com­pa­ny SSE and Dan­ish ener­gy firm Ørst­ed are among those hailed for their impact reports.

Beyond this, Jones says eth­i­cal investors must con­sid­er the wider con­text of all green bonds issuers.

“We screen assets out based on cer­tain cri­te­ria, mean­ing we avoid com­pa­nies with links to the likes of tobac­co, alco­hol, gam­bling and ani­mal wel­fare [abuse],” he says. “If a phar­ma­ceu­ti­cal com­pa­ny that used ani­mal test­ing launched a green bond to improve the ener­gy effi­cien­cy of its build­ings, we would not invest.

“This is because while the use of the bond pro­ceeds are going towards improv­ing the envi­ron­ment, invest­ing in the bond allows that busi­ness to gen­er­ate excess prof­its from some­thing that’s uneth­i­cal.”

Focusing on outcomes

Span­ish oil giant Rep­sol split opin­ion when it launched its €500-mil­lion green bond in May 2017, the oil and gas sector’s first. The use of pro­ceeds was stat­ed as sup­port­ing invest­ment in projects that would cut its CO₂ emis­sions by 1.2 mil­lion tonnes with­in three years of issu­ing the bond.

Vigeo Eiris, a rat­ing and research agency that pro­vides SPOs on green bonds, gave it the thumbs up, cit­ing a “pos­i­tive con­tri­bu­tion to sus­tain­able devel­op­ment, aligned with the Green Bond Prin­ci­ples”.

Rep­sol said the mon­ey would not be spent search­ing for new oil or gas reserves, but would help upgrade exist­ing refiner­ies. How­ev­er, the pledged reduc­tion in CO₂ emis­sions was just a frac­tion of the 35.6 mil­lion tonnes it emit­ted in 2016. And it was to be spent upgrad­ing fos­sil fuel refiner­ies rather than invest­ing in new forms of ener­gy.

“Thus, think­ing about actu­al out­comes, this appar­ent ‘green’ bond sim­ply upgrades fos­sil-fuel burn­ing assets, extend­ing their lifes­pan, improv­ing effi­cien­cy, increas­ing com­pa­ny prof­itabil­i­ty and in absolute terms increas­es total emis­sions over the life of these assets,” accord­ing to Twen­ty­Four Asset Man­age­ment in its Sep­tem­ber 2020 green bond report. “A poten­tial win for share­hold­ers, but not the envi­ron­ment.” 

Digging deeper into green bonds

The Rep­sol exam­ple shows research into a green bond is crit­i­cal, espe­cial­ly as there are no legal require­ments for issuers to fol­low. How­ev­er, efforts to cre­ate a stan­dard­ised frame­work for green bond report­ing are under­way.

The Task Force on Cli­mate-Relat­ed Finan­cial Dis­clo­sures (TCFD), chaired by bil­lion­aire Michael Bloomberg, has pro­duced a set of stan­dards to help pub­lic com­pa­nies and organ­i­sa­tions improve their cli­mate-relat­ed finan­cial report­ing. 

The UK plans to make TCFD-aligned dis­clo­sures manda­to­ry across the econ­o­my by 2025, which means investors should have greater clar­i­ty around green bond stan­dards, which will also make com­par­isons eas­i­er.

Karim Arslan, pro­gramme direc­tor at the Green Finance Insti­tute, says this devel­op­ment is very encour­ag­ing because it will “force com­pa­nies to think about their expo­sure to cli­mate change and how it impacts their val­ue”.

He also expects the UK government’s plans to launch green gov­ern­ment bonds to be a cat­a­lyst for the green bond mar­ket, as hap­pened when Bel­gian, Irish and French admin­is­tra­tions launched green bonds in their respec­tive coun­tries.

Ongoing development of green bonds

Even with more rigid guide­lines, there are still rival stan­dards, with the Cli­mate Bond Ini­tia­tive devel­op­ing its own cri­te­ria and the Euro­pean Union work­ing on its Green Bond Stan­dard.

Ken­ny Wat­son, invest­ment man­ag­er in Liontrust’s sus­tain­able fixed income team, says the mix of rules means “there are lin­ger­ing issues with assess­ing just how ‘green’ bonds tru­ly are”, so investors are “tak­ing it on trust” that issuers keep their word.

“A com­pa­ny doesn’t have to put the mon­ey in an escrow account,” he says. “You are rely­ing on the finance depart­ment to keep the mon­ey sep­a­rate from the rest of its cap­i­tal.”

Investors scep­ti­cal about green bonds may see mer­it in sus­tain­abil­i­ty-linked bonds, which encour­age organ­i­sa­tion-wide shifts towards being more sus­tain­able rather than fund­ing a spe­cif­ic project and can link to glob­al cli­mate ini­tia­tives, like the UN’s Sus­tain­able Devel­op­ment Goals.

Either way, as Rath­bones’ Jones says: “It’s a real­ly excit­ing year to be invest­ing in eth­i­cal bonds because there’s so much out there.”

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