In recent weeks we have noticed a fresh wave of concerns and mixed perceptions around the Green Bond Market, which can be broken into four key themes: 1) Green bonds are being abused, 2) Green bonds create unhelpful segmentation in an increasingly illiquid debt market, 3) Green bonds do not inspire new green projects, and 4) Green bonds alone won’t do in tackling climate change.
“Green bonds are being abused”
Several highly ESG focused corporates have been reluctant in the past months to issue green bonds, arguing that this would risk diminishing their green credibility while pointing at green bond issuances in the past that have drawn criticism around so-called greenwashing to attract more investors and the seriousness of the green projects the issuances are supposed to fund.
Indeed, in a nascent and still low-regulated market, standards can vary significantly and transparency over how the proceeds will be used if there is no third-party verification is not always given. At the same time, those independent verifiers do not have to abide by any particular rules and, being paid by the issuer, might not be as independent as they claim to be.
At the other side of the table, ESG investors have acknowledged that a thorough due diligence is required before putting money into any green bond. Matching the independent verifiers on the issuer’s side with an army of ESG due diligence consultants – ranging from accountancy firms to management consultancies – on their side helps scrutinising the impact and effectiveness of green projects funded through a green bond. Indeed, the multi-pages long investor questionnaires do make it difficult for any issuers who hope to more easily collect funds by greenwashing their financial vehicle. Still, some examples of “bad green deals” for investors do come to light every year, however, they should not be a reason for non-participation in the market, but should, and will help to, further develop universally agreed standards.
“Green bonds create segmentation”
Several sovereigns have expressed concern that, amidst an increasingly illiquid debt market, green bonds create unhelpful segmentation and swamp the market with smaller, less liquid debt instruments. However, this is concern not shared often outside of sovereigns. The bond investor base is highly heterogeneous and hence appreciates the availability of a range of different debt types.
Furthermore, many of the larger ethical investors have been actively looking to source green private placements – linked to specific projects – and are therefore comfortable with the underlying illiquidity. With regards to sovereigns, any illiquidity concerns could be an argument for sovereigns to consider sustainability debt instruments to create a greater critical mass.
“Green bonds do not inspire new green projects”
An ongoing debate is whether green bonds can have the ability to function as a catalyst for new green initiatives or whether issuers simply flag a portfolio of sustainability projects they have already launched well before the placement.
While this might still be a strategy some issuers are persuing, we are actually finding that ethical investors buying green bonds place great emphasis on issuer engagement and do challenge issuers on improving their environmental and social commitments throughout the lifetime of the bond.
Companies are therefore increasingly paying heed to the need to be a 'green leader'. This, in turn, is forcing a treasury rethink. A typical treasurer would instinctively stay far removed from this green agenda, seeing their mandate as exclusively focused on the smooth functioning of the organisation's finances. However, such financial 'smoothness' is starting to become dependent on the company's greenness.
A compelling ESG profile is an increasingly important prerequisite for strong debt market access. Those with weak sustainability scores may have less flexibility in terms of timing and other parameters (such as tenor and coupon rate) when issuing bonds in the wholesale markets. As a result, their financing could be more expensive.
Questions around liquidity and funding policy – a treasurer's normal comfort zone – are substituted for enquiries on green procurement programmes, carbon dioxide emissions and so on. This can well be an eye opener for some corporates and not only trigger new green initiatives, but also result in a thorough corporate climate impact audit and consequently lead to a long-term, impactful, climate change mitigating green strategy.
“Green bonds alone won’t do”
Noting the scale of the challenge faced by COP21, market critics are pointing out that green bonds in isolation won’t do. Indeed, by themselves, green bonds are no panacea. They risk limiting a company's sustainability agenda to a mere portfolio of environmentally friendly projects.
However, internal and external stakeholders are demanding more from companies. Management boards are therefore seeking to make sustainability part of their firm's DNA, including the finance department.
Besides investors, there are a range of other pressures forcing treasurers to show their sustainability cards, including regulators, governments, NGOs and shareholders – and, perhaps most persuasively, their own boss. For many ambitious CFOs and CEOs, a green bond is not enough: they want their finance function or indeed their whole company to adopt a credible green strategy. So, if a placement of a green bond leads issuers on a genuinely “green path” then the bond has well shown that “it won’t do alone” but can be a green game changer.
