Litigation fears reduce green issuers’ appetite for the US market

April 08 2019

Dr Arthur KrebbersHead of Sustainable Finance, Corporates

View bio

Other insights

View more insights

“Why is the $ green bonds market still so small?” is a question clients regularly ask us, pointing to the fact that, while the US is the world’s leading green bonds issuer with more than $24 billion outstanding in mid-2016, the market share of green bonds only comprises 0.061% of the overall US bonds market (Climate Bonds Initiative 2016); a significantly lower percentage than in China, India and many European countries.

Market participants often argue that cultural differences between the US, Europe and Asia explain the differing appetite for green bonds, claiming that US corporates feel less pressure than their European or Asian counterparts to go green. However, when talking to green issuers, they cite the potential legal challenges that could be brought against them, as the reason why they are still hesitating to tap into the US market for funding.

US Securities laws make sustainability credentials a legal matter

We understand from discussions with [market participants?] that green bonds issuers may have concerns about investors potentially bringing legal action under US securities laws based on possible misstatements or omissions by the issuer (in a prospectus) about how the proceeds of a green bond offering are used. The concern is that if an investor loses money on the purchase of a green bond, they may try to pursue a legal action by claiming a misrepresentation or omission in the description of the “green” use of proceeds. This type of litigation for misstatements or omissions in connection with a securities offering is not as common in most other jurisdictions.

The general concern is that the more information a green bond issuer discloses in a prospectus about the expected environmental impact of the use of proceeds and then fails to fully live up to this standard, it could be exposed to a law suit challenging the accuracy and completeness of the disclosure –if the green bond underperforms.

Europe has catch-all risk factors

In the European market, issuers and lawyers generally consider an additional risk factor clause as sufficient to cover potential challenges by investors. This often includes wide catch-all statements, such as: “There is no clear definition yet of green”; “This green bond may therefore not be suitable for an investor’s green requirements” and “The second party opinion may also not give suitable comfort for an investor’s needs”.

This US-European discrepancy could discourage major US firms from making detailed impact reporting promises. In turn, the lack of such clarity may render US investors more reluctant to differentiate between green bonds and regular bonds

Detailed reporting – an investment well worth it

This will remain an area to monitor. A clarification or intervention from the regulatory or legislative sphere could potentially help tackle this issue, thereby lowering the threshold for many US firms to issue green bonds

Needless to say, NatWest Markets continues to closely advise issuers on the emerging USD green bond market structural trends. And we remain at the forefront of new transactions in this space. For instance, this month we priced a debut Sustainability US Private Placement of £175 million for a UK drinking water supplier.

Green bonds
Fixed income
ESG metrics & regulation

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc.

Copyright © NatWest Markets Plc. All rights reserved.