Grey areas in green bonds
Complicating matters is how some issuers are further slicing up this class of securities, for instance ‘blue’ bonds that are related to investment in water, or ‘transition’ bonds that promote the shift to a lower-carbon economy. Meanwhile, ‘social’ bonds that promise wider societal impact have seen renewed interest following the global coronavirus epidemic.
Sometimes it makes sense to look past the green label and to invest in ordinary securities issued by a truly green company. Some firms with a strong environmental pedigree have shied away from issuing green bonds because of the still small size of the market and its specialised nature, or because they calculate they are not being compensated for the additional compliance costs associated with green bond.
Sometimes it makes sense to look past the green label
So, for instance, only three car companies have so far issued a green bond, and Tesla, leader in the field of electric vehicles, isn’t one of them. And that’s notwithstanding the sector’s wider push into green transport, particularly electrification. Indeed, the green bond market is still relatively concentrated with more than 70 per cent of issuance by financials and utilities.
But for all the grey areas in green bonds, matters are improving. Some of that improvement comes from best practice, some comes from industry bodies, and some from regulators.
For instance, having issued three sustainable bonds, culminating with a USD1 billion debt raising in 2019, American coffee chain Starbucks has created a template for other companies to follow. Its aims of shifting the sourcing of its coffee beans to sustainable producers and making its retail operations greener attracted widespread investor support.3 The company, in turn, became an information resource for other firms seeking to raise green finance.
A voluntary industry code determines what qualifies as a green bond, which is verified by an approved party certified by the Climate Bonds Standard and Certification Scheme. This, in turn, is reinforced by a second opinion from independent external agencies, such as Sustainalytics, that review the greenness of the bond.
Finally, government agencies have been getting involved. The European Union has led the way in December 2019 by establishing rules governing which financial products qualify as “green” or “sustainable”. These rules require firms to fully disclose what proportion of their investments is environmentally friendly or sustainable. A mere 17 per cent of the market value of the green bonds held in the MSCI Green Bond Index would meet the requirements of EU Green Bond Standard (EU GBS)
But quantifying what are often qualitative aspects of operations is a challenge and the field is still new. Agencies that rate companies on environmental, social and governance criteria can provide wildly differing assessments, depending on the weights they give to various factors, such as industry, operating region and management intentions.
Given all the complexities involved, investors need to take a careful, analytical approach. Some green bonds are greener than others. Some ordinary corporate bonds issued by green companies will be greener than green bonds. And sometimes, ordinary debt finance raised by companies in dirty industries will be put towards environmentally worthy investments – especially when the firm is looking to fundamentally change the nature of its operations. Balancing environmental credentials with social factors demands taking a broad view of the market. No single green bond should be assessed in isolation of the issuing company’s overall strategy towards a greener more sustainable business model.