Gaps in green-bond space create openings for ‘brown’ issuers

Some are misusing the ‘green’ label in an effort to benefit from favourable financing terms

Gaps in green-bond space create openings for ‘brown’ issuers

For fund managers, it hasn’t been easy to sell green. Despite several studies suggesting strong investment performance among ESG-compliant companies, investors have been generally hesitant to put their dollars behind responsible investments.

One space is proving to be an exception. According to the Wall Street Journal, green bonds have become one of the fastest-growing asset classes, with issuance increasing from around US$10 billion in 2013 to US$161 billion last year. But a significant number of issuers are promoting their bonds as green even though they’re not actually qualified for the label.

“In the past two years, [the Climate Bonds Initiative] has excluded hundreds of bonds marketed as green or environmentally friendly from its index, rejecting US$24.5 billion of US$114.2 billion in issuance this year,” the Journal reported.

Companies that mislabel bonds as green often do so to benefit from favourable treatment of such securities. For example, banks in China that borrow from the country’s central bank can enjoy advantageous terms when they use green bonds as collateral. Issuers of green bonds can also see fast-tracked approval to sell new debt.

CBI could reject such issuers because they don’t provide enough detail about how proceeds will be deployed. Another common issue is when the funds raised don’t align with the Paris Agreement’s goal of containing global temperature increases to less than two degrees Celsius above preindustrial levels.

According to critics, the worst cases of greenwashing come from China and other developing countries. For example, CBI rejected two recent bond deals marketed by state-owned Taiwan Power Co, which together sought to raise US$271 million in “green” financing to help upgrade gas and coal power stations.

The trouble stems from differing frameworks in determining greenness. According to Moody’s Investors Service, countries may vary in the outcomes they pay attention to. Reducing carbon emissions from fossil fuel-dependent operations, for example, could be framed as a green outcome. Even funds and issuers in developed economies can disagree on what counts as a green bond.

“We really need to improve the definition of what it means to be a green bond as right now, even a dirty-brown corporate can carve out a deal that looks green,” said Andrew Jackson, head of fixed income at London-based Hermes Investment Management.

The lack of consistency in frameworks also contributes to numerous securities excluded from CBI’s index still being accepted in environment-focused funds, as uncovered in an analysis of Thomson Reuters data done by the Journal. These include funds managed by Luxembourg-based von der Heydt Invest SA and Amundi Asset Management, Swiss private bank Lombard Odier, BNP Paribas Asset Management, and US-based Calvert Research and Management.

Responding to the Journal’s findings, many of those managers said they screened securities using stringent procedures that deviate from the CBI methodology, but are in line with green-bond principles laid out by the International Capital Market Association.


Related stories:
HNWIs to lead Canada’s impact-investing charge
Adoption isn't the only problem for ESG investment