I’m not one to be cynical or cavalier about an issue like greenwashing. All the same, I would like to be clear-eyed on the sources and nature of any such risks in the green bond market. According to a research report from Dutch asset manager NN Investment Partners in October, 15% of green bond issuance then came from companies involved in controversial projects contravening environmental standards. That’s a real problem.
Green bonds dominate a market that also includes instruments such as social bonds and sustainability-linked debt and loans, among other things. With so many options, some issuers may simply aim for the wrong one, especially if they’re in a hurry to capture investor demand.
The International Capital Market Association Green Bond Principles are readily available, so there’s little excuse for any issuer or investor not to digest or understand them. That said, they are also “voluntary process guidelines”. Without firmer strictures, issuers and even investors may be tempted to go easy on at least some of the guidelines.
The so-called “greenium” for green assets is also likely to encourage issuance.
For instance, Italy priced its first green sovereign bond at a slight premium to its comparable regular debt in March. With greenium well established, almost any issuer would want to aim for that premium.
There’s also the obvious issue with green bonds in that they are project-based. A particular project financed with a specific green bond doesn’t necessarily reflect the overall environmental footprint of the issuer. Some green bond investors do take notice of the broader context but others don’t. One signature example was Saudi Electricity Co.’s US$1.3 billion green sukuk or Islamic bond offering last September, ostensibly to finance installation of smart metres and other green projects. Many commentators were surprised at the strength of the reception to such an issuer.
The positive interpretation is that we are seeing immense appetite for green bonds and other sustainability-focused investment instruments, well in excess of the market’s ability to satisfy it. If they can’t get precisely the quality and type of exposure they want, some institutions and funds may simply conclude that even slight green credentials, or the merest of green intentions, may be better than none.
Scepticism about issuers shouldn’t overlook the role of investors, especially asset managers, many of whom are rushing to satisfy the appetites of institutional and retail clients. With greater fiduciary obligations than the issuers they choose, these managers should aim for commensurately higher standards.
More robust regulatory and reporting standards should eventually correct the issues. In the meantime, let’s hope that no big scandal comes along to really upset the entire thesis.