Green bonds have come a long way, but much remains to be done
The lively green finance session at The Asset’s Asia Bond Markets event in London covered the high points of where the finance sector is vis-à-vis one of the most important global issues of the day
27 Aug 2019 | Keith Mullin
PANELLISTS talked about how they define green, which is still far from clear in the absence of a globally-accepted taxonomy and a formal regulatory overlay.
Mitch Reznick, head of research and sustainable fixed income at Hermes Investment Management, said the way he defines green is aligned with the Green Bond Principles and other evaluation services.
From a financing perspective, this captures anything specifically designed to create environmental and climate-change benefits. This can include financing a telecom company installing equipment that will reduce network carbon emissions and securitizing green housing.
Giulia Pellegrini, BlackRock’s head of EM debt, ESG, noted that a lot of the discussions surrounding index methodology revolved around clearer definitions.
BlackRock partnered with JP Morgan in 2018 to launch a suite of global fixed-income indices to address demand from bond investors for a benchmark targeting emerging market issuers with strong ESG practices.
The indices have a number of external inputs; the green bond designation comes from Climate Bonds Initiative (CBI). Formal CBI certification is a core requirement, meaning that only bonds labelled green by CBI typically make it into the indices and by extension, BlackRock funds. “That doesn’t mean bonds that are not CBI certified can’t make it into our funds, but they will have a lower potential allocation and will be subject to a stronger level of scrutiny,” Pellegrini says.
The Green Bond Principles are accepted as a way for issuers to generate credibility by making a clear commitment to the financing of green assets and and informing investors.
But Julien Bras, SRI fixed-income portfolio manager at Allianz Global Investors, looks beyond the specific projects being financed.
“We look at the climate strategy of the issuer,” he says. “We want to avoid business-as-usual green bonds – bonds that finance projects that are green but which are part of an issuer’s standard activities that are labelled green because it is easy from a marketing and communications standpoint.”
Tough scrutiny
Bryan Carter, head of emerging market fixed-income at BNP Paribas Asset Management (BNPP AM), is sceptical about the way the green finance market has evolved. Asked if the green and sustainability standards, definitions and labels used in the market are credible, his answer was a clear “no”.
He explained that BNPP AM’s green screening is conducted by an in-house think tank that takes care of the research, due-diligence and engagement piece across a bond’s life cycle.
The assessment framework tackles three broad definitional challenges, which starts with what is green. “If a utility company issues a green bond to make its grid more efficient but the source of the energy is coal, that’s not credible for us,” he says.
The second element is segregation of funds, which can be problematic, particularly when it comes to sovereign issuers since fiscal transparency is a challenge and use of funds can be difficult to track.
The third element is reporting. “The biggest challenges are impact reporting and reporting on ex-post use of funds,” Carter says. This is especially problematic in Asia, which scores much lower than Europe or Latin America, because of the concentration of issuance from financials, which are among the worst at segregating funds, he adds.
Carter would like to see the standardized green bond label from the EU’s sustainable finance roadmap adopted globally.
Can ratings determine pricing?
Ian Dixon, head of EMEA & APAC infrastructure and project finance at Fitch Ratings, spoke about how rating agencies view the green and sustainable world.
“We rate many green bonds across the globe, but we are not looking at whether they’re green or not, we’re looking at underlying credit risk aspects.”
Dixon said Fitch had been looking at E, S and G factors for many years. “What we haven’t been doing is saying to the market: ‘these are the issues’ and giving guidance as to how ESG has impacted the rating,” he says.
At the beginning of this year, Fitch launched an integrated scoring system showing how ESG factors impact individual credit rating decisions.
The IFC is one of the world’s biggest issuers of green bonds, having issued close to US$10 billion in green bonds since 2010. The agency also has a new social bond programme that has seen just under US$2 billion in issuance.
“We issue these bonds because we have a pipeline, meaning we have energy efficiency, renewable energy or green building projects [on the lending side],” says Flora Chao, the IFC’s head of funding. “We committed to having over a third of our financing being climate-focused by 2025. We’ve already met that target and are continuing with it.”
“The industry has worked together incredibly efficiently to put together the GBP. Are they perfect? No. It’s not much more than 10 years old and most of the issuance has emerged only in the past few years,” says Tim Skeet, a senior adviser to ICMA.
BlackRock’s Pellegrini said banks, investors, regulatory agencies and all market constituencies have a collective responsibility to increase their engagement with companies and push them down the sustainability track.
Regulation and issuer incentives
Reznick believes regulations are vital. “Investors can tell companies ‘this is what you need to do and this is the effect on your cost of capital.’ But as that voice gets louder, regulators will move,” Reznick says.
Bras acknowledges from a philosophical standpoint that investors should reward companies because by transitioning to low carbon-intensive business models, they are reducing their carbon risk. But he points out that currently, carbon risk is not priced in and it is unlikely it will be in the coming years.
Skeet would like to see more incentives, but also believes the debate should be taken away from pricing.
“What you’re pricing for is credit and liquidity risk,” he said. “ESG risk is extraordinarily difficult to factor in. But we should be telling people to engage with this market because there is a much greater reason for doing so.” 
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