Going green: examining the GBP agenda

October 2021  |  FEATURE | CORPORATE GOVERNANCE

Financier Worldwide Magazine

October 2021 Issue

The compulsion to ‘go green’ has gained momentum over the last 10 years – an urge that goes well beyond mere rhetoric to attain economic, social and environmental well-being across the globe.

Corporations, in particular, are under constant pressure to refine their environmental footprint, a key factor behind the establishment of the Green Bond Principles (GBP) – which enable capital-raising and investment for new and existing projects with environmental benefits – in 2014.

Drilling down, according to a June 2021 report by the International Capital Market Association (ICMA) – ‘Green Bond Principles: Voluntary Process Guidelines for Issuing Green Bonds’ – the principles outline best practices when issuing bonds serving social or environmental purposes through global guidelines and recommendations that promote transparency and disclosure, thereby underpinning the integrity of the market.

The GBP also raises awareness of the importance of environmental and social impact among financial market participants, which ultimately aims to attract more capital to support sustainable development.

“Green bonds are designed to be a way to raise capital specifically for projects or businesses aligned with creating a more sustainable planet,” affirms Adam Rawling, investment analyst at Tatton Investment Management. “A key advantage for both investors conscious about the environment and corporations is that it allows a method to not starve companies of capital in order to help them transition and improve.

“If we want companies to change, they need to raise capital in order to do so,” he continues. “These bonds therefore provide some security to investors that they are not damaging the world but also allow companies to raise capital for projects that may otherwise have been too expensive.”

Testifying to the increasing appetite for ‘going green’ is the huge increase in green, sustainable and social bonds seen in recent years, which includes the GBP, the Social Bond Principles (SBP), the Sustainability Bond Guidelines (SBG) and the Sustainability-Linked Bond Principles (SLBP).

“We saw double the amount of sustainable bonds issued in Q1 2021 as we saw in Q1 2020, and not only has the monetary amount increased significantly, but the number of issuers has tripled in the same period,” attests Mr Rawling. “Some of these are hugely oversubscribed, signalling huge investor appetite for such instruments. The Italian government issued bonds worth €8.5bn in the first quarter of 2021 which were nearly 10 times oversubscribed.”

Greenwashing

With the GBP being a voluntary commitment for issuers, there is an obvious risk of greenwashing, with investors’ economic, social and environmental desires potentially going unfulfilled. Adding to the risk is that the exact definition of ‘green’ is left up to the issuers to decide.

Testifying to this is Aegon Asset Management which estimates that around a third of bonds designated as eco-conscious contain elements of greenwashing. Given the motivations of investors, this a major area of risk and concern.

“Anytime there is an inconsistent framework and a lack of clear regulation there is a heightened risk that companies do not do what they say they will,” says Mr Rawling. “The level of concern probably depends on the investor. Most will be very concerned. They have supplied capital based on a set of obligations and understandings and expect these to be met. If there were some financial covenants in there, you would expect penalties on the issuing company.”

Investors, ideally, should be considering the wider impact, rather than just those tied to the bond. “If the bonds proceeds are used to install new renewable power, but at the same time the fossil fuel business expands significantly, are investors still going to be happy, even though the specific obligations for the bond were met?” ponders Mr Rawling.

Green evolution

As we emerge from the COVID-19 pandemic, the green agenda has a key role to play in strengthening resolve and building back better, with safeguards around green standards essential to ensuring that recovery does not come at the expense of environmental goals.

“Consistency of reporting will need to improve so that investors can access key metrics,” suggests Mr Rawling. “However, having an absolute standardised format is likely to be difficult due to the specific nature of the obligations for various bonds. But some key documentation and updated reporting is essential.

“Growth of more specifically linked and green bonds with definitively measurable targets is likely,” he continues. “For example, 2021 has seen a big rise in carbon reduction measures and an increase in third parties asserting whether green investment obligations have been met. There is also the potential for financial punishments to come in, but this does not seem to be particularly close.”

Ultimately, it is up to each of us in our respective roles – whether on the inside of companies or outside as stakeholders – to dissect, analyse and hold accountable those tasked with addressing economic, social and environmental concerns; calling out actors that paint a rosier picture than reality to investors, but without the evidence to substantiate their green claims.

© Financier Worldwide

BY

Fraser Tennant