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Green bonds are on the rise – but are they as green as they seem?

Anjuli Pandit green bonds
Anjuli Pandit, BNP Paribas Global Markets

The issuance of green bonds is higher now than ever before, but there are increasing concerns about transparency and whether they are really helping to improve the environment.

In the second quarter of this year a total of $66.6 billion worth of green bond transactions took place: 164 transactions in all, according to Moody’s, who believe that by the end of the year the sum will rise to over AU$295 billion.

The increase – of 48 per cent on the previous year – is credited to high demand from investors seeking environmental, social and governance investing. These are no longer niche sustainability investors, but more conventional investors who want to integrate environmental and social governance (ESG) principals across their portfolio, said Anjuli Pandit, Primary Sustainability Manager at BNP Paribas Global Markets.

“This is not a fad. This is mainstream and that has become clear to issuers,” she told The Financial Times.

Because there is no shortage of buyers, there is a strong incentive for issuers to enter the market.  US Telecom company Verizon’s AUI$1.48 billion green bond issuance, was oversubscribed by a factor of eight.

Widely seen as a game changer, this issuance was to finance a drive to provide at least half of its energy use with renewable sources by 2025. Its popularity allowed Wall Street underwriters to reduce Verizon’s borrowing cost to below the rate on its typical corporate debt.

Investors also want to see companies take on more social and sustainable projects. “It is a bit of marketing and PR from the issuers side,” said Matt Kuchtyak, an analyst at Moody’s.

Most green bond issuers so far this year are from the financial sectors:

Most green bonds are issued to finance energy and building infrastructure:

USA, France, Netherlands and China top the list of countries using green bonds:

Twelve governments have now issued a total of 23 green bonds. HSBC is the largest green bond underwriter.

Asset-backed security bonds

What gives investors confidence in green bonds? With asset-backed security (ABS) green bonds, the issuances are collateralised by a pool of assets, similar to a mortgage-backed security, except that the securities are not mortgage-based.

Some ABS green bonds are used to finance eco-renovation and renewable energy. In these cases the securities are either buildings themselves, or a guaranteed income.

For example the Connecticut Green Bank used “solar home renewable energy credits” backed by a Residential Solar Investment Program that were sold by homeowners to two energy utilities to finance solar installations.

The bank issued AU$57 million of investment-grade rated ABS bonds to support about 14,000 of these residential solar photovoltaic systems capable of generating rated at around 105 MW.

Renovate America’s HERO Program offers homeowners loans for energy efficiency upgrades from approved contractors in return for equity. This equity is used as security for their own green bond issuances. They issued AU$4.6 billion of green bonds this year.

Questionable criteria – especially from property companies

But are all green bonds as green as they seem? Joshua Kendall, a senior ESG analyst with Insight Investment says he has discovered more than dozen green bonds this year alone that do not meet their criteria.

These suspect bonds have particularly come from several property companies. These have not succeeded in providing sufficient detail on how the proceeds of the bonds will be used, nor how the expected energy savings will be verified.

Kendall even found that in some cases investors’ money would be used to pay for other bonds with no environmental criteria whatsoever.

Kendall also criticises Poland, which issued its third green bond in 2019, for not using them to reduce the country’s dependence upon fossil fuels.

This is the kind of thing that gives green bonds a bad name.

So how should property companies wanting to use green bonds proceed?

They should use well-recognised criteria and independent assessment.

One leading example of screening criteria is explained in the Climate Bonds Initiative (CBI) Green Bond Database Methodology.

Most but not all green bond issuances listed on the climate bonds website are externally reviewed; there are up to 10 main reviewers – ISS_oekom, S&P Global ratings, CICERO, JCRA and Deloitte and Sustainalytics are a few.

Renovate America has made several issuances of green bonds. They have been independently evaluated by Sustainanalytics, whose methodology and criteria explain what technologies are eligible and how to calculate the financial and energy saving benefits.

A review of one of Renovate America’s issuances concludes: “The HERO program is an effective way to promote the uptake of energy and water efficiency products as well as renewable energy-generating products in the US.

“PACE incentivises home owners to install green products by financing their installation through increased home property taxes, payable over an extended time frame. Hence, homeowners do not have to pay for these energy efficiency renovations upfront, and energy savings often offset associated costs.”

Where the CBI oversees a green bond deal, they put a value on the environmental benefits.

For example, for the Connecticut Green Bank solar offering, they said it represented a greenhouse gas reduction intensity of 19.4 tCO2e per AU$1480 invested and was fully compliant with the Climate Bonds Standard.

When the project is implemented, these figures can be verified.

The Climate Bonds Taxonomy has eight categories under which bonds can be issued:

  • Energy
  • Transport
  • Buildings
  • Water management
  • Waste management & pollution control
  • Nature-based assets, including land use, agriculture & forestry
  • Industry & energy-intensive commercial
  • Information technology & communications.

Investors have also started adopting policies and strategies linked to the UN’s sustainable development goals and wider ESG goals.

David Thorpe is the author of the books The “One Planet” Life and the new “One Planet” Cities.

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