Green Bond Seller Investing in Coal Shows ESG Can Be Tricky

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When a South Korean electric utility issued green bonds last year while investing in new coal-fired power plants in Southeast Asia, the mixed environmental messages fueled investor skepticism about sustainability debt that’s only been growing since.

Korean issuers have shot up the rankings for green note sales this year with $10.5 billion in deals, the most in Asia after China, according to data compiled by Bloomberg, but the sellers include many companies in emission-intensive industries. Nonprofit firm Anthropocene Fixed Income Institute calculates that more than half of all green bonds from Korea come from “potentially controversial sectors” such as autos, chemicals, power producers and oil and gas, according to founder Ulf Erlandsson.

Green Bond Seller Investing in Coal Shows ESG Can Be Tricky

Issuers exaggerating or misrepresenting their environmental credentials in marketing sustainability debt, known as greenwashing, is a risk facing investors around the world. It’s a danger for Korean borrowers because smokestack industries are such a big part of its export-reliant economy. While raising funds via green notes can be a way for companies to transition to more climate-friendly operations, if they mislead on how funds will be used that could make investors more hesitant to buy the debt in the future.

“Greenwashing can ruin the Korean green bond market’s reputation and depress the demand for Korean green bonds,” said Christina Ng, senior lead analyst of fixed income at the Institute for Energy Economics & Financial Analysis. “This is something, I think, the Korean government is very aware of.”

The utility that stirred debate about some of the issues confronting investors was Korea Electric Power Corp., which sold a $500 million green bond last year. The debt deal, whose proceeds were to go to renewable energy projects, attracted more orders than the notes available. But it came while the firm was set to invest in new coal-fired power plants in Indonesia and Vietnam. The green bond proceeds weren’t used for the investment in the plants.

That combination “sent wrong signals to the international market,” Hong Jong Ho, a professor at Seoul National University Graduate School of Environmental Studies, said by phone. “Being a major public company, it’s raising skepticism among global investors over whether South Korea’s green bonds are transparently managed.”

A Kepco spokesperson said the company announced last October that it will make a transition to low carbon businesses, and it won’t be funding any new coal projects. For the investment in Vietnam and Indonesia plants, the firm had to consider various elements including its ties to those countries, as well as partnerships with other companies, the spokesperson said.

Rising investor scrutiny over Korea’s environmental, social and governance debt has prompted the government to work on releasing a draft of a labeling system, known as a taxonomy, in the next two months to help investors classify green investments, according to the Ministry of Environment.

The government unveiled guidelines for green bonds in December, but it lacks binding power. While the rules require borrowers to seek an external review before issuing such notes, getting a post-issuance verification or rating by a second party is voluntary. There’s also a lack of clarity now on who is qualified to be an external reviewer.

As investors from private asset-managing firms to public pension funds face mounting pressure to boost sustainability-focused bonds and stocks in their portfolio, the lack of clarity is pushing them to create their own frameworks and screening processes to determine if an asset or project deserves the green label.

Seoul-based NH-Amundi Asset Management Co. evaluates green bonds using its own credit research, in addition to external analysis and rating systems, said Han Sooil, chief investment officer of the firm’s fixed-income division. ESG-related information from issuers can often be insufficient, particularly for companies that are not listed, he said.

“The Asian green bond market is still evolving, and that means that we can expect changes in investor reaction and regulatory frameworks,” Ng from IEEFA said. “It’s a learning process, sorting through good and bad issuances.”

©2021 Bloomberg L.P.

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