Green Bonds Get Rubber-Stamped as Investors Question the Label
Green Bonds Get Rubber-Stamped as Investors Question the Label
(Bloomberg) -- Global investor enthusiasm for saving the planet has helped spur record issuance of green bonds. It’s also driving a surge in third-party verification that proceeds from the debt sales are actually destined for environmentally friendly projects, as fears of “greenwashing” mount.
There have been about 480 green bonds issued by companies and governments so far this year with some form of assurance, a record high, according to data compiled by Bloomberg. That’s about 80% of all the green debt sold, and PepsiCo Inc. and Starbucks Corp. are among those paying independent reviewers for certification.
“If we say something is sustainable, when our clients look under the hood it has to live up to that reputation,” said Mark Haefele, chief investment officer at UBS Wealth Management, which buys green bonds. Asset managers are concerned about lack of definition of what’s truly green, Haefele -- whose firm manages $2.5 trillion in assets -- said in an interview.
Borrowers don’t have to prove proceeds will be used for a particular purpose, though second opinions can help sell bonds at a time when issuance is surging. Companies and governments typically align offerings with green bond principles and standards endorsed by the International Capital Market Association and Climate Bonds Initiative. But misleading claims about environmental benefits of projects are on the rise, making assurance and second opinions increasingly important to investors.
“It really comes down to credibility,” said Heather Lang, executive director of sustainable finance solutions at Sustainalytics, which sells second opinions to green bond issuers. “Borrowers want to ensure the frameworks they put in place focusing on the green use of proceeds are aligned with global guidelines,” she said in a phone interview.
Sustainalytics issued 35% more second-party opinions for green bonds in the third-quarter of this year compared to the same period a year ago. That included a 20-page opinion on Verizon’s green bond framework before the phone giant sold $1 billion in green bonds in February.
The benefit of getting the second party opinion outweighed the cost, according to Kee Chan Sin, Verizon’s assistant treasurer.
“It’s important to tie the green bond back to Verizon’s commitment to certain things like renewable energy and carbon neutral,” said Sin in a phone interview. “For some companies it might be expensive but for us it is money well spent.”
What’s Green?
Borrowers are taking advantage of the varying interpretations of green finance. Spanish refiner Repsol SA became the first major oil company to sell green bonds when it raised 500 million euros ($559 million) to help cut greenhouse-gas emissions and make its facilities more efficient in May 2017. That raised greenwashing concerns and led the Climate Bonds Initiative to exclude the debt from its database.
Pepsi’s $1 billion green bonds -- marked for projects like sustainable plastics and packaging -- may be excluded from the Climate Bonds Initiative database if the company doesn’t provide more information on plastics.
Bloomberg LP, the parent of Bloomberg News, also provides a green bond classification.
Some borrowers are going a step further and asking auditors to review the use and management of proceeds, as well as reporting after the bond is issued. Assurance that funds raised are being allocated to the right projects could help the market grow, said Kristen Sullivan, sustainability and KPI services leader at Deloitte, which provides assurance to green bond issuers.
Some investors are also doing their own audits.
Large bond funds like Nuveen, which manages over $11 billion in responsible investing fixed-income strategies, are coming up with their own guidelines for identifying green bonds. The fund opted not to buy Verizon’s green debt because of “concerns around the lack of clarity on impact reporting and potential inclusion of 5G,” said Jessica Zarzycki, a co-manager of responsible investing fixed-income strategies at Nuveen.
“You have to make sure what the issuer is promising is really what you are getting and everybody needs to do their homework,” said Zarzycki in a phone interview. “We’ve seen bonds that are labeled green and have second-party opinions where they don’t fit typically to our framework.”
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