A word of warning to green and social bond buyers

The issuance of green and social bonds has taken flight. Compared to last year, the market has doubled, and year-to-date issuance amounts to EUR 325 billion globally. Despite positive issuance premia that sometimes turn negative, investor appetite for these types of bonds is at an all-time high, particularly as more and more investors seek to green their own product offering.

Although we wholeheartedly welcome bonds that finance positive green and social impact, we have deep concerns about the rising trend in issuance. Lack of investor appetite for additionality, and the lack of conditions around timing for the allocation of proceeds is significantly hindering the very reason for the existence of this asset class.

The basic principle behind green and social bonds is to allocate money to new projects that bring about environmental or societal benefits. This includes the improvement of the issuers’ own sustainability performance. Yet for many investors, this additionality is of little interest, and the bonds are wrongly viewed as an end unto themselves rather than a means to an end. As long as there is a green or social label, the bonds are immediately snapped up, seemingly without any thorough assessment of the sustainability profile of the issuer, nor of the bond itself. With investors being increasingly scrutinised to improve the sustainability profile of their own products, it’s an easy option – but without additionality considerations it’s not a robust nor truly sustainable one.

Equally worrying is that green and social bond frameworks often lack sufficiently short look-back or look-forward periods. If a look-back period is too long, investors run the risk of simply refinancing old projects. Some bonds have a look-back period of 10 years or longer; an approach that we object to. In fact, it qualifies as greenwashing and is a concern I have raised earlier. We believe look-back periods should be a maximum of two years prior to the bond issuance date. This provides issuers enough time to gather relevant projects that qualify under associated frameworks.

In terms of look-forward periods, we believe it is important that 100% of the proceeds be allocated within 12 months from the issuance date. Many, but not all frameworks apply this maximum. As an example, we recently came across a green bond that had only invested 11% of its proceeds in alignment with its framework within one year of issuance. This issuer had allowed itself seven (!) years to fully invest the proceeds. It begs the question: what happens to the proceeds that are not invested in the meantime? The company was very transparent about its long look-forward period at the time of issuance, but investors were seemingly unconcerned and the bond was readily absorbed by the market.

With the European Commission exploring the possibility of a legislative initiative for an EU Green Bond Standard, we call upon the policy makers to take heed of our concerns. Taking them into account is paramount if green and social bonds are to achieve their true purpose of creating positive, lasting, sustainable change.

, Portfolio Manager at Triodos Investment Management

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