The $123 Billion Question Hanging Over Renewable EnergyBy
Buyers want to know real environmental benefits of investments
Different standards, lack of regulator hinder assessments
The green-bond market has boomed on the allure of investments that help the environment. Now, the industry is trying to show that the reality matches these ambitions.
Advisers and rating companies are starting to track the environmental effect of projects funded by green bonds, such as the impact on air pollution. The services may help investors move away from relying on bond-sale promises -- which are hard to check and often legally impossible to enforce -- and boost confidence in a market where sales will surge 30 percent this year to a record $123 billion, according to a Bloomberg New Energy Finance forecast.
“If we buy a green bond, how do we know that it is really green?” Robert Parker, Credit Suisse Group AG’s former senior adviser, said at a recent conference in Luxembourg. “There are some big issues to make sure it is compliant.”
Reassurance is needed because there is no regulator for the green-bond market, and investors can’t monitor hundreds of separate projects around the world themselves. The lack of enforced standards also gives issuers some latitude in determining what constitutes a “green” project.
Attempts at standardization include a green-bond label introduced this week by LuxFlag, a group backed by the Luxembourg government and the nation’s stock exchange, which lists more than 50 percent of green bonds worldwide. Issuers requesting the label have to meet criteria including an independent assessment of a project’s environmental impact, according to LuxFlag’s website.
“The most important factor is truth in labeling,” said Anouk Agnes, deputy director general at the Association of the Luxembourg Fund Industry, which helped found LuxFlag. “Investors need to be reassured that if they buy a fund or a bond that says it’s green or sustainable, it is doing what it says.”
Bloomberg LP, the parent of Bloomberg News, also offers a green bond tag.
S&P Global Ratings debuted a service in April to evaluate how much green bonds benefit the environment, as well as the governance and transparency of the financing. It is also preparing a system to rank borrowers based on environmental, social and governance values, according to Michael Wilkins, a managing director.
“We’ve seen significant demand from investors for these tools,” he said. “We’re trying to provide greater transparency because investors aren’t getting much information about how their bond proceeds actually impact the environment.”
Moody’s Investors Service started assessing green bonds last year. The company has assessed 16 bonds and all were awarded the highest grade partly because borrowers are able to work on matching Moody’s scorecard, according to Henry Shilling, a senior vice president in New York. Rated issuers include District of Columbia Water & Sewer Authority and Monash University in Melbourne.
Defining what counts as “green” still remains a challenge, particularly when traditionally heavily polluting industries seek funding. In China, the biggest source of green bonds last year, notes can be used to fund coal power plants, if the project meets certain criteria.
Major oil producers have also started selling green bonds. Repsol SA made the industry’s first sale in May, raising funds to help cut greenhouse gases and make facilities more efficient. The issue split the green-bond industry. Vigeo Eiris said the note counted as a green bond, while Climate Bonds Initiative excluded it from a list of environmentally friendly investments partly because of concerns about prolonging the use of fossil fuels.
“I’m very concerned when a company sells a green bond and on the other side their business isn’t compliant with energy goals,” said Ulf Erlandsson, an investor at Swedish state pension fund Fjaerde AP-Fonden, which manages about $37 billion. “There is certainly an element of green-washing in the market.”
Issuers are seeking to address investor concerns by boosting green-bond transparency. At the end of last year, about 80 percent of issuers were committed to reporting on the use of bond proceeds and the environmental impact, or to undergo external review, up from about 70 percent in the first quarter of 2015, according to Bloomberg New Energy Finance. The International Capital Markets Association also this month updated its green-bond guidelines, adding recommendations for greater reporting.
To help investors make use of this data, Rockefeller Foundation is supporting a “carbon yield” methodology that acts as a way of comparing the environmental impact of different investments. The tool, which is publicly available online, relies on estimating how much carbon-dioxide pollution is avoided. It was devised by merchant bank Lion’s Head Global Partners, sustainability adviser South Pole Group and asset manager Affirmative Investment Management.
“The thirst to understand what impact people’s investment is having is becoming ever more concentrated, particularly as the impact of climate change is becoming more visible to the man on the street,” said Christopher Egerton-Warburton, a partner at Lion’s Head.
— With assistance by Andrew Monahan, Emily Chasan, Daniel Shurey, and Judy Chen