Green bonds first emerged as issuances by supranational development banks. Since then, the market has grown considerably, with greater issuer diversification across countries and sectors (see Exhibit 1). Yet, not all green bonds are created equally, and we believe in the need to discern among green bonds in our investments.
Internationally accepted guidelines such as the International Capital Markets Association’s Green Bond Principles have helped formalise the structure of a green bond. New issuers can now benefit from the experience of their structuring advisors who themselves have contributed to those guidelines.
Based on our proprietary green bond assessments, the average score at the time of issuance (‘the ex-ante score’) has risen over the years (see Exhibit 2). We believe this reflects that most issuers have indeed applied those guidelines in terms of structure and information disclosure.
However, those minimum standards do not yet cut out greenwashing. Tackling this is becoming a high-level regulatory issue in the EU where the EU Commission plans to protect customers against these practices.
In recent years, we have seen green bonds from issuers to finance solar PV projects, but these issuers are also expand environmentally harmful activities elsewhere, such as new coal-fired power plants. On occasion, this is done on a larger scale than the environmentally beneficial activities. In essence then, the green bond is ‘greenwashing’ the issuer. In other words, the bond is not credibly green, no matter how well structured it is.
We believe it is now time for us to upgrade our methodology to formalise a new approach to assessing green bonds. We will be more discerning between bonds that not just meet minimum market expectations, but also deliver credible environmental benefits both at the bond level and the issuer level.
The concepts of ‘green-ness’, ‘integrity’, and ‘ambition’ should be distinguished when we assess green bonds.
For a green bond to be credible, it must deliver on all concepts. No single concept is a sufficient condition by itself. To illustrate this, a green bond whose proceeds are used to finance utility-scale solar PV is considered green, but if the reporting fails to cover how the proceeds were allocated, tracked, and reported on, the ‘integrity’ is weak. If the issuer has no deliberate renewable power targets as part of its power mix, the ‘ambition’ is weak.
BNPP AM’s Sustainability Research Team applies a two-step framework to assess each green bond:
Source: BNPP AM, March 2021
Our assessment results in a score out of 100 points, and a corresponding rating of Positive, Neutral, or Negative. For our global green bond strategy, the investment universe is limited to bonds rated Neutral and Positive.
1) How does the issuer respect the “Do No Significant Harm” principles? How does the issuer reduce the risk of negative externalities during the implementation of the projects/activities? Are there any negative controversy surrounding the issuer that may indicate future potential harmful externalities?
2) How does the issuer intend to allocate the proceeds within a timeframe and its share of refinancing? What is the issuer’s timeline for fully allocating the proceeds? What percentage of proceeds is used for refinancing and new financing?
We also check if the methodology used to estimate the impact is disclosed and explained (e.g. assumptions, baselines). Third-party verification of the report will boost its credibility. Finally, we assess how the bond contributes to the issuer’s sustainability ambition (e.g. % contribution to decarbonisation trajectory).
At the end of each step, we can choose to add either a bonus overlay or a penalty overlay to the overall score after assessing the various components to arrive at our final score and recommendation.
The overlay is informed by our conviction of the ambition of the issuer, for example, doubts over the credibility of the issuer’s sustainability strategy, a lack of clarity over planned eligible green projects/activities, incoherent future capital expenditures. Our conviction can also be based on elements that have not been formalised in our framework, e.g. unclear positive environmental benefits from eligible projects/activities.
Across the lifecycle of the bond, we monitor for negative controversies or high reputational risks related to the green bond. Sources include our portfolio managers who closely watch the issuers as well as rating agencies. If the negative controversy or reputational risk is substantial, we will not hesitate to sell the green bond to safeguard the reputation of our clients.
Our green bond assessment framework allows us to discern between green bonds by:
More on fixed income investing
 EU – New Consumer Agenda Plans : https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020DC0696
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
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