Strong demand from investors has resulted in the issuance of ESG-focused bonds from companies, government bodies and institutions in APAC (ex-Japan) currently outstripping issue from the US. But being truly ‘green’, sustainable, or aligned to net zero goals is complicated. It’s definitely not as simple as buying something with a virtuous label.
What are “green” bonds?
The first “green bonds” were issued in 2007 in a bold initiative by the European Investment Bank and the appetite for these bonds has soared: $3.5 billion worth was issued in 2010; by 2020, the value of new green bonds issued was $305.3 billion.
These bonds are designed to facilitate directing capital towards projects with positive environmental impact. This money is supposed to be used to mitigate the impacts of climate change and build a greener future. As the Climate Bond Initiative put it: “The green bonds era has begun – mobilising bond markets as a low-cost financing tool will be essential for the realisation of a low-carbon and climate-resilient economy.”
Certainly, green bonds have made some positive environmental impact, but relying solely on these instruments is wishful thinking.
There aren’t enough
The data reveals that not all sectors – and certainly not all the relevant sectors – are issuing enough green bonds. The energy sector, for example – its operations cause 9 per cent of all human-made greenhouse-gas emissions; the fuel it produces creates another 33 per cent of global emissions. According to the International Energy Agency, to achieve a 1.5-degree pathway, no new oil or gas fields should be developed. So, the energy sector should surely be utilising green financing. In 2020, the sector issued 1.2 billion in US-dollar green bonds but raised 214.7 billion in traditional US-dollar bonds, so less than 1 per cent of the total debt raised was green. This year’s figures are similar.
Lack of oversight
Currently, there is not enough oversight to measure what difference green bonds are making. A bond can be called “green” even if it doesn’t require a company to reduce emissions. Yes, there is “impact reporting”, which may require the company to disclose the emissions for a project, but this doesn’t necessarily translate into any company-wide commitment around reducing emissions.
In the property sector, refinancing debt used to purchase “green” buildings built a decade ago can be an eligible use of proceeds, when in reality nothing new is built or developed. In the automobile sector, cars must emit less than 50 grams of CO2 per kilometre to be considered sustainable under new EU regulation, and only until 2026. Plug-in hybrids are sold as a low-carbon alternative to traditional vehicles and can be considered green bond eligible. However, recent research suggests hybrid vehicle emissions can be significantly higher than the permitted CO2 threshold.
The risk of green bond buyers being “greenwashed” is considerable, especially in emerging markets. According to the Climate Bonds Initiative, almost 8 per cent of the green bonds issued in 2020, worth $8.8 billion, did not meet “green” labelling standards as the use of the proceeds did not qualify.
Doing the homework
The only way to uncover how sustainable or green a bond could be is to take a rigorous approach to the research. Analysis by sector experts and thorough peer review should be part of this process. Scrutinising the use of proceeds, the impact reporting and the alignment with recognised standards is important, but the overall ESG credentials of the issuer are also crucial. For example, a utility company that doesn’t have coal phase-out plans issuing a green bond to finance renewable projects raises serious questions.
There are many good green bonds out there, where proceeds will have a beneficial impact. We have found many good opportunities within sectors including electric utilities, transportation, REITs, packaging, water and paper.
Shui On is a Chinese property developer, headquartered in Shanghai, that primarily specialises in commercial and mixed-use property development. At a time of great stress in the Chinese property sector in general, for Shui On, sound management has supported the company’s resilience. We have observed a strong desire from management to focus on ESG and also sustainable development, and we have seen this commitment translate into tangible plans and action. For example, the company has setup an ESG working committee, staffed with dedicated specialists and senior management from the company. Beyond just setting targets for itself, the company is also working with the tenants to encourage more sustainable practices.
The company has announced a commitment to adopting Science Based Targets. One of the pillars of the new strategy revolves around “community”, with Shui On looking to work with local businesses, and also enhance welfare and opportunities for their own employees.
Previously, we have highlighted some of the automobile sector’s shortcomings. However, as with any industry, some companies are doing better than others. Take Volvo (owned by China’s GEELY), as of last year, every new car it sells will be a hybrid or full electric vehicle (EV). It has pledged a climate-neutral production by 2025 and value chain by 2040. It has set science-based targets, while its green bond framework offers extremely detailed disclosures around its exclusions criteria. We think these measures set a high bar for other automakers looking to issue green bonds.
In our opinion, when selecting green bonds to invest in, it’s important not to avoid sectors in a knee-jerk fashion. No matter the sector or company, in the transition to a net-zero economy, ensuring capital is allocated to where it’s required and to where it can have the biggest impact is crucial. No one should be left behind.
Rene Buehlmann, CEO, and Adam McCabe, head of fixed income Asia-Pacific at abrdn.