lu_inside12-full
You also want an ePaper? Increase the reach of your titles
YUMPU automatically turns print PDFs into web optimized ePapers that Google loves.
Inside magazine issue 12 | Part 03 - From a corporate perspective<br />
How green is it really?<br />
Getting tough on greenwashing<br />
In disclosure terms, requested prospectus<br />
information and ongoing disclosure<br />
obligations for green bonds are the same<br />
as for any other ordinary bond. Similarly,<br />
guarantees on the green use of proceeds,<br />
as normally described in the bond<br />
documentation, are generally not inc<strong>lu</strong>ded<br />
as contractual covenants investors can<br />
enforce. Instead, they must rely on market<br />
reprobation to ensure issuer compliance.<br />
As a result, one concern that is repeatedly<br />
raised is the danger of “greenwashing,”<br />
which can span from simple breaches of<br />
trust to serious green fraud. For us, the<br />
prevalence of the term “greenwashing,”<br />
reflects the fear that issuers of green<br />
bonds will not use bond proceeds in a way<br />
that is consistent with the bond’s declared<br />
green credentials. The practice—and<br />
fear—of greenwashing seriously damages<br />
the perceived integrity of the market. When<br />
two Forbes contributors angrily proclaimed<br />
that “when greenwashing occurs, we’re all<br />
taken to the cleaners,” 32 they were thinking<br />
mainly in terms of swindled consumers<br />
in the eco-friendly product market. In<br />
our context, if you agree that the green<br />
bond market is an important element of a<br />
broader green strategy (which we do), any<br />
undermining of the green bond market as<br />
a result of real or perceived greenwashing<br />
harms us all.<br />
It’s made more complicated by the fact<br />
that even if issuers are not out to dupe<br />
investors, the flexible definition of “green”<br />
can give rise to controversial uses of<br />
proceeds. Just look at the furor raised when<br />
it turned out that one of the projects being<br />
funded by the Massachusetts State College<br />
Building Authority—using money it raised<br />
through a green bond—was a multi-story<br />
car park for 725 cars 33 and the heated<br />
debate over whether an oil company<br />
should be allowed to issue green bonds. 34<br />
Definitions of “green” are based on a<br />
complex and fragmented classification<br />
system that will need urgent harmonization<br />
to ensure a safe and thriving market.<br />
Market practices and related initiatives are<br />
pushing in the direction of a harmonized<br />
framework and definition of Green Bonds<br />
Principles 35 covering the following aspects:<br />
••<br />
The guarantee by the issuer of the<br />
adequate (i.e., green) use of the proceeds<br />
raised by the bond<br />
••<br />
The eva<strong>lu</strong>ation and validation by the bank<br />
in charge of the issuance of the green<br />
aspect of the underlying project financed<br />
by the bond<br />
••<br />
Regular audits on the use of the proceeds<br />
(until maturity) and related disclosure/<br />
reporting<br />
Control and certification is key in the<br />
whole process to ensure that information<br />
disclosed by issuers can provide investors<br />
and the market with a sufficient level of<br />
independent assurance.<br />
Many actors—from banks to auditors—are<br />
trying to define the best practices that will<br />
be adopted as standards by the market<br />
and therefore shape future regulations.<br />
Bridging the trust gap: principles,<br />
second opinions and indices<br />
Two main initiatives stand out from the<br />
mass of guidance propositions: a group of<br />
over 50 large institutions have developed<br />
Third-party control of green bonds<br />
Others<br />
1%<br />
No<br />
40%<br />
the Green Bonds Principles and an<br />
international non-profit organization—the<br />
Climate Bonds Initiative—has proposed<br />
Climate Bonds Standards. These lay the<br />
foundations for internationally agreed<br />
standards that could be adopted to<br />
define what can be considered as green,<br />
which partly means eva<strong>lu</strong>ating whether a<br />
project funded by a bond meets certain<br />
criteria intended to ensure a positive<br />
environmental impact. A report 36 inc<strong>lu</strong>ded<br />
in the broader projects on Greening<br />
China’s financial markets also refers to<br />
these standards as a “step-by-step” guide<br />
to issuing a green bond in China.<br />
Third-party control is required to assure<br />
investors that independent compliance<br />
assessment with reference to defined rules<br />
and criteria is taking place. The drive to<br />
ensure investor confidence has given rise<br />
to a growing number of second reviewers,<br />
who are taken on by issuers to back up<br />
their green claims. The big players here<br />
are CICERO and VIGEO, and a number of<br />
smaller players are now jostling for space<br />
in this market. The Climate Bonds Initiative<br />
noted that, in 2015, 60 percent of all green<br />
bonds came with this “second opinion”<br />
assurance.<br />
Oekom<br />
4%<br />
Source: Bonds and Climate Change: The State of the Market in 2015, p.11<br />
DNV GL<br />
4%<br />
CICERO<br />
33%<br />
VIGEO<br />
18%<br />
106