lu_inside12-full

Recommendations

Info

Inside magazine issue 12 | Part 03 - From a corporate perspective How green is it really? Getting tough on greenwashing In disclosure terms, requested prospectus information and ongoing disclosure obligations for green bonds are the same as for any other ordinary bond. Similarly, guarantees on the green use of proceeds, as normally described in the bond documentation, are generally not included as contractual covenants investors can enforce. Instead, they must rely on market reprobation to ensure issuer compliance. As a result, one concern that is repeatedly raised is the danger of “greenwashing,” which can span from simple breaches of trust to serious green fraud. For us, the prevalence of the term “greenwashing,” reflects the fear that issuers of green bonds will not use bond proceeds in a way that is consistent with the bond’s declared green credentials. The practice—and fear—of greenwashing seriously damages the perceived integrity of the market. When two Forbes contributors angrily proclaimed that “when greenwashing occurs, we’re all taken to the cleaners,” 32 they were thinking mainly in terms of swindled consumers in the eco-friendly product market. In our context, if you agree that the green bond market is an important element of a broader green strategy (which we do), any undermining of the green bond market as a result of real or perceived greenwashing harms us all. It’s made more complicated by the fact that even if issuers are not out to dupe investors, the flexible definition of “green” can give rise to controversial uses of proceeds. Just look at the furor raised when it turned out that one of the projects being funded by the Massachusetts State College Building Authority—using money it raised through a green bond—was a multi-story car park for 725 cars 33 and the heated debate over whether an oil company should be allowed to issue green bonds. 34 Definitions of “green” are based on a complex and fragmented classification system that will need urgent harmonization to ensure a safe and thriving market. Market practices and related initiatives are pushing in the direction of a harmonized framework and definition of Green Bonds Principles 35 covering the following aspects: •• The guarantee by the issuer of the adequate (i.e., green) use of the proceeds raised by the bond •• The evaluation and validation by the bank in charge of the issuance of the green aspect of the underlying project financed by the bond •• Regular audits on the use of the proceeds (until maturity) and related disclosure/ reporting Control and certification is key in the whole process to ensure that information disclosed by issuers can provide investors and the market with a sufficient level of independent assurance. Many actors—from banks to auditors—are trying to define the best practices that will be adopted as standards by the market and therefore shape future regulations. Bridging the trust gap: principles, second opinions and indices Two main initiatives stand out from the mass of guidance propositions: a group of over 50 large institutions have developed Third-party control of green bonds Others 1% No 40% the Green Bonds Principles and an international non-profit organization—the Climate Bonds Initiative—has proposed Climate Bonds Standards. These lay the foundations for internationally agreed standards that could be adopted to define what can be considered as green, which partly means evaluating whether a project funded by a bond meets certain criteria intended to ensure a positive environmental impact. A report 36 included in the broader projects on Greening China’s financial markets also refers to these standards as a “step-by-step” guide to issuing a green bond in China. Third-party control is required to assure investors that independent compliance assessment with reference to defined rules and criteria is taking place. The drive to ensure investor confidence has given rise to a growing number of second reviewers, who are taken on by issuers to back up their green claims. The big players here are CICERO and VIGEO, and a number of smaller players are now jostling for space in this market. The Climate Bonds Initiative noted that, in 2015, 60 percent of all green bonds came with this “second opinion” assurance. Oekom 4% Source: Bonds and Climate Change: The State of the Market in 2015, p.11 DNV GL 4% CICERO 33% VIGEO 18% 106
Inside magazine issue 12 | Part 03 - From a corporate perspective to improve standards (taxonomy, use and management of proceeds, financial and impact reporting, assurance/second opinions, etc.) without jeopardizing the market and limiting access for nonrecurrent issuers. So while stringent standards are necessary, it is expected that the criteria will remain holistic rather than prescriptive and that investors will continue to carry the onus to perform their due diligence and assess whether the green value of the bond is in line with their environmental and performance objectives. The Climate Bonds Standards Board has approved a list of verifiers issuers can contact if they wish to have a “climate bond” checked and formally certified; issuers subsequently receive a formal assurance report based on developed and vetted standards. This remains, however, a voluntary process for issuers. A revised version of those standards is expected in 2016 covering in particular the special status that could be given to “puregreen” companies to facilitate green bond issuance. Yet, even if pre- and post-issuance controls exist, there are no clear and standardized criteria to validate a bond as green, and the scope for interpretation is wide. Moreover, the move from national references to an international (even supranational) approach is unlikely to happen overnight: there are currently upwards of 400 different standards in existence. 37 Faced with such a rapidly evolving environment, the market has started to self-regulate both on product structuring— the issuance process—and the qualification of the green aspect of the project behind such bonds. In France, the issuance of a green bond by EDF in 2014 paved the way for defining a framework for the use of proceeds and became a reference for subsequent green bonds. The same was true for Sweden with the Gothenburg Municipal Green Bond. Despite all the efforts made so far, extra-financial ratings agencies remain critical with regard to the way financial institutions communicate their green funding and investment product ranges. Common reporting standards would allow a transition from marketing-only communication to transparent disclosure of the issuer’s approach to managing and tracking green bond proceeds and to monitoring the environmental impact of the funded projects. While such initiatives certainly support the booming development of green bonds, only independent, accepted and international/supranational standards would guarantee the certification of some bonds as green and their recognition by all (investors, financial institutions and supervisors) as such. In the rush to define convergent standards, however, we need to ensure that those standards are not so onerous as to crowd out issuers, particularly in light of the existing issuance gap. Currently, issuance costs under the best disclosure practices are far too high for infrequent issuers. The industry is considering how Finally, an interesting trend witnessed over the last few years has been the creation by a number of different players, including ratings agencies and financial institutions, of indices to rate different green bond issuers. Among these are the Solactive Green Bond Index, the S&P Green Bond Index and S&P Green Bond Project Index, Bank of America Merrill Lynch Green Bond Index and MSCI Barclays Green Bond Index. Though still nascent, the trend toward green bond indices demonstrates the growing significance of the green bond market, its dynamism—and the demand among investors and potential investors for reliable information to facilitate decision making. Luxembourg stock exchange: our role as we see it In a context where standards are very likely to remain open, even if better defined, transparency will be paramount: that is where stock exchanges will have to play a fundamental role in enabling markets to trust particular products. At this stage, we see our mission as threefold. First, pushing for transparency and disclosure; second, actively supporting the development of industry standards, and, third, accelerating market developments. 107
Page 1:
Inside Triannually insights from De
Page 4 and 5:
Inside magazine issue 12 | Contents
Page 6 and 7:
Inside magazine issue 12 | Foreword
Page 8 and 9:
Inside magazine issue 12 | Part 01
Page 10 and 11:
Page 12 and 13:
Page 14 and 15:
Page 16 and 17:
Page 18 and 19:
Page 20 and 21:
Page 22 and 23:
Page 24 and 25:
Page 26 and 27:
Page 28 and 29:
Page 30 and 31:
Page 32 and 33:
Page 34 and 35:
Page 36 and 37:
Page 38 and 39:
Page 40 and 41:
Page 42 and 43:
Page 44 and 45:
Page 46 and 47:
Page 48 and 49:
Page 50 and 51:
Page 52 and 53:
Page 54 and 55:
Page 56 and 57: Inside magazine issue 12 | Part 02
Page 144 and 145: Inside magazine issue 12 | Contacts
Page 146: Our expert authors, who are brimmin
show all

lu_inside12-full

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?