An investor rebellion over financing a coal mine could herald a new dawn for the green bond market, writes Peter Cripps

The green bond market is playing a key role in piling pressure on State Bank of India (SBI) to abandon its plans to finance a controversial coal mine in Australia.

The largely state-owned bank is reported to be preparing to advance a $650 million loan to Indian conglomerate Adani, which is struggling to raise funds for the Carmichael coal project in Queensland, as NGOs noisily protest and investors turn their backs. If it gets funding, the A$2 billion ($1.4 billion) project is expected to start producing between 10 and 60 megatonnes of coal a year.

As revealed by Environmental Finance, some of the investors who have bought some of the three green bonds issued by SBI have baulked at the prospect, and are actively voicing their opposition.

Amundi, which manages the world's biggest green bond fund, the $1.4 billion Amundi Planet Emerging Green One, first engaged with SBI, voicing its displeasure, and has now proceeded to divest the SBI green bonds it held.

Axa Investment Managers and NNIP have also sold SBI's green bonds in protest.

On the face of it, SBI has done nothing wrong with regards to its green bonds. There is no suggestion that the proceeds raised by its green bonds have been used for anything other than the green projects that it promised to finance.

But the reaction of the green bond investors is interesting because it demonstrates that the green bond market is prompting investors to engage with the company about its broader activities and not just the activities financed by the green bond issues.

However, it should also be noted that it appears that the influence of the green bond investors has been limited. While SBI has been silent about whether it still plans to make the loan to the coal project, it appears that the green bond investors have not succeeded in changing its proposed course of action. In fact, two of the green bond divestors have admitted that the company has been unresponsive to their requests for engagement.

And the fact that these investors were able to sell their bonds shows that there remain willing buyers for them.

Ulf Erlandsson of the Anthropocene Fixed Income Institute points out that the spreads on an SBI green bond have widened only marginally since mid-November when investors began to engage and sell.

"It now appears that SBI will struggle to return to the green bond market, as its credibility has been shot"

So, cynics about the green bond market – of which there are many – could argue that nothing has been achieved by the furore about the proposed loan.

However, I wonder if this saga could mark the beginning of a new phase of engagement for the green bond market. It coincides with a broader trend that has seen green bond investors paying closer attention to the sustainability strategies and overall ESG credentials of issuers, not just the 'use of proceeds' of the green bonds.

While green bond investors may not have persuaded SBI to ditch its support for the coal project, this could set a precedent in the market which will see green bond investors rebel when green bond issuers continue to practise unsustainable activities. This has not always been the case in the past.

It now appears that SBI will struggle to return to the green bond market, as its credibility has been shot.

The story of SBI has taken an interesting new turn, with the bank reported by Bloomberg to be in the market for another bond issue – presumably an unlabelled issue! It is understood to have mandated Bank of America, Citi, HSBC, JP Morgan, MUFG and SBI as bookrunners for a dollar-denominated issue.

It will be interesting to see how investors respond to this and whether the furore around the Carmichael mine has driven any investors away. As Erlandsson points out, this bond will effectively be helping it to make the loan to Adani.

Another interesting trend is the way in which the activists who are campaigning against SBI's planned support of the coal project are now taking aim at underwriters.

Erlandsson and other activists point out that banks like HSBC – the biggest green, social and sustainability bond underwriter in 2019 – cannot bury their head in the sand and claim to be oblivious to the controversy surrounding SBI and Carmichael. They should not be underwriting SBI's unlabelled bonds at the same time as trumping their credentials as a green bond underwriter, Erlandsson argues.

This is again a new departure for the green bond market. It is not just issuers whose credentials risk being tarnished by their non-green bond activities, but underwriters too.