Repsol's green bond rocked the green bond market in May by reigniting the 'what is green' debate.
The €500 million ($563.2 million) issue sparked controversy after it was left out of the main green bond indexes.
Repsol claims the bond will save 1.2 million tonnes a year of carbon dioxide by improving the efficiency of its operations. It received a second opinion from Vigeo-Eiris.
But critics, such as influential NGO the Climate Bonds Initiative (CBI), say that it does not merit a green tag because it does not represent a fundamental change in the oil company's business model. The CBI describes the improvements as incremental.
This is the first green bond from a major oil and gas company, so was always going to court controversy. (In 2015, Thai oil company Bangchak claimed to have issued a green bond, but we were never able to track down the paperwork didn't explain how it was green, so it never made it into Environmental Finance's Green Bond Database.)
There have previously been green bonds from fossil fuel companies. Southern Company, for example has issued more than one green bond, despite being one of the biggest coal burners in the US.
Crucially, Southern's bonds have been mainly for financing renewable power. But Repsol's bond has pushed the boundaries because it was for improving the efficiency of its fossil burning activities. This throws up questions as to whether this bond is helping finance the company transition to a lower carbon economy or whether it is just helping to improve and perhaps prolong the life of, existing fossil fuel assets.
Of course, Repsol's is not the first controversial green bond we have seen. There have been green bonds for an airport or that have been criticised for financing hydropower, for example. Poland's green bond was voted by investors as the Sovereigns, Supranationals and Agencies (SSA) bond of the year in our Green Bond Awards, but it drew a lot of criticism because of the country's reliance on burning coal and for the obstructive role it has played in setting emissions reductions targets within the EU.
As the market grows, we will see more and more controversial issues. Currently, the main benefits of issuing a green bond are helping to boost the perception of the green credentials of a company and investor diversification. These are benefits that will appeal most to so-called brown companies that want to improve their PR or who do not currently attract 'green investors'. As a result, I believe more controversial issuers will be drawn to the market.
This dynamic is a challenge for the market for two reasons.
First, the market needs to fiercely protect its integrity and reputation.
Second, the lack of certainty over what is green is a risk to potential issuers that is putting many of them off.
Phil Brown of Citi recently summed the problem up neatly at a City of London Green Finance conference: "Issuers look at all the additional work they have to do, the additional risks they have to take in terms of the criticism they may receive if what they are doing is not viewed by the world as being good as it should be. At the same time they don't receive a very substantial reduction in the cost of funding."
He argued that there is "a lack of clarity about what constitutes green", adding that there was a "disappointing amount of scientific evidence about what is green".
"The scientific community could do a great deal more to define what is green," he argued. "We are, at the end of the day, bankers. We are not environmentalists, we can't [be expected to] determine ourselves what is green. We still don't have an internationally accepted taxonomy of what is acceptable large-scale hydro. A company has to go into the market and risk criticism for stepping what is perceived to be the wrong side of that line."
Brown went on to say that he expects market growth to slow this year.
So, does the market have a problem?
Well, the question of what is green is not new. There are a growing number of actors who are entering the market to try to give their version of what is green, as we pointed out in our feature a few months ago: 50 Shades of Green and 50 ways of assessing them.
The Green Bond Principles, which have formed the bedrock of the market, took a pragmatic view, arguing that the 'what is green' debate was nowhere near to being solved, so they would encourage transparency and let investors decide (often helped by external assessment providers such as second party opinion providers, rating agencies, or the Climate Bonds Standards).
It could be argued that the market is currently functioning well using its current system. After all, the fact that the indexes have refused to swallow the Repsol bond show that there are some checks and balances in place.
But as Phil Brown pointed out, that doesn't work very well for new issuers, who risk coming to market only to find that their green bond has attracted controversy. If the market is to fulfil its potential, I think it will ultimately need to reach a common definition of green. There is already a great deal of common ground between the various bodies provide some kind of assurance.
At Environmental Finance, we don't have all the answers. We can help to boost understanding and be a forum for debate.
We have tried to be fair and balanced in our coverage of Repsol's bond. We have published numerous article, from our own journalists and from contributors:
- Spanish oil company issues controversial green bond
- Repsol's green bond excluded from main indexes
- Marcio Viegas explored the pros and cons of the bond
- Keith Mullin argues that the Repsol bond shows that it's time for the green bond market to grow up
We invite comments on any of our articles.
And it's not too late to sign up to our Green Bonds Europe 2017 conference on 19 June. Or there's Green Bonds Americas on 23 October. Hope to see you there!
Peter Cripps is editor of Environmental Finance