17 December 2020
As more green bond funds come to market, institutional investors are calling for more consistency and detail in their impact reports. Graham Cooper explains
In parallel with the rapid growth in green bond issuance in recent years, numerous funds have been launched to help pension funds and other institutional investors gain access to this market.
As the Green Bond Principles (GBP) call for issuers to report annually on how bond proceeds are used and the environmental impact achieved, it is to be expected that investors will want green bond funds also to report on the impact of their portfolios.
Environmental Finance therefore decided to examine how green bond funds are reporting their environmental impact and to what extent their reports meet the needs of their investors. (See Box 1)
We concentrated our survey on the 49 funds that have been operating for more than 12 months. Three quarters of these have already published some form of impact report but, just as the funds vary considerably in size and maturity, so their reports differ widely in terms of format, frequency and the level of detail they provide. They range in size from two pages to 51.
A key finding was that there is broad agreement between green bond funds and investors on the key metrics that are of most interest: reductions in greenhouse gas (GHG) emissions; clean energy generated; and energy efficiency gains. (See Figures 1 & 2)
But there is clearly much room for improvement. Nine out of ten investors said they considered impact reports 'crucial' or 'nice to have', but 60% said they consider current impact reporting to be "inadequate". This applies to both direct investments in green bonds and indirect investments via funds. (See Box 2)
Less than half the investors said they had received impact reports from more than 75% of their green bonds or green bond funds. This is largely because many of the bonds in their portfolios and several green bond funds are less than 12 months old and are therefore not yet at the impact reporting stage of maturity.
Almost half said they would be happy to receive a short impact report, provided it contained granular impact metrics and numbers. But one in five would prefer an extensive report with methodologies, benchmarks and modelling all included, and a similar percentage would like to have the data presented in a format that would allow them to download it into their own databases.
The full findings can be found in a report Green Bond Funds – Impact Reporting Practices 2020.
Data collection presents a challenge
Despite the great variation in the size of green bond funds, all of them face the same fundamental challenge of collecting data from bond issuers and aggregating it to form the basis of their own impact report. Data collection is a time consuming, mostly manual, task which does not always result in sufficient data being gathered. Several of the smaller funds said the time and resources required to gather impact data from issuers is a major barrier to extending the scope of their impact report.
Several stressed that that there is little consistency in the timing, format, metrics, methodologies, and benchmarks used by issuers in their impact reports and that this can add additional layers of difficulty in collecting the data required. Most are published in the form of a PDF or other non-interactive format.
Furthermore, as there is little consistency in the structure of the reports, they require close reading to find the salient impact information and to understand how the impact numbers have been calculated.
Even large funds, some of which hold more than 100 bonds, said it is usually necessary to be pragmatic and to focus on a representative share of their portfolio rather than aim for exhaustive coverage.
As climate change mitigation is one of the key targets of green investment and one of the main environmental objectives of the GBP, it is no surprise that the reduction or avoidance of GHG emissions is the most widely reported metric by green bond funds.
But there are numerous ways of calculating emission reductions. For example, there are a variety of benchmarks that can be used which can be as granular as the geographical grid reference of a project or as macro as the host country average or even an EU average. The choice of which benchmark to use can greatly affect the resulting data and reported impact
Different funds then aggregate the data in different ways, depending on the composition of their portfolios and the resources they have available. One in five funds currently outsource some or all of their data gathering and aggregation to third parties.
Metrics can mislead
In some cases, the choice of a reporting metric "can mislead readers to believe certain impacts are larger than what is actually achieved," said Colette Grosscurt, responsible investment officer at Dutch asset manager and green bond investor, Actiam. It can also create confusion "as some impacts are reported only for a selection of the projects to which the green bond is allocated, or it can lead readers to compare the impacts of different green bonds which have different underlying assumptions that actually make them incomparable."
The choice of which metrics to use to assess the environmental impact of a project, bond, or fund is critical, as different metrics can tell different stories. Many investors pleaded for greater standardisation in reporting and several said they found it difficult to justify spending much time analysing fund impact reports as their allocation to these funds represents a very small share of their overall investments. But all the investors surveyed said they intend to increase their investments in green bonds.
One significant step to help simplify and standardise impact reports is the Harmonised Framework for Impact Reporting from the International Capital Market Association (ICMA) which provides practical templates and instructions for issuers. These guidelines are used by two-thirds of the funds surveyed.
Another ICMA guide – A high-level mapping to the Sustainable Development Goals (SDGs) – helps issuers and investors understand how projects funded by green bonds can contribute to the SDGs. Nine out of ten fund impact reports already discuss the portfolio's alignment with the SDGs.
Around the world, institutional investors are under mounting pressure from customers and regulators to disclose more about the sustainability of their investments. For example, the EU's Sustainable Finance Action Plan aims to encourage more private finance towards investments that support the SDGs and the
Paris Agreement target of a carbon-neutral economy by 2050. And, from 31 December 2021, companies offering investment funds, pensions and other investment products will have to report the extent to which their products align with the EU's new classification system for sustainable activities – the EU Taxonomy.
"Impact reports differ widely in terms of format, frequency and the level of detail they provide. They range in size from two pages to 51"
Ahead of these government-level initiatives, the Principles for Responsible Investment (PRI) – a global network of investment institutions – plans to introduce mandatory outcomes-based reporting next year for its signatories to help them understand the impact of their investments on the SDGs.
These developments are key drivers leading investors to demand more consistency in impact reporting by green bond issuers and green bond funds, as well as more detail.
"Asset owners and investors will want more detailed information on the impact that is achieved with green bonds or green bond funds," said Grosscurt at Actiam. They will need this to check "whether they are on the right track to reach their targets and to provide transparent reporting to clients, authorities and society as a whole."
Joshua Linder, credit analyst and fixed income sustainable finance lead at APG Asset Management, agreed: "We expect investors will continue to demand more granular impact reporting going forward. As the green bond market grows and expands into more sectors, the importance of accurate and detailed impact reporting will only be greater from an investor perspective."
Managers of green bond funds seem to be preparing for this, with 70% saying they expect to include more impact metrics in future reports.
But some investors want more than quantitative data. Timothée Jaulin, head of ESG development & advocacy, special operations at Amundi, for example, reported requests from investors for more qualitative information on the projects being financed by the Amundi Planet EGO fund, the largest fund for emerging market green bonds.
Amundi responded by providing further qualitative data and commissioning case studies, including one using drone footage of a wind farm in Turkey which was supported by one of the bonds in the EGO fund portfolio.
On 3 February 2021, Environmental Finance will host a webinar on how such impact reporting practices have evolved and hear recommendations for best practices. The Green bond impact reporting: shining a light on best practices webinar will also include an opening presentation on key takeaways from the Green Bond Funds - Impact Reporting Practices 2020 report.
Box 1: Survey methodology
We identified 55 funds that allocate, or intend to allocate, at least 50% of their assets to green bonds and, in September, we sent them all an online questionnaire. Responses were received from fund managers responsible for 38 funds.
A complementary questionnaire was sent to asset managers and asset owners and responses were received from 21 major green bond investors. In addition, we followed up with 30 telephone interviews and conducted our own research of publicly available information. The detailed findings have been published in a report: Green Bond Funds – Impact Reporting Practices 2020.
Although several different labels have been introduced to describe various types of bonds that finance sustainable development projects – with Covid-19 having triggered particularly rapid growth in social and sustainability bonds – we restricted our survey to labelled green bonds.
This is because most of the funds we examined define themselves in terms of their exposure to labelled green bonds and because the metrics for measuring the environmental impact of such bonds are more precisely defined than those for social and sustainability bonds.
This report was supported by the Green Bond Technical Assistance Program (GB-TAP), a multidonor program by IFC, a member of the World Bank Group, to promote green bond issuance from emerging-market financial institutions. GB-TAP is implemented in partnership with the State Secretariat for Economic Affairs of Switzerland “SECO”; the Swedish International Development Cooperation Agency, “SIDA”; and the Ministry of Finance of Luxembourg.
Box 2: Key Findings
- More than two-thirds of investors regard impact reports as 'crucial';
- 60% of investors say current impact reporting practices are 'inadequate';
- Most investors prefer standalone impact reports rather than integrated reporting;
- Key areas for improvement are transparency and standardisation of the reports;
- More than 80% of green bond funds monitor the ESG ratings of issuers;
- 74% of green bond funds already issue impact reports; a further 16% intend to do so;
- Two-thirds of funds report in line with the Harmonised Framework for Impact Reporting;
- 90% of fund impact reports discuss their portfolio's alignment with the SDGs;
- Key metrics (for both funds and investors) are GHG reductions, clean energy generated and energy efficiency gains; and
- 70% of funds expect to include additional impact metrics in future reports