How to ensure the ESG credentials of green bondsComment

Channels: Green Bonds

Companies: BAML, Credit Agricole, Citibank, JP Morgan, Mirova, SUST4IN, Bureau Veritas

People: Marcio Viegas

Green bonds should not focus on just one environmental factor, but should take broader environmental, social and governance considerations into account, argues Marcio Viegas

Marcio ViegasIt is almost scary that it is now ten years since I published the article "GHG reductions and sustainable development" on Environmental Finance, in November 2004, just before the entry into force of the now defunct Kyoto Protocol. Scary because the Kyoto Protocol did not achieve its objectives and, finally, because most of the sustainable development issues - and the lack of attention to them - I raised then remain a concern.

My original article basically asked for better consideration, in a harmonised and global way, of sustainable development aspects when designing, implementing and assessing Kyoto Protocol mechanisms, particularly the Clean Development Mechanism (CDM). Not necessarily because we wanted to save the planet, but more because of basic risk management, given that investments in climate change projects were, and still are, long-term enterprises and, in the case of CDM projects, are often located in risky and fast changing geographies.

The article presented a series sustainable development indicators and a step-by-step guide on how to assess CDM projects against those sustainable development criteria, taken from the CDM Sustainable Development Impacts guidelines published by the UNEP earlier that year.

Ten years later, it is not all bad news though. 2015 may be the year when we see the approval of the Sustainable Development Goals (SDGs) (in September) and a broadly accepted and enforceable "Paris Protocol" to fight, or at least adapt ourselves, to climate change.

The best news of 2014, however, and a hot topic right now, are so-called green bonds, a relatively new financial product which has injected some $35.4 billion in 2014 to finance 'green' projects.  

The concept of 'green bonds' started in 2007. At first, progress was slow and mainly driven by multi-lateral banks. But from 2013, the corporate sector started to show an interest, first with EDF and particularly around the summer of 2014, although less enthusiasm was evident towards the end of the year.  

Broadly speaking, green bonds should ultimately finance investments that are additional, not to finance acquisitions of projects or assets already in place or that would happen anyway.

More important was the progress with the market structure. The Green Bond Principles (GBPs) were launched in January 2014 by BAML, Credit Agricole, Citibank and JP Morgan and are now endorsed by more than 70 investors, underwriters and issuers.

The definition of a green bond, however, remains to be discussed and agreed. While it is fine to let the market start operating smoothly - and we all learn by so-doing - the consideration of sustainable development criteria is a critical minimum step to safeguard the reputation of the bonds and of the market.

The parallel with the Kyoto Protocol mechanisms is irresistible: there is, once again, a need to set consistent global minimum sustainable development requirements, this time for green bonds.

Climate change or other pure environmental benefits should not be taken in isolation to justify the greenness of a bond.  Minimum and practical sustainable development requirements would give the green bonds more credibility and reduce long term "externality" risks. The ISO 26000 Social Responsibility standard - being used by some second-opinion agencies - is a quick but imperfect answer: first because it is not truly verifiable, and secondly because it does not consider governance criteria, despite its 99 pages. The multi-lateral banks criteria eg the Environmental and Social Handbook used by the European Investment Bank (EIB) is very complete, but its 208 pages put most of the users off.

Another parallel refers to the so called "additionality criteria" then set for Kyoto Protocol projects: broadly speaking, green bonds should ultimately finance investments that are additional, not to finance acquisitions of projects or assets already in place or that would happen anyway. This vision is becoming mainstream and shared by Mirova, the large environmental, social and governance (ESG) fund manager.  Nevertheless there is also a case for relaxing on additionality, at least while the green bonds market builds sufficient volume to make it noticeable to mainstream bond investors.  

Obviously, the main objective of a bond is to make money for investors and, naturally, most of them are not happy to earn one penny less just because a bond is green.

ESG considerations can provide investors with peace of mind in the short- and long-term, and deliver broader benefits to all of us and to the environment

Nevertheless, if a bond is to be called a "green", and if we do not want to be accused of green or social washing, only broader considerations of material ESG considerations can provide investors with peace of mind in the short- and long-term, and deliver broader benefits to all of us and to the environment. This is what a modern lay person expects from anything called "green".

Some socially responsible investors (SRIs) go beyond this, and set stricter and broader - some say fundamentalist - sustainable development criteria, so that they are proud of their investments. The problem with this voluntaristic approach is that it can generate confusion in the market.

Such consistent and global minimum sustainable development requirements should support the initial validation of a bond and then be specifically verifiable by independent third-parties on an annual or continuous basis. It should also follow the current best and mainstream practice on reporting, such as the Global Reporting Initiative (GRI) G4 guidelines, and consider modern ESG concerns all the way to anti-bribery.

With this in mind, we propose the following basic steps to safeguard the long term ESG performance, risks and efficiency of green bonds:

  1. Consider the ESG concerns the relevant stakeholders may have in relation to the project/s;
  2. Engage with stakeholders in advance with these concerns in mind (GRI G4 can help here);
  3. Define which ESG concerns really matter, by using a materiality matrix (see GRI G4 again) or another risk management tool to allow focus on key aspects. Obviously, the minimum expected performance of the project is to respect the local law, but also the relevant legislation from the issuer's jurisdiction (eg the UK Anti-Bribery Act);
  4. Set actions and measurable parameters to maintain, monitor, report and improve ESG performance of the projects;
  5. Get assurance through a third and independent party validation that the above four steps have been followed;
  6. Report on a regular, annual or continuous basis specifically about the projects and in formats appropriated to the different stakeholders;
  7. Keep engaging with stakeholders, review the progress and improve the efficiency and ESG performance of projects;
  8. Get third-party, independent and public verification, proper assurance to the stakeholders that the above process is in place.

The key international ESG references to be used for the first step can be:

  • The Green Bond Principles (GBPs) and whatever ESG guidelines come from them;
  • The Sustainable Development Goals (SDGs) to be approved by the UN in September 2015;
  • The OECD Guidelines for Multinational Enterprises (already mentioned ten years ago and still valid);
  • The UN Global Compact;
  • The ILO Tripartite Declaration of principles concerning multi-national enterprises and social policy;
  • The Equator Principles;
  • Verifiable international standards such as ISO 14001 (Environmental Management), SA 8000 (Social Accountability), ISO 45001 (Health and Safety, to be published in 2016)
  • Relevant international law, such as the "Paris Protocol".

This forward-looking article is not the first, neither the most elaborate, proposal to harmonise green bonds with real environmental or sustainable development benefits, but it optimistically aims to enrich the debate and to help issuers, investors and other market participants to at least think about the basics, always using mainstream references, so that investors, the market and society-at-large get more assurance that green bonds really are "green".

Marcio Viegas is the founder and managing director of SUST4IN ( When he wrote the first article he was the global product manager for environment, safety and social responsibility at BVQI, now Bureau Veritas