4 February 2021

Change on the horizon for green bond impact reporting

Proposals for an EU Green Bond Standard (GBS) and the pending launch of a platform designed to make it easier for investors to access data signal change for green bond impact reporting, according to participants of a webinar on the subject.

Peter Lööw, head of responsible investment at SEK1 trillion ($120 billion) Swedish pension fund manager Alecta, said the launch in March of a platform that will enable investors to access green bond impact reports “will be game changing”.

The platform, which will be launched by the Nasdaq Sustainable Bond Network, “will make it possible for investors to draw data directly from the platform – you can list your portfolios and there will be standardised reports to pull from the platform,” Lööw said. “It will also be a ‘win-win’ situation for the issuers in that they can benchmark [their impact reports] against other issuers. It will also be a place they can interact with investors in various ways to increase efficiency,” he added.

The platform is already available for issuers, who, along with Nasdaq, are populating the platform with data ahead of the March launch, Lööw said. Nasdaq launched the network in 2019.

Meanwhile, Katie House, analyst for sustainability and impact at green bond investor Affirmative Investment Management, predicted that the proposed introduction of an EU GBS could herald an “evolution” in impact reporting.

House predicted that, if issuers report contributions in line with the EU’s taxonomy of sustainable activities as part of the GBS requirements, this could make it simpler for investors to aggregate their own reporting of the impact of their green bond investments.

House and Lööw were speaking this week on a webinar hosted by Environmental Finance and the IFC, Green bond impact reporting: shining a light on best practices.

More than two-thirds of investors regard impact reports as ‘crucial’ – however, 60% of investors say current impact reporting practices are ‘inadequate’, according to Green Bond Funds Impact Reporting Practices 2020, a report supported by the IFC’s Green Bond Technical Assistance Programme (GB-TAP).

The report identifies transparency and standardisation of the impact reports as key areas for improvement.

Alecta’s Lööw said that, on the whole, “we agree with the findings of the survey and we agree with the need for harmonisation and standardisation of impact reporting”.

He said that while impact reporting for the roughly €5 billion worth of green bonds Alecta invests in is generally good, the information on impact tends to be hard to aggregate to provide comparable and easily digestible figures. “It has proved very difficult and time consuming for us to aggregate this information.”

To improve reporting, he said Alecta engages with issuers and often tells them to read the position paper on impact reporting published by a group of Nordic public sector green bond issuers.

Jürgen Köstner, vice president and head of investor relations at Germany’s KfW, which is both a green bond issuer and investor, told the webinar that “getting impact data for the very large number of projects” financed by KfW’s green bond issuance programme was the bank’s biggest challenge.

KfW has issued more than €30 billion in green bonds since the inception of its issuance programme. Its green bonds finance renewable energy projects and energy efficient residential buildings in Germany.

“Currently, we finance more than 40,000 green projects with our green bonds each year. To handle this you need an extremely high degree of standardisation. This restricts the universe of our green lending, which we use as the potential underlying assets for our green bond issuance programme.

“Typically, about 40% of our new lending each year is for green financing. However, our green bond programme accounts for only 10-15% of our debt capital markets funding. The major reason for this gap is the lack of standardisation in project data. 

“To solve this we decided to go for two highly standardised green lending programmes [renewable energy and energy efficiency] where we were already collecting relevant green project data during the loan application process. This data, we get from the borrowers through our electronic application process. We have the data in our IT system with very little manual effort.

“Our second decision was to run a portfolio approach - all KfW green bonds issued in one calendar year form a portfolio, this then is linked to a portfolio of all disbursements during the same calendar year of the underlying green lending programmes. As a result, the effort required to create an impact report for one calendar year is completely independent from the number of green bonds in the respective year. 

“These two decisions allowed us to easily scale up our green bond issuance programme if there was enough demand from investors. This year we intend to issue up to €10 billion in green bonds – more than three times the average of our first five years of issuance. The workload to measure the impact and create an impact report will not triple.”

Affirmative IM’s House added that the London-based investment manager intends to develop its own internal database to store the information it collects from issuers, “to make our own process more streamlined”. We will aggregate it all up, to make it less of a manual process than it has been in recent years. That is because we see this reporting scaling up year on year.”

She added that the introduction of the EU taxonomy means “impact reporting is going to have to evolve … it will be a whole new area people will report against”.

“We expect that we will have to report percentages of alignment of projects with the taxonomy in what will be our 2021 report, to come out in 2022. That will become a much simpler exercise if we can explain in the impact reports how the issuer has also drawn up their own alignment [with the taxonomy].

“One point on standardisation – not just in relation to the EU GBS, but generally – I would not want it to make issuers feel that they could not go beyond this level of reporting. And for some of the better reporters out there that already give us more information, I hope it doesn’t encourage them to scale that back,” House said.

Simone Utermarck, director of sustainable finance at the International Capital Market Association (ICMA), which in April published a Guidance Handbook that includes information on impact reporting best practice, said an ICMA working group is developing further guidance in this area.

ICMA is planning to publish suggested impact reporting metrics for green bond-eligible projects in the themes of the circular economy, and ‘environmentally sustainable management of living resources and land use’. Utermarck did not provide a date for the publication of these updates.

A recording of the webinar can be watched on-demand here.