12 January 2022

Impact report quality deters green bond fund investors

Poor data and inadequate impact reporting are deterring many investors from making further investments in green bond funds, according to a recent Environmental Finance study.

Of 14 major investors questioned, 12 said they are interested in increasing their exposure to green bonds and green bond funds, but three quarters of them said they thought impact reporting practices in the green bond market were inadequate.

The study identified 68 funds that have more than 50% of their portfolio in green bonds, up from 55 in the December 2020 study. The combined assets under management soared by 31% to $34 billion from $26 billion. More than 70% of the funds already produce an impact report and a further 15% intend to do so.

But the study revealed a disconnect between the metrics that green bond funds highlight in their impact reports and what specialist green bond investors want to see. For example, while many bond issuers, and regulatory bodies, stress the importance of the Sustainable Development Goals (SDGs) as a measure of impact, the large pension funds and insurance companies interviewed in the study have reservations about their value. They acknowledge that they are useful for giving a high-level understanding of a firm's ESG performance, but some fear they can facilitate greenwashing and several said they are too broad to give the more precise measure of impact that they require.

More than 70% of the funds surveyed report on their alignment with the SDGs and one in five claim to align with all of the 17 Goals. But, on more focussed environmental metrics, many funds are failing to meet investors' desire for more detailed impact data. Most funds are meeting investors' needs for information on the greenhouse gas (GHG) emission reductions achieved by their portfolios, but they are falling well short on data concerning alignment to a 2ºC global warming scenario, biodiversity and social impact.

Many more investors expressed interest in social impact data than in the 2020 survey, which reflects the explosive growth in issuance of social and sustainability bonds during the Covid-19 pandemic. Six out of ten green bond funds are now also able to invest in social or sustainability labelled bonds.

Less than 20% of the funds surveyed currently report against the 2ºC metric, although a majority of the investors surveyed would like to see such information. And, even on the more basic GHG emissions data, funds' impact reports show little consistency. This is largely due to the fact that the funds rely heavily on bond issuers' own impact reports which vary considerably in the metrics, baselines and methodologies used, and the format in which the data is presented.

Fund managers remain very keen to see more standardisation of impact reporting by bond issuers, as this would facilitate the difficult task of aggregating impact data across their portfolios. A growing number are turning to external companies or third-party databases to help with this work and several voluntary standards have been proposed to complement the widely used Harmonized Framework for Impact Reporting from the International Capital Market Association.

The full findings of the study can be found in a report Green Bond Funds – Impact Reporting Practices 2021.

They will also be discussed in an Environmental Finance webinar on 2 February 2022.

Survey methodology:

An online questionnaire was sent to 55 funds which allocate, or intend to allocate, at least 50% of their assets to green bonds, in September 2021. Responses were received from 40, representing 84% of the overall AUM in dedicated green bond funds. A complementary questionnaire was sent to pension funds, insurers and asset managers who invest in green bond funds and directly in green bonds. Detailed responses were received from 14. All but two manage more than $10 billion of assets and six have assets of more than $50 billion. In addition, four investors were followed up with in-depth one-on-one interviews.

The 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.

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