12 November 2020
The 'use of proceeds' model adopted by most green bonds came under attack, amid allegations that it is susceptible to 'greenwashing', at a panel at Environmental Finance's ESG in Fixed Income Europe 2020 virtual conference.
Speaking at the panel 'Is the use of proceeds model fit for purpose', Jakob Thomae, managing director for Germany at the 2 Degrees Investing Initiative (2DII), described investing in controversial corporates through green bonds, as being "a little bit like having a cousin who is going to school and also taking drugs.
"So, I tell myself I'm just going to give him pocket money for school books [the green bond]. And, meanwhile, the other money he makes he's spending on his drug habit right, but I can be happy because I'm just giving him the book money."
The debate over the use of proceeds model comes as a range of new sustainability labels have been introduced in the sector in recent years, including transition bonds, which adopt the use of proceeds model, and sustainability-linked bonds, which do not.
Responding to Thomae's comments, Johanna Kob, head of responsible direction at Zurich Insurance Company, said: "I do disagree with the examples he made about green bonds because it's somewhat makes them sound like they're all useless, and they're all greenwashing and it's connected to companies as if taking drugs. So that kind of language I know is nice and provocative, but I think it does injustice to the market.
"The idea of integrity is not necessarily tied to the instrument. Both the 'use of proceed' and the sustainability-linked models are focused around transparency and integrity, and I think both come in more ambitious and in less ambitious formats. It's the duty of investors to make up their minds [about the credibility of the issue]."
This year the International Capital Market Association (ICMA), which administers the Green Bond Principles, introduced principles for sustainability-linked bonds, while guidelines on transition bonds are expected next month.
Ben Caldecott, director of Oxford University's Sustainable Finance Programme, said: "Sustainability-linked bonds, and indeed sustainability-linked loans, are a really significant development for the future of sustainable finance, and are much more powerful and important than most of the green 'use of proceeds' stuff out there in the market.
"The reason for that is very simple, which is that it creates a clear economic incentive for issuers to change their behaviour. The magic happens when a key performance indicator (KPI) is found that both reduces credit risk, but also improves environmental and social outcomes."
The EU's forthcoming green bond standard also came under fire. Thomae said it was possible that under the standards a corporate could issue a 'use of proceeds' bond while the overall carbon output of the business rises. He described this as "an unfortunate choice".
But Jens Hellerup, senior director, head of funding and investor relations at Nordic Investment Bank, the largest issuer of green bonds in the region, defended the 'use of proceeds' model: "When we have been speaking with investors, they have been vocal that they would like to get some impact. And that's where the green bond or the use of proceeds bond has been transparent, for showing the impact on where the investor's money is going, and that's why I still think there is room for the use of proceeds [model]."
On the sustainability-linked bond versus use-of proceeds debate, Eusebio Garre, head of funding at IDB Invest, said: "Both models have their own merits, both for issuers and for investors. The KPI-linked model innovates by appealing to issuers because it does provide them with full flexibility on the use of proceeds, as long as they can commit in a transparent and consistent way to improve very specific KPIs.
"However, I think the jury's still out about how many issuers are going to be able to deliver such a consistent and credible message."
The panel was moderated by Tanguy Claquin, head of sustainable banking at Credit Agricole CIB.
Last month Environmental Finance hosted a webinar on transition bonds as part of its Build Back Better series, where eligibility criteria for the use of proceeds focused on transition was identified as a key point of discussion.
The panel discussion was moderated by Tanguy Claquin, Head of Sustainable Banking, Crédit Agricole CIB
More information about the event is available here.