09 January 2018
While the fourth core component of the Green Bond Principles ("GBP") emphasises "reporting" by issuers, it was originally focused around the narrower requirement to account for the allocation of Green Bond proceeds either on a project-by-project or on an aggregated portfolio basis. Nevertheless, even in the GBP's initial form, it recommended reporting on the positive environmental impact of the investments funded by Green Bond proceeds, encouraging "the use of quantitative and/or qualitative performance indicators which measure, where feasible, the impact of the specific investments (e.g. reductions in greenhouse gas emissions, number of people provided with access to clean power or clean water, or avoided vehicle miles travelled, etc."
Since the January 2014 release of the GBP, impact reporting has garnered increasing attention, as the confluence between the requirement for the Green Bond market to underline its credibility and contribution to increasing capital allocation to environmental sustainability projects marries with investors' increasing demands for reporting. Whether the clamour is driven by their internal reporting obligations that are designed to attract and retain their own investors, or to comply with regulatory requirements such as France's ground-breaking Article 173, and/or recommendations by market and regulatory bodies such as the Task Force on Climate-Related Financial Disclosures, it is clearly growing ever louder.
The 2017 update of the GBP goes further in emphasising the importance of disclosing the key underlying methodology and/or assumptions used in the quantitative determination that may help inform market participants. This is, of course critical in allowing investors to appraise the comparability of the estimated impacts, but also in facilitating alternative assessments and calculations to be carried out independent of a specific methodology.
To enhance the transparency and integrity of the Green Bond market, a significant effort has been undertaken by the GBP's Working Group on Impact Reporting to establish voluntary guidelines that aim at a harmonised framework for impact reporting. The remit for this working group, which includes issuers, investors, underwriters and environmental advocacy and advisory groups, is to focus on the conveyance of information reflecting the environmental benefits of the assets funded by Green Bonds that are aligned with the GBP. The goal is both to reduce the uncertainty for issuers and ensure the timely availability of relevant information for investors and wider stakeholders by agreement on the best practice for disclosure, both quantitative and qualitative, of the "impact" resulting from Green Bond investment.
Since most Green Bond issuance programmes are significantly directed towards the funding of energy efficiency and renewable energy projects, the GBP impact reporting process was kick-started by an informal working group of development banks, who outlined core principles and recommendations and proposed core indicators for these two sectors. The output included illustrative reference reporting templates that could be utilised or adapted by issuers, whether reporting on a project-by-project basis or undertaking portfolio-based reporting.
Specifically in relation to reporting on GHG emissions data, it is acknowledged, that in the absence of one single commonly-used standard for the calculation of GHG emissions reduced/avoided, issuers may follow their own methodologies while making these transparent to investors. There are a number of calculation methodologies both within and across institutions. While there are on-going efforts to harmonize GHG accounting methodologies for relevant sectors among a broad group of International Financial Institutions, given the current differences in calculation approaches, reporting GHG emissions data based on a uniform, consistent and published methodology remains a challenge.
Issuers are encouraged to report GHG emissions data only when they can provide full transparency on the applicable GHG accounting methodology and assumptions, which can be referenced. Green bond market players are increasingly interested in seeing as much disaggregated information as practically feasible and expect that the method of estimating the impacts is made transparent with the core underlying data behind the impact assessments.
Building on these "good practice" impact reporting guidelines for energy efficiency, and renewable energy projects, in June 2017 the GBP released suggested impact reporting metrics for water and wastewater projects. Recognising that such projects may also be closely interlinked with energy consumption, albeit not the central driver of water and wastewater projects, it was recommended that energy savings and Greenhouse Gas ("GHG") reductions be reported under the template for energy efficiency, and renewable energy projects.
While broadly following the same format and similarly providing reporting templates, the suggested core indicators for each category of water and wastewater projects described were kept to a minimum, and benchmarks were proposed to facilitate reporting at a project and/or at a portfolio level across geographies. The importance of the geographic context in the assessment of solutions reinforces the benefit of providing additional contextual information. We therefore encourage disclosure on the local and regional context, including location and region specific baselines, to help understand the environmental impacts/benefits of the project in its context. Additional qualitative reporting is also encouraged.
The impact reporting guidelines recognise that for meaningful aggregation of indicators across projects, consistency in the methods of calculation, baselines and benchmarks would be required. Thus for the purpose of data quality, issuers are encouraged to disclose additional technical reports and/or data verification protocols where additional information could be provided as well as links to the sources of such data and methods of calculation.
The impact reporting should be based on ex-ante estimates (developed prior to project implementation) of expected annual results for a representative year once a project is completed and operating at normal capacity. When reporting on a portfolio level, ex-ante estimates can be based on the annual analyses per portfolio and, if several categories are financed, per category, if possible.
In recognition that not all Green Bond issuers may be in a position to report under the proposed metrics, additional sustainability indicators for water management projects were proffered that centred primarily on the number of people benefitting from the relevant project, or the land area covered. This highlights the tension between the drive to enhance the integrity and transparency of environmental finance funded through Green Bonds, and the need to ensure that reporting requirements are not so onerous that it debars Green Bond issuance by the wide variety of issuers that would allow the Green Bond market to fulfill its goal of promoting and amplifying the important role that financial markets can play in helping to address environmental issues.
The value of these "other sustainability indicators", which may also align well and facilitate reporting against the Sustainable Development Goals, as well as the encouragement for all issuers to provide qualitative information on the impact of their projects to be funded by Green Bonds goes beyond a broadening of the issuer base by underlining the insufficiency of quantitative reporting alone, given that these are estimates, rather than a precise science that produces comparable and aggregable data. This may arise from differences in focus, for instance between the more precise measurements of CO2 "avoided" or "reduced" by contrast with CO2 "savings", which are highly dependent on pre-assumptions; or whether the focus is on Scope 1 and Scope 2 projects, or the more problematic Scope 3 projects where assumptions are less well defined.
There is often a misconception that a benefit of quantitative reporting would be to direct investors to Green Bonds that fund projects estimated to provide the largest CO2 savings, thereby implementing investment strategies for a 2û scenario. Quite apart from the reality that such a scenario is ill-defined, with different countries having disparate nationally determined contributions, it is not a given that a low carbon pathway is determined by the biggest delta in CO2, and there may indeed be a greater importance in the future on technologies that do not provide significant CO2 savings. This, as well as the lack of precision of estimates of CO2 savings are only a few of the reasons why one should be sceptical of the value of assessing Green Bonds based on the calculation of CO2 savings per US Dollar invested.
It is clear that there are many important projects that we should continue to focus on, as reflected in the several broad categories for eligible projects under the GBP, and for which new impact reporting metrics are to be encouraged.
Authors: Isabelle Laurent and Mikko Venermo