Bond investors and sustainability: Is it all greenwash?

"We are in a boom era for borrowing linked to sustainability criteria," according to Saida Eggerstedt, Schroders' head of sustainable credit.

In 2020, the global issuance of green bonds alone totalled $226bn as governments and companies sought finance for planet-friendly initiatives, Bloomberg has revealed. That's compared to about $40bn at the end of 2015. Global issuance of green, social and sustainability bonds will hit a record $650bn in 2021, a 32 per cent increase over last year, according to Moody's Investor Service.

But while green bonds are clearly in fashion, there is less agreement about their definitions and the standards underpinning them (see below).

"The recovery from the global pandemic has been fuelling this expansion, as governments across the world are looking to stimulate economies and create jobs while committing to ambitious environmental targets," Eggerstedt says. "This is being met eagerly by institutional investors wanting to meet their own ESG objectives and seeking returns in an unrewarding global fixed income market."

However, as the pandemic pushes sustainability bonds from niche to mainstream, she warns: "There are concerns that asset selection standards or sustainability objectives of issuers might not be as high or as tight as they could be, which could leave some open to accusations of greenwashing."

Green, social and sustainability-linked bonds explained

Green bonds, which have so far hogged the limelight, are issued by governments and companies specifically to fund new and existing projects with environmental benefits - such as renewable energy and energy efficiency projects.

Eggerstedt cites GetLink, the company which runs the Channel Tunnel linking Britain to mainland Europe, as a recent example. It issued green bonds last year to finance clean energy projects such as low carbon transport and wind farms.

"Britain will issue its first green government bond this year to tackle the climate crisis and aid recovery from the pandemic," she explains. "Germany, France and the Netherlands are among countries to have issued green bonds already, and the European Commission said in September last year that 30 per cent of the EU's coronavirus recovery programme should be funded this way."

Meanwhile social bonds have funded a range of causes from access to education, affordable transportation, and food supply protection. According to Bloomberg, the issuance of social bonds increased seven-fold last year, partly due to the response to Covid-19.

"The pandemic saw the International Finance Corporation, the global development institution and sister organisation to the World Bank, issue bonds to reduce the economic impact on developing countries, for example," says Eggerstedt.

Sustainability-linked bonds are a hot topic at the moment. The issuer commits explicitly to future improvements in sustainability outcomes across the business within a predefined timeline.

For example, Italian energy company Enel and Brazilian pulp and paper producer Suzano have issued bonds that link the cost of capital to their objectives to decarbonise the production process.

"High profile examples include the French luxury goods brand Chanel and UK retailer Tesco," explains Eggerstedt. "Schroders itself converted its corporate credit facility into an ESG-linked one in 2019 - with pricing dependent on performance on diversity targets, ESG investment integration and use of renewable energy."

Are there global standards?

"The lack of accepted global principles is one of the biggest challenges," Eggerstedt says.

Investor trade body the International Capital Markets Association has launched both green and sustainability-linked bond principles but these are voluntary standards outlining how issuers can use funds and keep investors informed.

Meanwhile, the Climate Bonds Initiative, an international not-for-profit, has its own criteria, describing its scheme as a 'FairTrade-like labelling scheme for bonds'.

The Taskforce on Climate-Related Financial Disclosures (TCFD) is helping to standardise climate-related financial reporting, which in turn should improve clarity around green bonds.

"The fact is many companies aren't quoted on one of the world's major stock markets," explains Eggerstedt. "Some of them are smaller companies which need bond-holder stewardship and engagement to improve their transparency and accounting. I think bond-holders have a big role to play, sometimes alongside their equity colleagues."

Some markets are clearly ahead of others in the sustainable investing journey, but it is not a straightforward picture, Eggerstedt says. "Europe is leading with the US and Asia showing momentum," she adds. "That is important for reaching global sustainability targets. I am positively surprised by the emerging market issuers. Recent bonds, linked to the UN's Sustainable Development Goals, from a Brazilian company are very advanced, even looking at issues such as workers' mental health, for example."

Asking questions, monitoring outcomes

Investors and asset managers must do their homework to assess a bond issuer's credentials and targets and to monitor sustainable outcomes.

The oil and gas sector's first green bond was issued by Repsol in May 2017 raising €500m euros, with the Spanish giant claiming the finance would help it cut CO2 emissions by 1.2 million tonnes within three years. However, the money was to go towards upgrading and making more efficient its existing fossil fuel refineries.

"The Repsol green bond should remind investors how important it is we ask questions around what constitutes a valid target or key performance indicator," Eggerstedt says. "There is also the issue of monitoring how the money is spent."

She continues: "Investors must undertake due diligence and not just believe issuers' promises that the money they get from a green or other ESG bond is used solely for appropriate projects. There are even fears some companies could be opportunistic and try to access cheaper funding while waiting for suitable initiatives to come along. It is clear that bonds must be assessed on a case-by-case basis."

Saida Eggerstedt is head of sustainable credit at asset manager Schroders.