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The first responsible financial instrument we are going to look are are Green Bonds. These have come to prominence in recent years as a way of funding sustainable environmental projects and will be a key component of a greener future.

Green Bonds: Prioritising environmental concerns

David Katimbo-Mugwanya David Katimbo-Mugwanya Senior Fund Manager
Edentree Insight reports

The Rise of Social and Sustainable Bonds

David Katimbo-Mugwanya


Senior Fund Manager
30 Dec 2020

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Chapter 2

Green Bonds: Prioritising environmental concerns

In essence, green bonds are debt instruments whose proceeds are deployed exclusively to finance projects with clear environmental benefits. They first came to market in 2008, as a novel way for bond investors to play an active role in mitigating climate change. Over the subsequent 12 years, an increasing number of companies have sought to reduce their environmental impact and this, alongside growing investor demand for ESG products, has resulted in an exponential growth in supply of these instruments.

Global green bond issuance has so far been strongest in Europe, with China also being a major contributor to the cumulative total USD900 billion in bond volumes since the market’s inception.

Climate Bonds USD bn

Chapter-2_ClimateBond_1048x210

Source: Climate Bonds Initiative. (Data as of 16th September 2020)

Green bond issuance per year (USD bn)

Chapter-2_Green-Bond-Issuance_1048x428

Source: Climate Bonds Initiative. (Data as of 16th September 2020)

By geography

Chapter-2_Geography-pie_524x372

Source: Climate Bonds Initiative. (Data as of 16th September 2020)

By use of proceeds

Chapter-2_Proceeds-pie_572x412

Source: Climate Bonds Initiative. (Data as of 16th September 2020)

Green gilts: better late than never

UK Chancellor Rishi Sunak’s November 2020 announcement of a green sovereign UK government bond was arguably long overdue and should provide a boost the country’s green finance markets.

Poland was the first country to issue a sovereign green bond in 2016, followed by France the year after, therefore, the UK has been a notable absentee from a market that now includes government issuers such as Belgium, the Netherlands, Sweden and, more recently, Germany.

Funds raised from the issuance of green gilts are likely to fund projects in the renewable and clean energy sectors. We believe strong investor demand could result in better pricing terms for the government relative to its conventional debt yield curve when the bonds launch.

The Green Bond Principles

It is important to note that issuers cannot just label their bonds green. Use of the green bond categorisation is subject to the voluntary Green Bond Principles (GBP), created by the International Capital Markets Association (ICMA), whose transparency and disclosure guidelines seek to uphold the market segment’s integrity. Qualifying project areas include renewable energy, energy efficiency and green buildings, pollution reduction, clean transportation, sustainable water and sustainable agriculture.

The Principles propose adherence to the following framework:

Chapter-2_Green-Bond-Principles_1191x729

The category of green bonds shown in this example are ‘use of proceeds’ bonds, where the bond’s coupon interest and principal repayments originate from the issuer’s general cashflow rather than from revenues generated by the designated green projects.

Such nuances underline the reason why we believe stringent due diligence is critical. While the use of a green bond’s proceeds are clearly stated, it is important to also consider the wider company’s business activities.

In our view, focusing mostly on how the proceeds of green bonds are used could make investors more susceptible to ‘greenwashing’ as the green bond label could falsely suggest these values represent a company’s wider sustainable practises and/or products, which may not always be the case.

Daimler AG

Daimler AG’s green bond, issued in September 2020, is one such instrument that fell short of our issuer assessment (using the Environmental Management pillar), even though the proceeds of the German Auto manufacturer’s EUR1 billion 10-year debt were going to projects that included the production of zero-emission vehicles and the recycling of batteries as well as fuel cells.

Teekay Shuttle Tankers

Another example where the underlying issuer of a green bond failed to live up to scrutiny is Teekay Shuttle Tankers’ USD125 million green bond, issued in October 2019 to help with the purchase of energy-efficient tankers. Canadian company Teekay specialises in transportation for the offshore oil industry – a carbon-intensive sector that rightly falls short on ESG screens.

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