(ATF) The coronavirus pandemic has triggered a scramble for responsible investing but has also underlined the need for vigilance against ‘greenwashing’ – unproven claims that a company’s products are environmentally friendly.
Sustainable finance bonds issued in 2020 totalled over US$544 billion – more than double issuance levels during full year 2019 and notching an all-time annual record, according to Refinitiv data.
Issuance gathered pace as the pandemic spread rapidly across the world and the fourth quarter issuance tally of over $180 billion was the highest quarterly aggregate posted.
Sean Kidney, co-founder and CEO of the Climate Bonds Initiative, told Asia Times Financial, said: “Once you include the ‘daughters of green bonds’ – [that is] social, sustainable, SDG [UN Sustainable Development Goal], that all use the green bonds use of proceeds model – the market has grown hugely in 2020, albeit [those] green-labelled only grew modestly. And we face large-scale green bond issuance from sovereigns and the EU that will double the size of the market in short order.
“Governments can take advantage of investor demand for green by using fiscally efficient measures [from central bank regulation, incentive of green Quantitive Easing, to partial guarantees] to promote more green bonds in policy priority areas.”
But like all financial trends there will be a lot of issuers latching on to this wave and experts say there is a need to be mindful of the mismatch.
“First, it can be helpful to distinguish between different kinds of greenwashing: the first can arise due to a lack of standards or data to define ‘green’ activities; the second is a more deliberate form of intentionally misleading disclosure. Personally, I have found the first to be much more prevalent,” Gabriel Wilson-Otto, Global Head of Sustainability Research at BNP Paribas Asset Management, said.
NO GLOBAL STANDARDS FOR ESG
While, rating agencies, independent verifiers, data gatherers and auditors have established their own parameters, there are no global standards, definitions or regulations regarding environmental, social and governance investment factors.
Thus, there is a risk that the lack of clear definitions could bring about inconsistencies, create confusion and heighten the potential for greenwashing.
Last month, the European Commission and national consumer authorities released the results of a screening of websites, which for the first time focused on greenwashing.
The screening which involved examination of 344 seemingly dubious claims in more detail, found that in more than half of the cases, the trader did not provide sufficient information for consumers to judge the claim’s accuracy.
In 37% of cases, the claim included vague and general statements such as “conscious”, “eco-friendly”, “sustainable”, which aimed to convey the unsubstantiated impression to consumers that a product had no negative impact on the environment. And in 59% of cases the trader had not provided easily accessible evidence to support its claim.
GREENWASH ALERT
Meanwhile, governments have started to create standards in efforts to crack down on greenwashing. This will protect consumers and ensure alignment with energy and climate policy.
The EU’s sustainable finance strategy, for example, is creating a new landscape of standards and transparency that financial institutions will have to navigate.
“Regulatory development outside the EU has been piecemeal in comparison, focused on specific areas,” Fitch Ratings said in a note.
“Regulatory efforts in APAC and Latin America have targeted developing green finance as well as enhancing company ESG disclosures. The US has looked to clarify how sustainable investing and ESG fits under the existing regulatory regime, such as rules around fiduciary duty.”
Overall, however, these initiatives are timely as governments have increased focus on social and environmental challenges.
Fitch Ratings’ Global Head of ESG research Mervyn Tang told Asia Times Financial Television the pandemic had triggered debate over whether phenomena like deforestation or loss of biodiversity, had triggered the global health crisis.
“Governments have become much more cautious on biodiversity loss and are starting to implement regulation that limits the environmental impact,” he said.
“We are going to see financial institutions as well as policymakers able to act better to tackle these biodiversity issues.”
GREEN STIMULUS
Rival rating agency Moody’s said in a report this month it expects 2021 to be the year of green stimulus as major economies attempt to integrate their economic recovery and job creation initiatives with their longer-term efforts to reduce carbon emissions.
The EU recently upped its 2030 greenhouse gas emissions reduction target to 55%, from 40% previously set in 1990. US President Joe Biden’s plan indicates a 2025 target to be put to Congress this year as a first step to a net-zero 2050 target and decarbonising the US power sector by 2035 while China ratcheted up its 2030 commitments in its revised Nationally Determined Contributions at the end of 2020 under the Paris Agreement.
“Green stimulus packages are aimed at supporting the development of new low-carbon products and services, such as electrified transport, technologies that enhance energy efficiency, renewable energy generation and green hydrogen,” the Moody’s report said.
“The Biden administration is also planning a $2 trillion ‘Build Back Better Recovery Plan’, which is expected to have a green infrastructure focus.”
The demand for the sustainable finance products is already starting to reflect in pricing.
“There is a 3-5bps green premium, cost pricing advantage to issuers,” said Chaoni Huang, Head of Sustainable Capital Markets, Global Markets APAC at BNP Paribas.
“Looking at 2019-2020 APAC sustainable bonds issued publicly in US dollars, we found that sustainable bonds for all ratings have an average 4bps outperformance in New Issue Premium (greenium).”
“In terms of price compression [the difference from final pricing guidance to initial pricing guidance], on average, Sustainable Bonds achieved 1.89 bps greater price compression compared to Conventional Bonds. Sustainable bonds were able to achieve 5.33x oversubscription, slightly better than conventional ones.”
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