29 Jun 2021
29 Jun 2021
Thanks to campaign groups and the media, today we are more aware than ever about the concept of ‘greenwashing’. Whether it’s a ‘vegan friendly’ product tested on animals, a paper straw which can’t be recycled, or a company turning its logo green without changing its business – it’s a tawdry byproduct of the consumer drive towards more sustainable living.
Greenwashing is a potentially worrying trend, because it encourages us to believe that we are part of a problem’s solution, even though we may actually be making it worse. Scale that up over millions of people, and the cumulative effect could be disastrous.
While greenwashing claims are especially rife in consumer goods (think fast fashion, food and drink), as investors increasingly turn towards ESG and climate investing, similar questions are being raised about the true ‘greenness’ of certain investment products.
It’s important to tackle these questions. After all, investors have huge power to support or penalise companies whose standards slip, or who promise more than they deliver. By assessing an investment’s green credentials, investors can gain the confidence to support it, or understand that there are more suitable ways to deploy their capital.
If you have been following our blogs, you’ll already know that Lyxor is a big fan of green bonds – fixed income securities whose proceeds fund eco-friendly projects. We launched the world’s first green bond ETF in 2017 and we’re very happy to see the market boom in recent years. You can read more about our flagship ETF’s impact in the 2020 report we published recently.
To be eligible for inclusion in our ETF, a green bond must be approved by Climate Bonds Initiative (CBI), a not-for-profit dedicated to promoting investments for a low carbon and climate-resilient economy. In their latest report co-sponsored by Lyxor ETF, CBI looked at what’s called ‘post issuance reporting’ – a review of green bond issuance which asks the question “did the issuer do what they said they would do?”
The report has some interesting results and sheds light on whether greenwashing is an issue for green bond investors.
The CBI report looks at two main aspects of post issuance reporting for green bonds: ‘use of proceeds’, meaning how the bond’s proceeds were deployed, and ‘impact’, meaning the tangible effects achieved.
“Post-issuance UoP [use of proceeds] reporting is a core component of the Green Bond Principles (GBP) and the Green Loan Principles (GLP), and it is also recommended that issuers report on the environmental impacts achieved,” says the CBI. “Post-issuance disclosure provides transparency, ensures accountability and underpins the credibility of green bonds and loans. As the market has grown, so has investor interest in UoP and impact reporting to inform decision-making processes, analysis and investor reporting.”
If you’re interested in this topic, we encourage to go and read the full report. The CBI’s overarching aim was to be as comprehensive as possible to support the evolution of sustainable investing, so there’s plenty to dig into. Below we’ll share a few highlights that we think are worth noting.
From its study of green bonds issued from Nov 2017 to March 2019 included in the Climate Bonds Green Bond Database (694 bonds from 408 issuers representing $212bn), three main takeaways emerged:
The first interesting finding from the CBI’s research is that post-issuance reporting is already in a strong position. 77% of issuers, representing 88% of the amount issued by market value, provided use-of-proceeds reporting.
Second, there is little evidence of any greenwashing among the green bond issuers assessed by the CBI. By its estimates, almost all non-reporting issuers at the time of research have now reported at least use of proceeds.
The third point to note is that reporting of ‘impact’ is becoming increasingly common. However, it’s more complex than UoP reporting and according to the CBI, it is highly unstandardised, with a wide breadth of metrics used to measure and report it.
So, who is doing post-issuance reporting well? Below are two examples of companies that the CBI rates as excellent at post-issuance reporting for green bonds. Both can be found in the Lyxor Green Bond (DR) UCITS ETF.
One of the takeaways of the CBI report is that despite a rich landscape for post-issuance reporting today, it remains fragmented and there could still be room for improvement. In particular, in order to improve the availability, quality and consistency of reporting, a common reporting framework should be developed, and ideally a centralised reporting platform for better harmonisation of data.
The next evolution could be a more centralised, comprehensive and global reporting platform. The EU Green Bond Standard, which already requires UoP and impact reporting, could help deliver such a solution.
Source for all data: Climate Bonds Initiative, Post-issuance reporting in the green bond market, 2021.
The day is coming when a company’s fortunes will depend on the size of its carbon footprint, the global warming scenario it implies and its willingness to address broader societal issues, just as much as ordinary financial metrics. The best investment decisions keep this bigger picture in mind.
Our SFDR 9 compliant Lyxor Green Bond (DR) UCITS ETF offers a simple way for investors to take direct climate action in their fixed income portfolios. You can also learn about the impact our flagship Green Bond ETF had in our 2020 impact report.
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