Green bonds become big business – POLITICO

The explosive growth of green finance in recent years has been accompanied by a parallel boom in third-party reviews, generating big business for a few companies, but also echoing the role credit assessors played before the financial crisis. of 2008.

Moody’s expects $1 trillion in sustainable debt issuance this year – and has tripled its staff to provide advice to “meet the needs of market participants”, said Michael Simoncompany spokesperson.

There were 414 external reviews of sustainability bonds in the first half of 2022, according to Environmental Finance, a news and analysis service. This compares to 1,049 in 2021 and 450 in 2020 – numbers that show sustained interest despite generally tougher economic conditions. Much of the activity went to companies such as Sustainalytics, Institutional Shareholder Services, S&P Global, Moody’s, CICERO Shades of Green and Kestrel Verifiers.

CICERO Shades of Green has doubled the number of its employees in the past two years, says the co-founder Christa Clapp. This growth coincides with an increase from 47 external reviews conducted in 2020 to 103 in 2021, according to Environmental Finance.

“We have seen fluctuations with uncertainties in financial markets this year,” Clapp said. “However, overall there has been a fairly steady growth in interest in all products. For me, this means that there are still a lot of bond-issuing companies and organizations that are still doing the groundwork to get their opinions, even if they are not ready to come to the financial market.

Kestrel Verifiers, meanwhile, has earned three times more revenue from green, social and sustainable transaction reviews through August 2022 than the same time last year, said Melissa Winkler, senior vice president of sales and business strategy.

Reviews have become standard practice in the green bond market, although there is no formal requirement to do so for green transactions to be reviewed. Estimates from the Climate Bonds Initiative that 86% of green bonds underwent external reviews last year, thanks in part to guidelines issued by the International Capital Markets Association. The reviews, which provide a first check against greenwashing, aim to ensure that these transactions actually support environmental, social and governance objectives.

The financial system must shift trillions of dollars into green, sustainable and energy transition investments as part of the global effort to fight climate change. The $100 trillion bond market can play a key role in helping companies attract sustainability-minded investors.

What about greenwashing: There are still doubts about the value of green bond reviews, similar to the skepticism surrounding credit assessors in the years following the 2008 financial crisis. If issuers are paying for reviews, how will investors can they be sure reviewers aren’t inflating ratings just to please customers?

“I think what’s going to happen, some (reviewers) aren’t going to last because they’re probably giving their checks to the highest bidder,” said Jim Nadler, CEO of rating agency Kroll Bond. “Where the rubber will meet the road is when you have a company that is not meeting its targets, and you have to publish to the world that this company is not meeting targets and they will stop paying you. “

The ICMA guidelines deal with independence and conflicts of interest. Companies such as Cicero, Sustainalytics, S&P, ISS have agreed to align with the guidelines.

Better known unknowns. For a sustainability-linked bond or loan, where borrower performance is judged in part by the ability to achieve ESG objectives, determining whether a key performance indicator is meaningful or whether the associated objective is ambitious enough is often a sophisticated process.

“These structures are still new and evolving. Setting goals is even more of an art than an exact science,” said Tess VirmaniESG manager at the Loan Syndications and Trading Association.

There is a new push within the external review industry for additional reviews to monitor progress after a bond is issued. This concern manifests itself in the context of the European Union agreement development of a green bond standard, which would turn market orientation into regulation. The current draft text calls for mandated external reviews of allocation reports, but also for reviewers to have fewer conflicts of interest.

GAME ON — Welcome to the long game, where we bring you the latest efforts to shape our future. We offer data-driven stories, engaging interviews with industry and political leaders, and Tuesday-Friday news to keep you up-to-date on sustainability.

The durability of the team is editor Greg WordAssociate Editor Debra Kahn and journalist Jordan Wolfman. Contact us all at [email protected], [email protected]and [email protected].

Want more? Do all of us. Sign up for the long game. Four days a week and always free!

— Big Oil is trying to convince you that it can go green. The Financial Times breaks down why its low-carbon investments are insufficient.

— Restaurants are battling a new California law that gives fast food workers more protection, AP reports.

— Move over, IRA: Australia has just passed its first major climate law in more than a decade, Bloomberg writes.

Comments are closed.