Bond Market Asking `What Is Green?' Curbs Climate-Friendly Debt

Companies are second guessing whether to participate in green-bond markets as scrutiny by environmental groups raises the bar on what constitutes a climate-friendly security.

After quadrupling in size from 2012 to 2014, lifted by investors tracking environmental performance in addition to Yield Yield A yield is defined as the earnings generated by an investment or security over a particular time period. This is in typically displayed in percentage terms and is in the form of interest or dividends received from it.Yields do not include the price variations, which differentiates it from the total return. As such, a yield applies to various stated rates of return on stocks, fixed income instruments such as bonds, and other types of investment products.Yields can be calculated as a ratio or as a A yield is defined as the earnings generated by an investment or security over a particular time period. This is in typically displayed in percentage terms and is in the form of interest or dividends received from it.Yields do not include the price variations, which differentiates it from the total return. As such, a yield applies to various stated rates of return on stocks, fixed income instruments such as bonds, and other types of investment products.Yields can be calculated as a ratio or as a Read this Term, the green bond market is expected to slow for a second consecutive year, according to Bloomberg New Energy Finance. Growth moderated to 28 percent last year and in 2016 may nudge ahead just 4 percent, to $50 billion, the London-based researcher said.

“As soon as you start issuing green bonds, then you encourage lots of scrutiny from lots of interested people,” said Michael Ridley, director of green bonds and corporate credit at HSBC in London. The potential for controversy is making companies cautious, he said.

Take Engie SA. In 2014 the French energy company used green-labeled bonds to entice German, French and U.K. pension funds to snap up a record 2.5 billion euros ($2.8 billion) of the securities. While the company said the debt would finance “sustainable growth” from biomass, wind and hydropower, it didn’t mention inside a 171-page prospectus the full environmental consequences of its projects.

Engie, then called GDF Suez, used some of the money raised to finished the Jirau hydropower dam in Brazil. Even as that project lights up thousands of homes with its 3.75 gigawatts of fossil-fuel-free power, it also flooded 362 square kilometers (140 miles) of habitat. Conservation groups say the project displaced four indigenous tribes and threatens to eradicate fish species from one of the Amazon River’s biggest tributaries.

For it’s part, Engie said in an e-mailed reply to questions that it continues monitoring the dam’s environmental impact and that auditors from the International Hydroelectric Association reported a “very good sustainability performance.”

Green Default?

The Brazilian dam has since become a telltale example of the pitfalls waiting to snare issuers. In the absence of a uniform definition spelling out what constitutes a green investment, companies can pick and choose projects funded by the securities. That in turn has given environmental groups room to criticize companies they identify as betraying green principles.

Even as green bonds may attract “a broader range of investors” and “enhance an issuer’s reputation,” according to a 2015 KPMG report, investors may also “seek penalties for a green default, whereby a bond is paid in full but the issuer breaks agreed green clauses.”

The premium investors demanded to hold Engie SA’s green bonds rather than similar government securities has increased to 79 basis points from 76 basis points in September 2014 when environmental groups raised pressure the company. Engie’s 1.375 percent bond due May 2020, rated A1 by Moody’s, traded at 104.26 euros and yielded 0.27 percent on March 4.

Real Standards

“There has to be real standards that have to be monitored,” said Karen Orenstein, an international policy analyst at Friends of the Earth in Washington who campaigned against Engie’s Brazilian project. “Each corporation or bank can’t just decide what’s green or not. We would advocate against including large hydro under green bonds.”

Friends of the Earth teamed up with other environmental groups, International Rivers and Banktrack, to put pressure on Engie and other companies issuing green bonds. The absence of Regulation Regulation Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority ( Like any other industry with a high net worth, the financial services industry is tightly regulated to help curb illicit behavior and manipulation. Each asset class has its own set of protocols put in place to combat their respective forms of abuse.In the foreign exchange space, regulation is assumed by authorities in multiple jurisdictions, though ultimately lacking a binding international order. Who are the Industry’s Leading Regulators?Regulators such as the UK’s Financial Conduct Authority ( Read this Term means nuclear, waste incineration and even fossil fuel companies could cash in on the securities, too.

Green Credentials

Engie was advised by Paris-based Vigeo ESG, a ratings agency that assesses the environmental practices of companies. Issues such as local development and the well-being of local communities, as well as ethical supplier relationships and environmental protection, were used to determined the 2014 security’s green credentials.

“Vigeo has evaluated Engie’s green bond only before this issuance,” the French company said in an e-mail, adding that it didn’t assess how the money was subsequently used or take a view on whether the projects financed met their green criteria.

To be sure, Engie’s bond isn’t the only company to draw scrutiny by issuing green bonds. Green-bond selling banks with large coal holdings have also been targeted. When Bangchak Petroleum Public Co Ltd., a Thai oil refiner and gas station operator, sold 3 billion baht ($85 million) of green bonds last year, it prompted a debate about whether oil companies should be allowed to issue the securities.

‘Prone to Controversy’

The added scrutiny has soured some companies’ appetite for green bonds, according to HSBC’s Ridley. “You do stick your head above the parapet when you could have just carried on merrily in your business issuing non-green bonds and doing that fine,” he said.

Some underwriters are even advising clients against issuing the securities because of the added scrutiny.

“We have turned away companies,” said Jonathan Weinberger, managing director of capital markets engineering at Societe Generale SA.

In some cases “the project is unlikely to be judged as green by the market at large,” said Weinberger, who has helped Societe Generale underwrite about 8 billion euros of green bonds. In other cases, “the project is okay but as a corporation, a certain track record can make it a poor candidate and prone to controversy,” he said.

Several voluntary frameworks are used to help corporate issuers figure out whether they’re fit to issue green bonds. Two of the most popular -- the Green Bond Principles and the Climate Bond Initiative -- have gained traction among investors.

“The voluntary principles act like a filter, only letting bonds through if they fit the guidelines,” said Dan Shurey, analyst at BNEF. “Like any filter, these principles are needed to bring quality and consistency to the labeled-green-bond market, but by doing so, they can slow the flow of capital into it.”

--With assistance from Jessica Shankleman and John Glover To contact the reporter on this story: Anna Hirtenstein in London at ahirtenstein@bloomberg.net. To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net, Jonathan Tirone

By: Anna Hirtenstein

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