In late 2014, two Australian institutions, Stockland and NAB, joined the growing global trend and issued their first Green Bonds. Both were oversubscribed. The rapid growth of the market has been spurred on by many factors, one of which is the desire for investment in sustainable development without the perceived risk of investing directly into a ‘green’ project.
The emergence of the ‘use of proceed’ or ‘asset linked’ green bond has allowed many more issuers to enter this market. These bonds are essentially normal bonds, backed by the issuer, with a commitment to using the proceeds towards the development of green projects. For the issuer, the cost of a green bond is no different and for the investor, the risk of repayment is also comparable to a normal bond. So the green bond is likely to fit with the risk appetite of a traditional bond investor.
So, a win-win? Yes, but there have been criticisms in some quarters about just how ‘green’ these bonds are. The question is whether such bonds, while allowing both sides to feel good about the transaction, are really leading to additional green projects, or simply ones that may have happened anyway without this available ‘green’ finance?
I believe the role of Standards and Assurance will be critical in establishing the credibility of the Green Bond market in the face of such scepticism. Currently the market does not require compliance with any standard before an issuer can label their bond as green.
But while some form of standardisation is necessary, from my experience with Sustainability Reporting and Greenhouse Gas measurement, it will be very difficult to ever get one standard to define the criteria for green performance. The most widely accepted framework, in sustainability reporting, is the Global Reporting Initiative (GRI). As comprehensive as GRI is, no two company reports look the same, and every company has to provide detail to explain exactly how they measured performance.
The Greenhouse Gas Protocol also establishes principles and methodologies for measurement, but even this is supplemented by additional national measurements with more specific guidance for every activity.
So to create a standard set of criteria to measure the green performance consistently across Green Bonds is a very ambitious goal.
A more realistic approach would be a requirement to reference already established, publicly available, criteria to measure green performance. Investors would then be able to assess whether a bond was sufficiently ‘green’ for them and could compare the relative ambition and statement of each issuer in terms of what they are seeking to achieve. A proxy for the investors is also the emergence of Green Bond Indexes, and it is likely they will play a bigger role in deciding what is accepted as green enough.
Assurance in the green bond market is much-misunderstood, with some referring to a ‘second opinion’ as a form of assurance, when those of us in the accounting profession would never accept that definition. I prefer the green bond terminology which refers to “second party consultations”, where an expert consultant with climate expertise can help in the establishment of a Green Bond’s eligible project categories.
When considering the scope of independent assurance, the aim is to provide comfort to the investor that the issuers are doing what they say they are doing. Assurance involves investigating the suitability of the criteria, but also testing processes and controls designed by the issuer to evaluate and select projects, manage proceeds and report to the market.
Ultimately, it is one thing to have very strict green criteria, but if the issuer does not actually have a robust process to evaluate projects, manage proceeds, and report on performance, the purpose of the Green Bond will not be achieved.
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