Are ‘Green Bonds’ green?

Beware 'Greenwashing', a practice that makes a bond appear green when it really isn't

Ruth Saldanha 27 September, 2019 | 1:27AM

 

 

This video is a part of our ESG Special Report week

Ruth Saldanha: A recent National Bank report found that the global green bond market is likely to hit record issuances this year, around US$245 billion for the full year. From June through August Canadian firms issued almost $3 billion in green bonds. This trend is likely to continue as responsible and sustainable investing gains in popularity. To discuss the basics of green bonds we have Radi Annab from DBRS here with us today.

Radi, thank you so much for being here.

Radi Annab: Thank you for having me, Ruth

Saldanha: What are some of the reasons that this global interest and Canadian interest is increasing in green bonds?

Annab: So, one of the key drivers in the growth of green bonds has been the shift in attitudes and in policies towards climate change and tackling climate change. As you know, in 2016, the Paris agreement on climate change was signed by almost all nations. Canada was one of the signatories. And this really has been increasing also the movement. Second driver, of course, are corporations. Corporations have been investing and issuing green bonds to be socially responsible, but also because they recognize that it's very appealing to the young generation and it drives customer loyalty because younger generations really care about climate change. So, these are two of the key drivers.

Saldanha: What are some of the differences between a regular bond and a green bond?

Annab: A green bond and a regular bond are essentially the same. But the difference is that with a green bond, the issuer is committing to investing the proceeds specifically in projects that are beneficial for the environment. One important point here, however, is that the definition of green bonds is not still accepted by all. For example, in Canada, Canada relies on – has a heavy industry, that has to with extraction of resources, for example. So, there are proponents of what are called carbon transition bonds. And these are bonds where the proceeds are used by the fossil fuel industry, but to make it greener. So, this industry is one where proponents are saying, well, these should be considered green or quasi green because we are benefiting the environment. Others say, no, anything to do with fossil fuels cannot be considered green.

Saldanha: Is there any way as an investor that you can ensure that a green bond stays green for its entire duration?

Annab: That's a great question. So, what you're asking essentially is how do you ensure that the term greenwashing doesn't happen, and this is used in the industry to mean when a corporation will just label a bond green and it could be not investing it in green projects. So, there are global standards. The Green Bond Principles are one of the main global standards for green bonds. And these were started by a group of bankers and investors. And as of 2014, the International Capital Markets Association began – essentially took over the Green Bond Principles to improve them and to keep on developing them. There are four components of these principles. How do you invest the proceeds, how are they invested? What process are you using to select the investments, these projects? How are you managing the proceeds, are they in segregated accounts? And finally, reporting; you have to report on an annual basis, the financial report has to be audited, but also, you need to specifically report on the projects you are investing in using the proceeds of the green bond.

Saldanha: From both a global and a domestic perspective, there's been a lot of interest in things such as climate change. Do you see this impacting the green bond market? And do you expect the interest in green bonds to continue?

Annab: Yes, I expect green bonds to continue to grow, specifically because of the shifting attitudes and because of the importance that newer generations place on climate. So, for example, in Canada, we have a federal election in October, and recent polls show that climate change is one of the top three most important issues for voters in Canada.

Saldanha: How can retail investors invest in green bonds?

Annab: So, as you know, retail investors can't access the bond market directly. However, there are increasingly – so mutual funds and exchange-traded funds that are investing in green bonds, some exclusively in green bonds. So, a retail investor can tap those through their bank or through their broker, for example.

Saldanha: Thank you so much for joining us today, Radi.

Annab: Thank you.

Saldanha: For Morningstar, I'm Ruth Saldanha.

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Ruth Saldanha

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca