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More green bonds are being scrutinized as investors focus on climate risk

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A worker at a solar farm in India.
Source: Associated Press

An increasing share of green-bond issuers are taking steps to assure investors that their money is spent on projects or assets that benefit the environment, suggesting that financiers have become more discerning in their approach to impact investing.

Until recently, issuers doubted that investors would pay a premium for green bonds scrutinized by third parties, said Josh Olazabal, a senior analyst in charge of environmental, social and governance investing at CreditSights. However, beginning in late 2018, issuers have become "more vocal about claiming that they have seen pricing benefits," he said.

Of the nearly $48 billion worth of green debt issued globally in the first quarter of 2019, 93% was certified by the Climate Bonds Initiative, or CBI, or was reviewed by outside groups to ensure that issuers complied with voluntary green-bond guidelines from the International Capital Markets Association, according to CBI and CreditSights. That is up from 71% a year earlier.

The decline in issuers self-labeling debt as green corresponds with a rise in ESG investing more broadly and likely reflects an increasing focus in Europe on climate-related financial risks, said Christa Clapp, research director at Norway's Center for International Climate Research, which provides second opinions on green bond frameworks.

Europe was the source of about half of green bond issuances in the first quarter, according to CBI.

In April, the governors of the central banks of England and France urged policymakers and the financial industry to "integrate the monitoring of climate-related financial risks into day-to-day supervisory work, financial stability monitoring and board risk management."

In addition to guarding against the financial risks of climate change, investors have a central role in transitioning to a low-carbon economy, said Jessica Ground, a fund manager and global head of stewardship at U.K. asset manager Schroders PLC.

"In case you haven't noticed, governments seem to have run out of money," Ground said May 15 at an investor meeting. "So there's going to be more pressure on channeling finance towards that direction."

At the same time, asset managers increasingly are expected to "maintain their own social license to operate" by "holding companies to account" for their performance on social and environmental issues, she said.

"Investors ask questions about not only what's the environmental risk but what's the reputation risk" in their portfolio, Clapp said. "So it's awareness, interest, regulatory push, concerns about financial impacts and financial instability ... all coming to a head."

According to CBI, green-bond issuances increased by 42% in the first quarter to $47.9 billion from $33.8 billion a year earlier. The share certified by CBI rose to 14% from 6% a year earlier, while groups such as the Center for International Climate Research reviewed another 79% of issuances compared to 65% in the year-earlier period, CreditSights said, citing CBI data.

"While the magnitude of the quarterly change may ultimately prove to be an aberration, we do note that there is a long term trend away from self-labeling, partially driven by a decrease in costs associated with the External Review option as more competitors enter the verification space," CreditSights analysts wrote in a May 14 note. "Moving to full certification, however, remains much more of a commitment," analysts said, particularly in terms of ongoing reporting requirements.

In April, Nedbank Ltd. issued a $116 million green bond certified by CBI that will be used to finance wind and solar farms that are under construction in South Africa. The bank will provide annual reports to bondholders that may include project-level information about how the proceeds were used, as well as the amount of electricity generated, CBI said. The initial offering was three times oversubscribed.