Not only green

The green transition has already become a fixture in financial markets. A report by the Climate Bond Initiative, the world’s leading organisation supporting the development of investments promoting climate protection, published at the end of January shows that issuance of the broadly understood green bonds has grown steadily since 2015 to reach USD 269.5 billion by the end of December 2020. This is yet another record, and the trend itself has not been halted even by the crisis caused by Covid-19.To date, the Climate Bond Initiative has recorded USD 54 billion worth of bond issues.

Looking through reports, publications and statistics, we usually come across the term ‘green bonds’ describing a range of investments, which on closer inspection turn out to be much more complex than wind farm financing. In addition, there is a whole spectrum of investment offers which do not have much in common with ‘green investments’, and where the issuers only try to make their offers more attractive by describing them according to new trends, but in reality they do not have much in common with care for the environment. This is the defined phenomenon of ‘greenwashing’.

In order to eliminate greenwashing standards and guidelines are agreed that allow the investors to direct their funds towards genuinely ‘green’ investments and the issuers themselves to obtain certification of the quality of their offerings. Among the most widespread standards and rules are those issued by the International Capital Market Association (ICMA) and the Climate Bond Initiative (CBI). ICMA’s standards and principles are concerned with issuance rules and the care for reporting to investors, while the Climate Bond Standard is about ensuring the quality of the financed investments, including their compliance with the objectives of the Paris Agreement.

Going back to the complexity of sustainable finance, one can identify four ISMA documents with guidelines and standards defining the bonds issued – Green Bond Principles (GBP), Social Bond Principles (SBP), Sustainability Bond Guidelines (SBG) and Sustainability-Linked Bond Principles (SLBP). Added to this is the concept of the Transition Bonds, which was originally developed in 2019 by Yo Takatsuki, AXA IM’s Head of ESG Research and Active Ownership, and which was finally described in the ICMA Climate Transition Finance Handbook of December 2020. It should also not be forgotten that at the European regulatory level, work is advanced on the creation of the EU Green Bond Standard, which may take the form of the guidelines but also be enacted in the form of a regulation.

Why talk about the opportunities of sustainable finance and its complexity? In terms of opportunities, the conclusion of a report by the Joint Research Centre, a research centre at the European Commission, shows that the green bonds issued by non-financial companies and supranational institutions have on average lower yields compared to the similar conventional bonds. This fact implies a lower cost of financing. The issue premium for being green i.e. the so-called ‘greenium’ was also confirmed in the latest Climate Bond Initiative report – “Green Bond Pricing in the Primary Market H2 2020”.

As for complexity, it should be emphasised that it has been well recognised by the domestic issuers. The best example is Tauron’s recent PLN 1 billion bond issue. The issue is based on ICMA Sustainability-Linked Bond Principles, i.e. financing aimed at achieving the specific environmental goals (here, reduction of greenhouse gas emissions through transformation of operations). According to the company’s press release, the TAURON Group, together with the issue coordinator, set the following ratios: CO2 emission reduction ratio (by 2% on average per annum) and RES capacity increase ratio (by 8% on average per annum). If the above ratios are not achieved, the base margin will be increased in line with the provisions of the terms and conditions of the bonds. Each year the independent auditors will confirm that the sustainability ratios were properly calculated.

This example shows that other recognised forms of sustainable investments can be an interesting alternative to the classic green bonds for companies seeking financing. Sustainability-linked bonds or transition bonds do not impose on the issuer such far-reaching restrictions on the use of the obtained capital as e.g. the classic green bonds. They allow the issuers to dispose freely of the obtained funds (departure from the “use-of-proceeds” principle present in the green bond standards, i.e. the use of funds for projects specified in the documentation) and thus give them the flexibility necessary in the complex processes of transforming the entire enterprises whose previous activity was far from being ‘environmentally friendly’.

To sum up – the world of sustainable investment is gaining momentum while recognising the growing needs of the entrepreneurs. It is therefore worth being aware of the possibilities when planning the sustainable debt financing.