An Investor’s Guide to Evaluating Green Bonds: GBP vs CBS

Mobilization of private capital to combat climate change has been led by the green bond market. The World Bank issued the first “green bond” in 2008 and the market has now grown to over $660bln outstanding – with estimates for 2019 new issuance at $200bln+. For issuers and investors considering green bonds, they must weigh the “pros and cons” of the two main green bond labelling frameworks – the Green Bond Principals (GBP) & Climate Bond Standards (CBS).

The Green Bond Principles (GBP) are a set of voluntary guidelines for issuers looking to issue green bonds. Established in 2014 by a consortium of investment banks and is now monitored and developed by the International Capital Market Association (ICMA). The GBP guidelines recommend transparency, accuracy and integrity of information on Use of Proceeds from the bond issue, the process for project evaluation and selection, reporting and management of the proceeds raised. The Green Bond Principles gives the issuer the ability to determine what is “green” – suggesting the broad green project categories include (but not limited to):

  • Energy Efficiency / Renewable Energy

  • Green Buildings

  • Clean Transport

  • Water management

  • Waste management & pollution control

  • Environmentally Sustainable management of natural resources and land use

  • Climate Change adaptation for Industry

  • Eco-efficient / Circular economy adapted products, production technologies and processes

  • Information technology & communications (ICT)

Whilst not explicitly stated by the ICMA – these principles were designed by bankers to assist corporate issuers bring green bond deals to market. The drawback for investors is the voluntary nature of the GBP and the ability of the issuer to define what they think is “green”. This has led to fears of “greenwashing” – where issuers issue a bond that is labeled green, to promote their environmental credentials, but does very little to impact climate change.

In contrast, the CBS, issued by an investor focused non-profit organization (Climate Bond Initiative, founded in 2010), utilizes a certification scheme to ensure green bond proceeds deliver a low-carbon and climate resilient economy. The CBS have developed a robust taxonomy to define climate aligned assets and projects. By leveraging a global network of technical and industry groups, CBS’s taxonomy utilizes the latest climate science to help investors understand what the key drivers are to deliver a low carbon economy. CBS defines what is green for the investor and ensures issuers are genuinely making an impact on climate change.

CBS Certification requires both Pre & Post issuance validation:

Source: Climate Bond Initiative

Source: Climate Bond Initiative

An important part of CBS labelling on green bonds is the assurance the certification delivers – as all bonds have been checked by an approved verifier who provides and assurance report.

For the GBP, they will use 2nd party opinion providers are used to provide a pre-issuance report to investors on what the use of proceeds will be and the ability of the issuer to deliver on the “green” objectives outlined in the bond indenture. They do not, however, follow the issuer reporting post issuance. The GBP standard suggests companies report until the Use of Proceeds have been fully deployed to eligible projects. With companies who adopt the CBS, they report on the impact for the duration of the bond.

Despite the more investor “friendly” CBS certification, GBP is the dominant labelling in the green bond market with about 85% of outstanding green bonds holding the GBP label (CBS only 15%). This reflects both the costs of the CBS (upfront & ongoing) as well as the additional flexibility GBP provides issuers vs the CBS certification. For investors, this does mean that they do need to do their own work to determine which issuers are potentially greenwashing using GBP – and choosing active portfolio management will aid investors in avoiding these pitfalls.

The GBP market dominance is set to be tested with the proposed European Union Green Bond Standard adopting the CBS style “pure verification” model. If adopted, this new Standard will see the role of 2nd party opinion providers greatly reduced in favor of auditors