Evolving disclosure standards in green bonds

The momentum of continued green bond issuance has given rise to increased political and market attention and progress has been made to reach a consensus on the disclosure standards of green bonds. This article examines the recent issues that have emerged in the green bond market.

Background

Since the publication of our briefing Green Light: full steam ahead with green bonds last year, we have seen notable developments in the green finance space. Climate Bonds Initiative, an international organisation working on mobilising the bond market for climate change solutions, reported that there was a record breaking issuance of US$81 billion of climate aligned bonds in 2016, with the largest number of new issuers and the largest single month of issuance to date. The issuance of the RMB30 billion (US$4.3 billion) green bond by Bank of Communications in China in November 2016 was recognised as the largest single green bond ever issued and Poland also issued the first green sovereign bond of EUR750 million in December 2016. In December 2016, Monash University in Australia issued the world's first green bond by a university.

With the increase in market interest and activity, the standards shaping the market have evolved. Updated green bond standards and issuance guidelines have been released at both multilateral and domestic levels. Stock exchanges have also been increasingly involved in driving uniformity of principles and best practices. This article highlights recent developments in these areas and their potential impact on the market. 

Evolution of International Standards 

The Green Bond Principles (GBP), originally launched by the International Capital Market Association in 2014 were further updated in June 2016 (another update will be announced at the GBP Annual General Meeting in June 2017). The GBP represent a set of voluntary guidelines that recommend transparency and disclosure and promote integrity in the development of the green bond market. The 2016 update has a particular focus on standardising information sharing and external reviews by recommending the use of proposed templates. With the templates and completed forms being available on the recently launched GBP Resource Centre and the Green Bond database, respectively, it is believed that the new recommendations will promote transparency in a standardised and simplified manner and enable the market to establish the alignment of issuances with the GBP. 

To reflect the 2016 update of the GBP and adapt to latest market developments, a new version (version 2.1) of the Climate Bonds Standard was issued by the Climate Bonds Initiative in early 2017. The Climate Bonds Standard sets out clear criteria to verify certain green credentials of a bond or other debt instrument and has been expanded in the updated version to include new debt instruments such as Sukuk.

In December 2016, the Task Force on Climate-related Financial Disclosures (TCFD) established by the Financial Stability Board released its report on how to develop consistent climate-related financial disclosures for public consultation. The TCFD's recommendations were structured around four themes (namely, governance, strategy, risk management, and metrics and targets) that are relevant to the operation of organisations and applicable across sectors and jurisdictions. The TCFD provided specific recommended disclosures for each theme and suggested that these disclosures be included in the mainstream financial filings of the organisations concerned. This underscores the increased attention paid to environmental, social and governance issues by issuers and investors. The availability of financial disclosures will also provide useful information to investors and lenders on how the reporting organisations think about and assess climate-related risks and opportunities. 

While the TCFD's recommendations are generally well received, some respondents requested further standardisation of the conduct and disclosure of scenario analysis and metrics for the financial sector. This shows that there is a strong demand in the market for specific guidance on standardised disclosure requirements from both internal governance and issuance perspectives. The final report of the TCFD will be delivered in June and is anticipated to advance the quality of disclosures and provide useful pointers for green bond issuers.

"The key to evolution of the market is for clear and transparent disclosure so that investors can compare bonds on a like for like basis on day one of the issuance as well as being able to ascertain the use of proceeds of the bond" notes Anna-Marie Slot, a finance partner at Ashurst. 

Publication of National Guidelines 

In addition to efforts made in harmonising disclosures at an international level, we have also seen more guidelines being published at a national level in recent months. 

In China, the People’s Bank of China (PBOC), along with six other government agencies, issued the "Guidelines for Establishing the Green Financial System" in August 2016 in which measures were proposed to promote harmonisation and sharing of information. 

In March this year, the China Securities Regulatory Commission issued the guiding opinions on supporting the development of green bonds. The guiding opinions, among other things, set out the disclosure requirements for green bonds and recommendations for independent professional assessment and certification. In the same month, the National Association of Financial Market Institutional Investors (NAFMII) issued a set of self-regulatory Guidelines on Green Debt Financing Instruments of Non-Financial Enterprises and standard form information disclosure tables. The PBOC and the European Investment Bank also announced that they are working together to develop a clear framework for analysis and decision making in green finance which is expected to include suggestions towards harmonisation of standards.

In India, the Securities and Exchange Board of India (SEBI) finalised their official green bond requirements in January 2017 after going through a public consultation at the end of last year. The final listing requirements have yet to be published but from the board papers available on SEBI's website, it seems to have accepted the importance of harmonising domestic standards with international guidelines and requiring issuers to disclose details of their decision-making process in terms of eligibility of projects and the benefits and impact of the funds raised.

Outside Asia, green bond guidelines have also been published in Brazil and Morocco in 2016. The commitment of national governments and organisations evident in the promulgation of policies and guidelines is certainly welcomed. It is hoped that this will help align domestic markets with international standards and provide more clarity and visibility to issuers and investors. There is also interest from regulators more broadly. "APRA, the Australian prudential regulator, recently announced climate change to be a material risk, economically, and we expect financial institutions, projects and businesses to address such concerns in their future transactions. We're already seeing this in the markets with green bond issuance growing markedly in Australia from the first green bond issue in 2014 to today where over AUD4.2 billion has been issued, reflecting year-on-year increases" comments Caroline Smart, a senior associate based in Sydney. 

Role of Stock Exchanges

While government support is pivotal, the contribution of stock exchanges in shaping and promoting the green bond market should not be overlooked. Stock exchanges across the globe are reacting to market developments with the introduction of green platforms.  In addition to the launch of dedicated green bond segments by various European exchanges such as the London Stock Exchange and green bond pilot programmes by the Shanghai and Shenzhen Stock Exchanges in China, the green bond segment of the Mexican Stock Exchange and Borsa Italiana and the Luxembourg Green Exchange, the world's first exchange dedicated to green securities, were also launched recently  (see diagram above). 

The Monetary Authority of Singapore has also announced the implementation of the Green Bond Grant Scheme effective from June this year. Under the Scheme, qualified green bond issuers can enjoy a cash grant of up to SGD100,000 to offset costs related to an independent review of the issuance (the conduct of which has to be based on international standards such as those referred to above in order for the issuance to be eligible for the grant). Not only will these initiatives increase the liquidity of green bonds and open up a larger and more diversified investor base for green bond issuers, the inclusion in the listing rules by the stock exchanges of, for example, the requirements to disclose the allocation of proceeds and results of independent review will also promote transparency and standardise disclosure and in turn build investor confidence. 

Greenwashing

The evolution of consistent standards can also play a role in reducing the occurrence of "greenwashing".  In its research report published in June 2016, the Word Wide Fund for Nature called for a set of industry standards for green bonds to address the growing risk of "greenwashing", a term describing situations where bonds or products are labelled and perceived as environmentally friendly while not fulfilling their green promise. It is believed that greater transparency brought about by the development of robust and widely accepted industry standards is vital to the success of the green bond market. The developments highlighted in this article would potentially drive the market towards a more standardised disclosure regime and provide positive influence to the establishment of a more mature green bond market.

Conclusion

This is an exciting time in the markets for green finance.  Green bonds are leading the way in the ongoing discussions regarding what is "green" and companies, governments, NGOs, stock exchanges and multinational organizations are contributing to creating a new breed of bond. The key to a well-functioning mature market will come in the details of disclosure regimes and market standards.