Don't look for perfection in climate assets, say consultants

The recent focus on greenwashing has put bond issues under greater scrutiny. However, some market participants believe this risks paralysis by analysis.
Don't look for perfection in climate assets, say consultants

Some institutional investors are holding back from getting involved in sustainable investing because of a lack of consistent and comparable standards and a fear of greenwashing, but serious investors should not wait for perfection and instead should conduct their own due diligence, consultants have told AsianInvestor.

An Australian sustainability industry consultant believes there is an element of “hypocrisy” amongst investors around climate change, based on their need for “perfection” before they decide to invest.

The executive, who advises asset owners on their use of green bonds and other sustainable investments said: “On a daily basis investors make massive investment decisions (in their total portfolio) based on imperfect information. Sometimes just a hunch on where a market is trending is sufficient to move billions of dollars.

“But with climate change investors have asked for perfection before making a decision.”

He believes calls for greater disclosure reflect this.

“There is a disconnect between the argument for enforceable and concrete standards and the level of effort investors are making on their own due diligence. Those who want to be serious are doing so. Some are still hiding behind calls for disclosure.”

The bond market for climate change solutions is worth more than $100 trillion, according to Moody’s, and mobilising this capital is the key to advancing the low-carbon transition.

Matthew Kuchtyak,

Matthew Kuchtyak, vice president of ESG Outreach and Research at Moody’s, told AsianInvestor that investors have been focusing more intently on the credentials of green bonds in an effort to better understand how the projects they finance align with issuers’ sustainability strategies.

This has led to the emergence of initiatives – for example, the proposed EU Green Bond Standard – aimed at providing checks and balances to allow investors to assess what and how much of an impact on the climate a green bond issue will have, and a greater scrutiny on the practice of greenwashing, which market observers suspect to be widespread in investment management.

The green and sustainable bond markets have largely been developed via the use of voluntary standards such the International Capital Market Association (ICMA)’s green bond principles.

But a consensus has also developed that the green bond market lacks enforceable and concrete standards around criteria such as labeling and reporting.

One potential challenge, said Kuchtyak, is the possibility of divergence in market practices across regions, as sustainable bond initiatives proliferate across the globe.

“Standards with inconsistent definitions around what constitutes a sustainable investment would be of concern for investors operating on a global or multi-region basis.”

Fiona Donnelly, director at the Hong Kong-based Red Links Sustainability Consortium, told AsianInvestor that “even from a quick look at the some of the go-to’s for green bond analysis, you have a potentially confusing mix of tools around green finance frameworks and projects, including the Climate Bond Standard, ICMA’s green bond principles and the ASEAN Green Bond Standards.

"Adoption of any of these tools is voluntary, although it is increasingly expected, yet they differ individually in terms of applicability.”

In their defence, Donnelly said these tools are relatively new and are still evolving.

“The ‘use of proceeds’ financial instruments have mushroomed in the last two or three years as part of the huge growth of sustainable finance,” she added. “So labelling and reporting expectations are sure to improve and align over time.”

Fiona Donnelly, Red Links

Donnelly said the art will be in identifying the appropriate sustainability performance targets and “the so-called forward-looking ESG outcomes”, that investors and others can measure accurately and confidently factor into specific trigger events that would affect the cost of capital, or other conditions of the green bond finance.

“This is much easier said than done,” she added. “But this will help entire businesses transition to be more responsible and sustainable in the long term, unlike use of proceeds instruments.”


Green bonds are likely to become more popular in late 2021 in the run-up to COP26 and beyond, said Kuchtyak.

“We anticipate green bonds, social bonds, sustainability bonds and sustainability-linked bonds will approach $1 trillion in annual issuance this year, with around half of the broader volumes coming in the form of green bonds.”

“We now have elements of a green boom,” said the Australian sustainability consultant. “My personal view is that, like every boom, we will see a price correction as the reality (and potentially disappointing outcomes) of transition becomes evident."

Asia Pacific has some of the biggest and most urgent infrastructure and energy needs, said Donnelly, for quality of life as well as carbon reduction/avoidance and many other reasons. "But sustainable investment on the whole is minuscule in Asia Pac, compared to EU and Americas."

Even in Australia, green bonds from local issuers have been relatively limited, with volumes typically accounting for around 1-2% of global issuance in recent years.

"Helping the developing and frontier economies of Asia Pacific comes with a very particular risk profile that could pose challenges, particularly for those investors who don’t know the region,” Donnelly said.

The Biden Administration's climate spending plans have spurred greater interest globally in the area. Bonds that are labelled green are now often oversubscribed. An example is the Australian Government’s National Housing Finance and Investment Corporation (NHFIC) which has now issued A$2bn of social bonds, the last $462 million tranche of which was oversubscribed.


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