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Quarterly issue 4

Practically speaking: bonds go for green

Author: ICAEW Insights

Published: 01 Dec 2020

A new framework for green bonds is part of a wider movement on sustainability reporting.

The EU’s Green Deal, agreed late last year, underlined the need for market signals to help direct long-term financial and capital flows to green investments. Part of the workflow includes an EU Green Bond Standard, issued in early 2020.

ICAEW responded to the public consultation because of its link to broader reporting, says John Boulton, Director of ICAEW Technical Policy. “This issue is not developing in a vacuum – it’s part of the broader debate about how sustainability sits within corporate reporting.”

Sustainability reporting is becoming increasingly relevant for all businesses. “SMEs may find their customers asking questions about supply chain and green credentials. Although EU debates about green bonds may seem distant for many businesses, the wider issues they raise are becoming of increasing interest.”

Green benefits

While there’s little firm evidence to suggest issuing a green bond offers companies – or investors – a financial benefit, it does send out a positive message about the company’s commitment to sustainability and can broaden the investor base.

Up until now, green bond issues have been a market-led initiative with little additional regulation over the environmental claims attached to the bond. The consultation aims to address this with a Green Bond Framework, which sets out incremental reporting and verification requirements for bonds wanting a green label.

Green bond issues would be accompanied by a “framework” report covering how much the bond issue will raise and what the funds will be used for. A subsequent allocation report details what the proceeds have been used for. The third step is an impact report, which describes the environmental outcomes and performance achieved. Under the EU Green Bond standard, the first two reports will have to be verified by external third parties.

ICAEW supports the EU’s initiative and a stronger statutory framework for these bonds. Describing a bond as green is based entirely on the credibility of these claims, says Boulton. “Trusted third party verification provides that evidence and is essential for there to be a thriving market in these bonds.”

The market for green bonds is likely to increase at a greater rate once public bonds are issued – a stated intention of the EU’s €750bn recovery fund to support post-pandemic relief efforts. Regulation is coming to make the classification of green bonds more rigorous, without being too costly, says Boulton.

“There are few quick and easy answers to credibly claiming a bond is green. But there are questions that can help, such as: How can we be sure the money raised has been used for environmental concerns? This is where the allocation and impact reports come in. But they need to be robust and properly assured.”

It’s still early days in the development of the green bond market, but the role the profession can play is becoming clearer.

An economy in transition

Another challenge is how to finance projects that are carbon intensive but that are needed to help the economy reduce its carbon emissions. An example of this is a wind turbine: the carbon cost of construction and what needs to be done to the land before the turbine is built may not qualify as green investment, and yet once the turbine is operating it generates renewable energy.

“There needs to be a framework that guards against greenwashing but also accommodates transition activities as this is potentially a large piece of the story in helping economies change,” says Boulton.