Those investing in green bonds need to work twice as hard as those buying more conventional debt. It is not just about assessing how likely the issuer is to give you your money back when the debt matures and make all the agreed interest payments along the way. Investors also need to make sure their cash is being used to make a difference. This requires double the level of due diligence.
However, it is difficult to monitor how the money raised from these bonds is being spent. “A lot of these funds are issued with a fairly detailed prospectus,” Manuel says. “If you look at the wording in those prospectuses often you will see something like: ‘At least x% of the funds raised will be used for a certain initiative.’ But there is no guarantee that it will be.”
Issuing companies wishing to widen their market by encouraging more investors to back their project could appoint an independent third-party to approve the bond’s ‘greeness’. This is an additional cost for an issuer over and above what it would cost to issue in the conventional bond market.
As already discussed, the US is one of the largest markets in the green bond universe, but future growth may not be as strong. The additional covenants could be limiting growth across the Atlantic with issuers having to make sure that they use the proceeds as advertised.
“Given the litigation climate in the US, it is seen as a covenant that they could trip over,” Freedman says. “So they are discouraged from issuing green bonds because they see it as one big legal risk and fear that their investors are going to sue them.”
It could be a case that the conventional capital markets appear a more attractive avenue to raise any funds needed. There is nothing in the rules that says that companies issuing debt in the Eurobond market, for example, for example, cannot use any proceeds received to build a solar power farm.
SETTING THE STANDARD
As this market grows, it will get more attention from regulators, which could put green bonds on the same footing as many of its conventional counterparts. “As the market gets bigger it has to start playing by some firmer rules,” Manuel says. If this happens then regulators will have to tackle one of the biggest challenges in the industry: how to implement mandatory standards across different jurisdictions?
This will be difficult to achieve. Perhaps the best hope is that country specific legislation will be introduced. High regulatory standards could attract more issuers and a wider pool of investors to the market. Despite the huge level of growth forecast by Moody’s, the level of growth is easing. The rating agency predicts a 60% rise in the amount of capital raised this year compared to the level recorded in 2017.
However, the $155.5bn raised last year was a 78% jump on 2016’s figures. With strong drivers pushing companies and investors in to more climate change fighting assets, it could be the lack of transparency that will hit growth.