The objectives of the International Capital Market Association’s (ICMA) Green Bond Principles1 include supporting issuers in financing environmentally sound projects and attracting more capital to back sustainable development. As the market has matured, investors and policymakers increasingly look to the green bond market as an additional medium to respond to environmental systemic risks such as climate change and natural capital depletion. Are green bonds consistently generating the intended outcomes?

 

The green bond market has grown exponentially over the past decade, with issuance totalling a record $517 billion in 2021>sup>2. Much of this growth was facilitated by the publication of the Green Bond Principles (GBP) in 2014. Still, estimates of the green investments needed to mitigate climate and nature-related risks far outstrip the amount raised from the bond market.

Labelled bond issuance by year 

The views expressed are those of the presenter at the time of preperation and may change in the future.
Source Bloomberg, as at 31.12.21. *SLB= Sustainability Linked Bonds. 

Falsely giving the impression that a company’s products and services provide greater environmental or ‘green’ benefits than is the case is a key issue hampering efforts to address environmental systemic risks. Averting greenwashing as well as encouraging a significant increase in green spending are required to begin closing the green investment gap. As providers of capital, it’s imperative that we monitor the end results of our investments in achieving a greener world and promoting well-functioning financial markets.

 

The relevance and importance of ensuring desired outcomes will garner greater attention once the European Union publishes the remainder of its taxonomy, a core classification system for sustainable activities, later this year. 

Robust verification process 

Already, the UK Stewardship Code, published by the Financial Reporting Council, sets standards for those investing money on behalf of UK savers and pensioners. Principle 4 of that code calls on signatories not only to identify and respond to systemic risks, but also to assess the effectiveness of these actions. Jupiter Fund Management Plc is a signatory to the code.

 

Jupiter’s environmental solutions team has a long history of innovation and experience in this space. As the team manage a range of ecology funds which are categorised as Article 9 strategies under the EU’s Sustainable Finance Disclosure Regulation, we evidence the fulfilment of both environmental and return objectives. To ensure our investments in green bonds are set up to achieve the intended outcomes, we have developed a robust proprietary verification process that considers both the issuer and framework.

 

The framework component of our assessment assigns the highest weight to two elements:

Is it additional? Is the project a one-off, business-as-usual activity, or does it form part of a step-change in environmental strategy and thus outcomes at issuer-level?
Is it contributing to green outcomes? Do the eligible projects make a net positive contribution to resolving environmental challenges? Or are they locking-in legacy technology for which feasible substitutes already exist, or solely boosting efficiency without considering absolute outcomes for climate and nature?

 

In a recent report titled `A net zero economy: the impact of decarbonisation’, McKinsey estimates a financing requirement of $9.2 trillion per year from 2021 to 2050 for climate mitigation in energy and land use alone, of which about $3.5 trillion must be new investments. The amount required is far higher than the $517 billion raised through green bonds in 2021. Therefore, it’s all the more crucial that the funds raised through green bond sales are spent effectively and that the market encourages incremental spending. 

Effective, incremental spending is key 

Green bond proceeds can finance or refinance new and existing green projects, directly or indirectly, under ICMA’s Green Bond Principles. Most often, the indirect route is taken: a virtual tagging of an equivalent amount to existing projects, freeing up the proceeds for general corporate financing.

 

For this reason, when evaluating the eligibility of unsecured green bonds for our portfolio, we look for issuers and frameworks which aim for incremental spending on green projects.

 

Equally important is the quality of the additional spending. While ICMA’s principles state that green projects should provide clear `environmental benefit’, they provide no clarification or definition as to what business activities or technologies qualify, nor what standards or thresholds should be applied to determine if this requirement is being met.

 

External review – also called a second party opinion (SPO) – is a recommendation for heightened transparency, but not required by ICMA GBP. There exists a wide spectrum of external reviewers and accordingly there is variation in quality. Investors also need to contend with potential conflicts of interest as SPO service providers are paid by the issuers. 

Encouraging developments 

Investors in the green bond market should recognise that the ICMA principles are guidance rather than standards, and thus must develop their own verification frameworks to ensure efficient capital allocation in the green bond market. Doing so requires verification which goes beyond process to consider outcomes.

 

At Jupiter, we have formalised our internal verification processes and continue to engage with individual issuers to boost the effectiveness of our investments in the green market. We are seeing some encouraging developments at the wider market as well. For example, the standards and guidelines set by Climate Bond Initiative and the attention paid by the European Commission on external review providers can help achieve greater consistency across the board, leading to greater effectiveness and outcomes from green bond investments. 

1The four core components of the ICMA GBPs are use of proceeds, process for project evaluation and selection, management of proceeds, and reporting, and two key recommendations for heightened transparency are green bond frameworks and external reviews. For further information see: Green Bond Principles » ICMA – International Capital Market Association (icmagroup.org)

2Source: Climate Bonds Initiative

The value of active minds: independent thinking

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

Important information

This document is intended for investment professionals* and is not for the use or benefit of other persons, including retail investors, except in Hong Kong. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. For investors in Hong Kong: Issued by Jupiter Asset Management (Hong Kong) Limited (JAM HK) and has not been reviewed by the Securities and Futures Commission. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI/JAM HK.
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*In Hong Kong, investment professionals refer to Professional Investors as defined under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong).and in Singapore, Institutional Investors as defined under Section 304 of the Securities and Futures Act, Chapter 289 of Singapore.