LOS ANGELES – The heightened focus on disclosure in green bonds could inspire better disclosure practices in the larger municipal bond market, S&P Global Ratings said in a report this week.
Green bonds, which aim to finance environmental solutions, are an increasingly large part of the muni market, surging from $4.2 billion in issuance last year to what S&P estimates could be more than $7 billion when 2016 is finished. While green bonds are sometimes very broadly defined, S&P said in the report released Monday that it expects disclosure and reporting surrounding bonds' green credentials to be increasingly important to investors, possibly leading to improved disclosure for munis in general.
Municipal disclosure has been a focus for regulators ever since the Securities and Exchange Commission's 2012 comprehensive Report on the Municipal Securities Market identified what the commission believed to be significant concerns over transparency.
Some issuers obtain third-party audits that confirm that their green bonds comply with the International Capital Market Association's Green Bond Principles, a set of guidelines aimed at standardizing what constitutes a "green issuance." The San Francisco Public Utilities Commission, for example, obtained such verification from the London-based Climate Bonds Initiative when it issued $240 million of green bonds as part of a larger wastewater issuance in May. The majority of municipal green bonds have no third-party verification, S&P said, and issuers often just label the bonds as green or state in bond documents that they intend to comply with the Green Bond Principles. Less often, an issuer has established its own green standard and provided disclosure related to that in the offering documents.
About 13% of muni green bond issuances are backed by external third-party reviews, according to S&P. By contrast, the much larger corporate bond green market has third-party verification attached to some 65% of issuances. While many green bond advocates encourage certification, other market participants have pointed out that the process could be too slow, costly, and burdensome for some issuers, particularly smaller ones.
"Thus, it is clear in the developing U.S. municipal market for green bonds that we observe both good intentions and a wide variation in reporting, including independent third-party confirmation of environmental credentials," S&P said in the report. "Over time, a key issue will be the pre- and post-sale level of commitment to timely and complete reporting by municipal issuers which operate in a segment of the capital markets where consistent disclosure has been a continuing concern voiced by investors. In our view, the heightened focus on disclosure in the green bond market is a positive that could carry over to more traditional financial disclosure and improve diligence in satisfying those ongoing requirements."
The report also predicted continued growth for the green bond sector. While low interest rates currently make it difficult to demonstrate any pricing advantage for green bonds, some existing issuances will be reclassified as green and investors will become increasingly socially-conscious and prefer green bonds.
