'Green' municipal bond designations colored in shades of gray

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Municipal “green bond” designations by various market participants are complicating how investors domestically and internationally view and understand the market for those bonds.

The lack of a universal language to define “green” is increasingly confusing investors and issuers alike while large asset managers have their own “black boxes” to define what they consider green or ESG. Mix in now COVID-19, climate change risks, hurricanes and wildfires, and it’s a real recipe for more disaster.

“We knew that to fill the gap between ‘green bond’ demand and available supply, the solution was to get more people creating more green paper,” said Dana Villanova, COO and head of business development at Kestrel Verifiers.

Bloomberg LP, meanwhile, is the latest to get in the mix and has begun in February to add a green leaf icon next to certain bonds on the terminal, designating them as green — even though it is not a certified 2nd party opinion provider or 3rd party verifier under any of the published guidelines about green and sustainable finance.

“We provide a service to our clients to identify issuance from one of the purposes that meet our criteria,” said Mark Betteridge, global head of Fixed Income and Currency Analytics at Bloomberg. “We leave it to our clients to determine which certification they follow, and what their own policies are for green bond issue designation.”

Without a universal language to help market participants navigate the landscape, it may not always be clear to investors what issuers are selling in the primary market and what is moving around in the secondary market.

Underscoring this sentiment, demand for this nascent bond asset class has been robust during the pandemic. As of the end of May, $14.6 billion of green issuance for all bond markets. Including a little for June, the total figures $69.3 billion, including $16.2 billion sold in April, the strongest month of the year, according to the Climate Bond Initiative.

Dave Sanchez, senior counsel at Norton Rose Fulbright, said that it is definitely potentially misleading for an issuer to label something as a "green bond" without providing more context.

"You can't just say 'these are green bonds' and have that be the end of your diligence and disclosure process." Sanchez said. "From a disclosure perspective, describing actual projects is more meaningful than simply characterizing projects as 'green'."

The Municipal Securities Rulemaking Board declined to comment on the state of play in green and impact bond designations. The Securities and Exchange Commission did not respond to a request for comment.

From an anti-fraud perspective, Sanchez explained, an issuer will likely need to explain the process and standards for labeling a bond as green. This includes the ongoing green bond standards, if any, the issuance is required to adhere to and any past issues adhering to those standards.

Guidance issued by the Government Finance Officers Association has focused on bringing to the attention of issuers the relevant considerations in issuing green bonds, but has to this point avoided taking hard stances on what issuers should or should not do.

A paper released in 2018 noted that while third-party attestation of green bond compliance is common, "the quality and depth of review and attestation can be inconsistent, and there appears to be a difference of opinion among investors regarding the value of such an opinion."

"Independent attestation will represent an increased cost of issuance, which may not be offset by reduced interest cost as described above," GFOA noted. "GFOA members need to consider whether the self-labeling or independent opinion approach is the best choice for their particular transaction."

However, some of the third-party verifiers are doing the work to make it more instrumental, similar to how bond insurers have shown issuers their integral role in making deals happen. They don’t ascribe “ratings,” per se, but they adhere to certain international standards to give their views more weight.

Kestrel Verifiers, an approved verifier accredited by the Climate Bonds Initiative, said that standardization is key to growing the green bond market in the U.S. Green bonds that are verified by Kestrel meet the internationally accepted standards established by either the International Capital Markets Association (ICMA) for Green, Social and Sustainability Bonds or the Climate Bonds Initiative Standards and Criteria.

“We knew that to fill the gap between ‘green bond’ demand and available supply, the solution was to get more people creating more green paper,” said Dana Villanova, COO and head of business development. “When our team of expert verifiers determines that a deal will meet the green, social or sustainability bonds criteria, we deliver that option to issuers, financial advisors, bankers, and underwriters in the most efficient way possible. Our goal is to grow the green bonds market and make it easier for issuers to have their green bonds reviewed."

Build America Mutual also has a green designation for insuring bonds. Sustainalytics provides green designations as well.

Bloomberg described for The Bond Buyer its process for designating transactions as green.

“Currently our data team reviews documentation provided by the issuer to look for certain criteria we have designated as green in our policy. This includes clean water, renewable energy (wind, solar, geothermal), green building construction and other related projects,” Betteridge said.

Bloomberg said it is working on updating its system to more clearly capture the involvement of third-party verifiers involved in deals.

“We currently add the third-party verifier in the text notes of the DES (Bond Description) and are in the process of enhancing our system to capture the Verifier as an Involved Party similar to how we show underwriter, bond council, trustee, etc.,” Betteridge said.

Asked about when Bloomberg makes the determination to designate something as green, Betteridge indicated that it depends on when Bloomberg receives key information.

“This green designation is done at time of issuance or whenever we are provided enough documentation to make a determination that the issued bond meets our green criteria,” Betteridge said.

Betteridge said Bloomberg has not spoken to any federal regulators about identifying "green" "ESG" or social bonds in the muni space.

Nasdaq late last year introduced a Sustainable Bond Network, a global online platform designed to improve transparency in the market for green, social and sustainability bonds.

The online repository provides issuers of sustainable bonds across the world with a platform to voluntarily publish key information and data regarding their specific bonds, which, in turn, provides investors with the information they need to compare sustainable bonds.

Issuers from New York and San Francisco have joined the Advisory Board with the likes of banks, housing agencies and climate initiative firms to help provide advice and mold the platform into the future.

In the green, sustainable, impact space, everyone is reporting in different ways and, to compare, the market needs more streamlined measures in a place where it is easy to find the information, Ann-Charlotte Eliasson, European head of fixed income listings at Nasdaq, said in December. Since the U.S. market contains really large issuers, on-boarding more of them makes sense to her.

Interviews with portfolio managers appear to indicate a consensus that the market cannot broadly rely on any single designation.

Stephen M. Liberatore, CFA, lead ESG/Impact fixed income portfolio manager at Nuveen, told The Bond Buyer they have their own proprietary framework to examine municipal issuers in terms of "green" or "social" factors and explain to their investors how what they own fits into their framework. And while they continually evaluate and modify their framework with new information as it becomes available, they are quite comfortable with holding that box tightly closed.

He said that third party verification is a good thing for smaller asset managers that may not have the level of expertise/resources needed to appropriately evaluate an impact transaction because they can rely on that verification to know that the third party verifier has spent time with the issuer, talked through their finances, and did their due diligence.

However, Nuveen has their own set of proprietary guidelines for ESG and green investments that it has developed over its 30 years of responsible investing experience.

“It is critical when evaluating impact investments, which can be subjective depending upon the investor, that as an asset manager, you have a clear and concise investment process so that the investor can determine if your approach aligns with their investment goals,” Liberatore said. “This is one of the main reasons that our impact investment framework focuses on direct and measurable impact.”

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