Green bonds grow into big business

Sep 08, 2022 View in browser   By Jordan Wolman THE BIG PICTURE The explosive growth of green financing in recent years has been accompanied by a parallel boom in third-party reviews — generating big business for a few firms, but also raising echoes of the role credit raters played ahead of the 2008 financial crisis. Moody's is projecting $1 trillion in sustainable debt issuance this year — and has tripled staffing for providing reviews to "meet the needs of market participants," said Michael Simon, a company spokesperson. There have been 414 external reviews of sustainable bonds during the first half of 2022, according to Environmental Finance, a news and analysis service. That's compared with 1,049 in all of 2021 and 450 in all of 2020 — numbers that show a sustained interest despite generally tighter economic conditions. Much of the business has been going to firms such as Sustainalytics, Institutional Shareholder Services, S&P Global, Moody's, CICERO Shades of Green and Kestrel Verifiers. CICERO Shades of Green has doubled its employee ranks in the last two years, said co-founder Christa Clapp. That growth coincides with an increase from 47 external reviews conducted in 2020 to 103 in 2021, according to Environmental Finance. "We've seen some fluctuation with uncertainties in the financial markets this year," Clapp said. "However, overall there's been quite a steady growth in interest across all products. To me that says there's still a lot of companies and organizations issuing bonds that are still doing preparatory work to get their reviews even if they're not ready to come to the financial market." Kestrel Verifiers, meanwhile, earned three times as much revenue from reviews of green, social and sustainable transactions through August 2022 as it did in the same period last year, said Melissa Winkler, the firm's senior vice president for sales and strategy. Reviews have become standard practice in the green bond market, even though there are no formal requirements to do them for green transactions to get reviewed. The Climate Bonds Initiative estimates that 86 percent of green bonds got external reviews last year, in part thanks to guidance issued by the International Capital Markets Association. The reviews, which provide a first check against greenwashing, are meant to ensure that such transactions actually support environmental, social and governance goals. The financial system needs to shift trillions of dollars into green, sustainable and energy-transition investments in the global effort to combat climate change. The $100 trillion bond market can play a key role by helping businesses attract sustainability-minded investors. What about greenwashing: There's still some doubt about the value of green bond reviews, along similar lines to the skepticism surrounding credit raters in the years since the 2008 financial crisis. If issuers are paying for reviews, how can investors be sure reviewers aren't inflating grades just to keep customers happy? "I think what's going to happen, some (reviewers) aren't going to last because they probably are giving away their verifications to the highest bidder," said Jim Nadler , CEO at Kroll Bond Rating Agency. "Where the rubber will meet the road is when you get a company that's not meeting objectives, and you're going to have to publish to the world that that company's not meeting the objectives and they're going to stop paying you." The ICMA guidance addresses independence and conflict of interest. Companies including Cicero, Sustainalytics, S&P, ISS have agreed to align with the guidelines. More known unknowns. For a sustainability-linked bond or loan, where borrower performance is in part judged by the ability to meet ESG targets, determining whether a key performance indicator is material or the related target is ambitious enough is often a sophisticated process. "These structures are still new and evolving. Setting targets is more of an art than an exact science yet," said Tess Virmani, head of ESG at the Loan Syndications and Trading Association. There's a new push within the external review industry for additional reviews to track progress after a bond is issued. That concern is unfolding within the context of the European Union's development of a green bond standard, which would turn market guidance into regulation. Current draft language calls for mandated external reviews on allocation reports, but also for the reviewers to have fewer conflicts of interest.   A WOMEN RULE CONVERSATION ON LEADING FROM THE GROUND UP: Join POLITICO's Women Rule on Sept. 15 for conversations focused on creating and leading sustainable, healthy and inclusive communities. The program will feature a Member Exchange panel followed by a keynote discussion exploring the most pressing issues facing women in their communities and women in leadership roles who are best positioned to solve these problems. REGISTER HERE.     YOU TELL US GAME ON — Welcome to the Long Game, where we tell you about the latest on efforts to shape our future. We deliver data-driven storytelling, compelling interviews with industry and political leaders, and news Tuesday through Friday to keep you in the loop on sustainability. Team Sustainability is  editor Greg Mott, deputy editor Debra Kahn and reporter Jordan Wolman. Reach us all at gmott@politico.com, dkahn@politico.com, and jwolman@politico.com. Want more? Don't we all. Sign up for the Long Game. Four days a week and still free!   LISTEN TO POLITICO'S ENERGY PODCAST: Check out our daily five-minute brief on the latest energy and environmental politics and policy news. Don't miss out on the must-know stories, candid insights, and analysis from POLITICO's energy team. Listen today.     WHAT WE'RE CLICKING — Big Oil is trying to convince you it can go green. The Financial Times breaks down why its low-carbon investments fall short. — Restaurants are fighting back against a new California law that gives fast food workers more protections, the AP reports. — Move over, IRA: Australia just passed its first major climate law in more than a decade, Bloomberg writes.   Follow us on Twitter Debra Kahn @debra_kahn Greg Mott @gwmott Jordan Wolman @jordanwolman   Follow us

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