Assessing Asian green bonds

By Ahren Lester

Reporting of environmental and social impact is 'patchy' among Asian green bonds, finds a report, which recommends eight priorities for the market. Ahren Lester reports

Evidence to support environmental and social impacts green bond issuance in Asia is "patchy" at best, a report from Carbon Care Asia (CCA) and Oxfam Hong Kong said, but enthusiasm for the instrument provides an opportunity for meaningful reform through engagement.

The report from consultancy firm CCA and charity Oxfam – entitled Making green bonds work – said green bonds are "important" tools for channelling funds towards projects that accelerate the transition to a low-carbon economy.

The researchers analysed 249 green bonds issued in Asia since the start of 2018, raising $84 billion. With Japan, Korea and Australia excluded, the bulk of the assessed bonds were from Chinese issuers (see Table: Asian green bonds assessed by issuer origin).

Only 12 of the green bonds analysed failed to align with the four components of the International Capital Market Association (ICMA)-administered Green Bond Principles (GBP), primarily due to allocation of proceeds to general corporate purposes – as allowed under Chinese regulations – rather than specific Use of Proceeds.

Whilst 83% of bonds disclosed the sustainability context of their bonds, only 26% offered details on how environmental impact was identified in their project evaluation process.

The report said that only 8% offered details on how they manage environmental risk and 3% mentioned climate resilience in their green bond frameworks. "This could imply that most of the projects have not gone through any assessment of climate risks or strategic planning for climate adaptation," the authors said.

Clear use of the best technology available for the projects financed or refinanced by the proceeds of the bond issue was also not clear from the analysis. Only 1% of assessed bonds referenced that they were using the best available technology in the project design, for example fibreglass maker China Jushi in its CNY200 million ($31 million) issue in May 2018.

"For any project, if a more energy efficient or environmentally friendly technology is available but not deployed, that represents an opportunity lost in bringing about the maximum environmental benefits."

"Whilst it is acknowledged that under certain circumstances the second best technology options may need to be adopted for technical or financial reasons, a full disclosure would be warranted to enable investors to make their own judgements," they added.

Nonetheless, the researchers believed that China Jushi's best practice investment in the most advanced technology could spur others in the market to do the same.
Monitoring is concerning for investors.

The authors – Mayling Chan and Samson Chow from Oxfam and Lan Xing, Lorène Delhoume, Justin Lai, John Sayer and Albert Lai from CCA – added that the integrity of the green bond monitoring process should also be a "concern" for investors.

Encouragingly, 89% of the bonds issued conducted an external review and 84% had their fund allocation verified by a third party, despite this not being mandatory.

The report warned, however, that the quality of the external reviews varied significantly.

Some of the more through external reviewers provide detailed information, including evaluation methodology, major assumptions, implication to the environment, and contribution to the UN Sustainable Development Goals (SDGs). In contrast, others only give an opinion on the bond's compliance with the GBP or simply confirm the proceeds are going towards the specified green projects.

Post-issuance monitoring was also a concern, the report said. More than three-fifths of bonds assessed had not yet issued an annual impact report. For some, this is because they had not yet reached their first anniversary. Nonetheless, the report authors said that many of the assessed bond issuers had failed to publish impact reports on time.

Of those that had published reports, just over half conducted an external review of their impact report. Yet only 39% had used quantitative indicators to communicate environmental impacts and 26% disclosed their key performance indicator (KPI) methodology and assumptions. The expected impact at project level was only provided by 31% of reports available.

Basic social impact assessment absent

Although not explicitly designed to incorporate social impact, the report authors said that investors tend to approach green bonds with a "high expectation" that they at least do no harm to the UN SDGs. This expectation, however, is poorly reflected in green bond disclosure.

"China Three Gorges Corp ... raised a combined total of CNY45 billion ($6 billion) through green bonds to build hydropower dams such as the 10.2GW Wudongde dam on the Jinsha river, whose construction led to over 14,000 people being displaced – increasing the risk of poverty"

While 15% of green bond issues show evidence of positive social impact at project level, only 3% mention contributions to the SDGs in their framework.

Demonstration of engagement with local communities is also low at 4%, with green bonds that have outlined the process to manage social risks or identify social impact representing only 4% and 6% of the total, respectively.

The result is that China Three Gorges Corp could raise a combined total of CNY45 billion ($6 billion) through green bonds to build hydropower dams such as the 10.2GW Wudongde dam on the Jinsha river, whose construction led to over 14,000 people being displaced – increasing the risk of poverty.

"Since the provisions for environmental and social impacts in green bond standards do not differ much for most national, regional or international regimes, the findings in this research on Asian bonds may have wider implications for green bonds and climate bonds globally," the report authors said.

Eight key priorities for engagement

As a priority, CCA and Oxfam Hong Kong outlined eight priorities for key stakeholders in the green bond process – including regulators, issuers, intermediaries, asset owners and standard setters – to encourage progress in the market. These priorities include disclosing the use of best available technology or explaining why it is not utilised, the use of quantitative KPIs that enable independent verification, and including climate resilience assessments (see Box: Green bond engagement priorities).

"The future of green bonds can only be assured if investor confidence is enhanced through better standards and practices with regard to environmental outcomes, social impacts and process integrity"

"The future of green bonds can only be assured if investor confidence is enhanced through better standards and practices with regard to environmental outcomes, social impacts and process integrity," the report said. "Even among mainstream economists, there is growing scepticism about the quality of ESG measurement and disclosure in climate finance."

"At the same time, there is emerging evidence that green bonds are retaining value better than mainstream corporate debt during the Covid-19 pandemic – which has spurred more investor interest. This combination of scepticism and enthusiasm presents an unprecedented opportunity for reform."