Vigeo Eiris helped pioneer the green bond market. It is a leading provider of second-party opinions, or SPOs. Paul Courtoisier, its Global Head of Sustainability Bonds, explains the value that SPOs bring, and how the firm is navigating the debates around transition bonds.
Environmental Finance: What role does Vigeo Eiris play in the green bond market?
Paul Courtoisier: 
Our role is to provide market participants with independent reviews of bonds, performed by our teams in Paris, New York, London, Hong Kong and Santiago de Chile. We have been a leading provider of SPOs in the green bond market since its very early stages. We have delivered more than 260 SPOs and Climate Bonds Initiative verifications since 2012.
We deliver opinions for any type of fixed income instruments intended to be labelled green, social or sustainable – such as bonds, loans, residential mortgage-backed securities and asset-backed securities, among others.
While we perform second-party opinions, we do not provide advisory services for the development of green bond frameworks. Delivering both services could pose potential conflicts of interest, as explicitly mentioned in the International Capital Markets Association [ICMA] guidelines for external reviewers.
EF: Could you talk me through the process by which Vigeo Eiris produces second-party opinions?
PC: It's a six-stage process which is designed to be fast, flexible and issuer-friendly. Engagement is at the heart of our process and our team meets with the issuance managers at several stages of the process. We remain very cautious in ensuring that our due diligence conforms with the issuers' expectations and our own independence requirements.
In a nutshell, we first arrange a kick-off meeting to ensure we have properly identified all the issuer's needs. We then collect and analyse information through questionnaires and interviews. We draft our SPO in a preliminary form which is presented and discussed with issuance managers before being finalised.
EF: What are the benefits to issuers and investors of producing second-party opinions?
PC: 
The diversity of issuers results in varied reasons for and requirements from SPOs when issuing green bonds. One of the main benefits for issuers of obtaining an SPO is to ensure that their green bonds are in line with market expectations and practices, thereby gaining credibility for their brand, green credentials and their offering among investors.
Thereby, obtaining a SPO is a powerful mechanism for issuers to demonstrate leadership in the sustainability agenda and to highlight their commitments in this space.
It is also a way for issuers to prove that they are managing their sustainability risks in an appropriate manner and can ensure they are properly managing reputational risks.
The green bond market is a self-designated market, and it can be difficult for investors to have a clear view on the green quality of an issuance without an external review. We observe a steadily increasing demand for independent information on the sustainability credentials of green bonds. This demand comes not only from investors, but also from issuers, regulators and intermediaries. A number of investors, green bond indexes and green bond funds also require an external review in order for them to be able to invest in a particular instrument.
The market is heading in the direction of making SPOs and other external reviews mandatory, as outlined in the proposals for the EU Green Bond Standard.
EF: What sort of information are investors looking for from SPOs?
PC: Two types of information are of primary interest to investors. The first is whether or not the green bond is aligned with market expectations and standards and, in particular, with the Green Bond Principles. This is quite a basic need. The second piece of information is whether the bond is expected to deliver pre-defined environmental and/or social benefits.
The role of our agency is to bridge the information gap and provide accurate and timely green bond information to investors.
EF: What about misconceptions? What do you find that investors and/or issuers don't understand about SPOs?
PC: Investors are looking for comprehensible information, and it's very important – particularly with the growth of new bond categories such as transition bonds – that they are provided with appropriate and relevant detailed information on these bonds.
In order to avoid misconceptions, it's critical for us that our SPOs provide issuers and investors with the relevant context to understand and analyse if and how a bond is in alignment with market standards, and how it contributes to specific sustainability issues.
EF: Are all SPOs created equal, or are some more rigorous than others?
PC: At Vigeo Eiris, we apply a rigorous and consistent approach to all our SPOs. More and more SPO providers are coming into the market around the world, and each one has its own methodology. We think that a quality SPO should capture all the features of the issuance, as well as the environmental social and governance [ESG] profile of the issuer. This approach provides critical information on the ability of an issuer to deliver positive impacts and can strengthen an issuer's credibility and legitimacy to tap into the market for sustainable finance. We firmly believe that this integrated sustainability analysis is crucial to provide a holistic view to investors, especially taking into account the role of issuers in the context of the global transition to a low-carbon and sustainable economy.
EF: What are your views on the EU's proposed Green Bond Standard?
PC: There has been a lot of discussion in recent years about the need to find a common language for the green bond market and the need for standardisation to support fair market growth, transparency and integrity.
The development of the EU Green Bond Standard will contribute to addressing this need. It largely relies on the EU Taxonomy for sustainable activities. The EU Taxonomy is the result of some very impressive work by the High-Level Expert Group on sustainable finance, set up by the EU Commission.
We are already using the EU Taxonomy screening criteria within our methodology. The EU Taxonomy includes a number of features that are also central to our SPOs and help us to identify recognised eligibility criteria and thresholds, as well as environmental and social risks as part of the "do-no- significant-harm" criteria.
To date, the EU Taxonomy only covers some sectors and EU sustainability objectives. We will closely track and monitor the evolution of the EU Taxonomy and the related EU Green Bond Standard.
EF: Are there any concerns you have about how the process is developing, or about risks that either the EU Green Bond Standard or the taxonomy could take the wrong direction?
PC: One repeated concern that has been widely raised is that the EU Taxonomy might be a little bit too stringent in its thresholds. The EU Taxonomy is a strict vision of sustainable activities aimed at achieving the 2050 EU targets, which could be perceived as non-correlated to industry practices and performances. One could say that a rigorous standard might help to preserve the integrity of the market. However, instead, it might reduce market growth by restricting access to some issuers, especially in 'brown industries', even though the taxonomy did expand to include 'transition' and 'enabling' activities.
One of the key limitations we see is the global implementation of the EU Taxonomy. The notion of 'green' is very sensitive to a specific project and its context. A tick-the-box approach towards eligibility is not appropriate, and it's important to maintain flexibility in relation to the criteria to constantly define and redefine a green project at the end.
Moreover, it is essential to ensure that the appropriate expertise and judgement is applied to assess a project.
EF: There is a fair bit of controversy in the market about transition bonds, which – depending on your point of view – either help unsustainable companies become green or use the green bond market to finance business- as-usual activity. What's your view?
PC: It is very important to note that the transition is about more than climate. There are as many transitions as there are Sustainable Development Goals.
The market today is primarily focusing on the climate transition. We've been having lots of discussions with issuers and intermediaries about climate transition bonds. The debate is getting more and more intense.
High greenhouse gas emitting industries are obviously part of the equation to achieve the goals of the Paris Agreement. Market participants are looking to support companies that are transforming their business models to contribute to the transition to a low-carbon and a climate-resilient economy.
We are recognised as the first SPO provider to have supported what is now called a 'transition bond'. The 2017 Repsol green bond, which was issued to finance energy efficiency projects with the oil and gas company's operations, was essentially a transition bond, reducing the overall environmental impact of an activity which is fossil fuel-based.
For the time being, as long as there are no 'Transition Bond Principles', we continue to apply the same approach to transition bonds as for green bonds. We draw on our extensive research on carbon and energy transition projects to evaluate how issuers can align with a below-2°C temperature increase trajectory and deliver towards the significant improvements which are needed to meet transition and sustainable development goals.
EF: What's your view on the ENEL sustainability- linked bond? Some market participants have raised concerns given that it is, unlike most green bonds, not linked to specific assets but rather to ENEL's overall sustainability performance.
PC: Many market participants have recognised that the ENEL SDG-linked bond is a positive market development. This issuance is an important evolution in the market, in particular because it is well-suited to so-called 'brown' industries, allowing them to demonstrate that they are delivering issuer-wide sustainability progression without targeting specific assets.
The ENEL deal is likely to bring additional sustainability- linked bond issuances in the future. This is something that we will be closely monitoring. We are already delivering SPOs for sustainability-linked loans and are prepared to do the same for bonds.
EF: What are your expectations for the market in 2020?
PC: We are seeing considerable efforts being made around the world to improve the infrastructure on which the green bond market relies.
Local standards are being developed by several stock exchanges, incentive schemes are being implemented by government authorities and market-based initiatives are being developed by private institutions. For instance, the Inter- American Development Bank is creating a 'Green Bond Transparency Platform', which was launched at COP25 in Madrid. It seeks to bring greater transparency to the Latin American and Caribbean green bond markets.
All these initiatives popping up across the globe will hopefully support the growth of a fair and transparent market, and we are fully supportive of these developments.