Cash & Liquidity ManagementInvestment & FundingCapital MarketsFrom little acorns: how green bonds are setting treasurers on path to low carbon

From little acorns: how green bonds are setting treasurers on path to low carbon

Treasurers look to secure a foothold on path to low carbon with green bonds

Appetite for issuing green bonds is rocketing and, with corporates accounting for half of total volumes, the debt instrument is clearly finding favour among treasurers as they look to help their firms finance the transition to a low carbon future.

According to Climate Bonds Initiative, a not-for-profit organisation responsible for certifying green bonds, issuance of green bonds hit a record $517bn last year, up 74% compared to 2019. In fact, Climate Bonds Initiative expects green bond volumes to top $1trn this year, though it reckons annual issuance will have to reach $5trn by 2025 if the global economy is to remain on target to achieve net zero carbon emissions by 2050, as proposed by the Intergovernmental Panel on Climate Change.

To maintain the momentum required over the long term will require sustained high levels of investor confidence in green bonds and that in turn will depend on the market’s trust in high-quality standards and certification, not least to allay rising investor concerns over “greenwashing”, whereby firms make exaggerated or false environmental claims to raise funds.

In the absence of stronger fiscal, monetary or regulatory policies to encourage the issuance and purchase of bona fide green securities, that crucial task has fallen heavily on the shoulders of organisations like the Climate Bonds Initiative whose Climate Bond Standard is responsible for green bond issuance that now totals more than $200bn.

Caroline Harrison, senior research analyst at Climate Bonds Initiative, says application of science-based certification criteria developed with industry experts, scientists, and financial services parties has been key to making sure that the initiative’s standards are “realistic, workable and achievable for issuers”. She explains that the role of standard setting is to confirm that any debt instrument is aligned with green bond principles, a set of guidelines originally developed in 2014 by a consortium of banks and now overseen by the Climate Bonds Standard Board.

“The aim is to ensure best practice for internal controls tracking, reporting, verification and financing of assets as well as – and this is crucial – consistency with the achievement of the net zero goals of the Paris agreement,” Harrison says.

The Climate Bonds Standard and Certification scheme provides the market with the reassurance to go ahead and achieve scale. If a bond is issued and it is compliant with the Standard, investors know what that means and they can be sure that the labelling is robust, that it really does what it says on the tin. And that should help encourage greater participation in the market,”

Tough nuts to crack

While Climate Bonds Initiative focused initially on low-hanging fruit relatively amenable to green standards and certification, such as the renewable energy sector, it soon began to tackle the environment, public transport and shipping. More recently it has sought to expand its standards and certification expertise to rather more challenging, “hard to abate” sectors such as steel, cement and chemicals.

“In the transition to net zero no industry must be left behind,” Harrisons says. “There may be parts of hard to abate sectors or certain elements of entities operating within it that may be very tough to deal with but that doesn’t mean the whole industry or an entity within it cannot participate in the drive towards a low carbon future.”

Currently the Initiative is trying to figure out the best way for those challenging industries to get on the path to net zero. It is, for instance, working on criteria that would enable certification of whole entities if they have a credible, verifiable transition plan that includes performance indicators and timelines to measure their progress along the way.

“The idea is if they meet our criteria then they could be in a position to be certified as a ‘transition company’ and still be able to raise money in the debt markets to support their plans,” Harrisons says. “This is something that is in development so it’s not available now but clearly we do need to have solutions for the more complex corporate requirements.”

Thumbs up for green bonds from treasurers

As guardians and anchors of a company’s financial health, treasurers will be at the heart of developing and executing green bond strategies.  Climate Bonds Initiative therefore sees engagement with corporate treasurers as crucial.

Harrison has been heartened by their enthusiasm, pointing to an overwhelmingly positive 2020 Climate Bonds survey of treasurers which highlighted the benefits they saw for their companies from green bond issuance. These include broadening of the investor base, enhanced visibility, strengthened stakeholder relationships and the catalysing of new green business lines. The overwhelming majority of treasurers surveyed recommend that others should simply ‘do it’.

Harrison is confident that a similar survey now would only reinforce the 2020 findings. The sooner a company starts on its journey to low carbon the better as there are clear benefits from being proactive, she says, citing as an example the experience of US-based telecoms giant Verizon which has issued three large green bonds and managed to get a pricing benefit on each of them.

Verizon recently updated its green bond framework to include the latest iteration of best practice and its experience provides valuable lessons for other companies.

“When Verizon started on its sustainability journey in 2019 it used best practice at the time,” says Harrison. “Market thinking has evolved over time and so it simply upgraded the framework. Issuers, therefore, should not be put off entering the market just because we have not arrived at the final destination in terms of standards, certification or regulation – treasurers should just focus on observing current best practice and look to amend later.”

So how should treasurers keen on green bond issuance kick off proceedings? Interviews by Climate Bonds Initiative with treasurers for the 2020 survey revealed that one of the first steps by many on their green bond journey was to set up a sustainability team or committee to discuss how to push the green bond project forward. Harrison says one critical initial task for the team to execute is to review all assets expenditures and projects and try to determine which ones would be suitable for inclusion in a green bond – a process called green tagging.

“Once they’ve identified the eligible project categories, they then have to make sure the assets are compliant with a recognised taxonomy such as the Climate Bonds Standard,” Harrisons says. “Some treasurers have told us that that the process was quite expensive and cumbersome to set up initially. It can be a bit of a challenge but once it’s set up, [treasurers] can feed that database as they go forwards.”

Green bond intangibles

Harrison says most treasurers “really enjoy” the experience of successfully issuing a green bond because it adds a new dimension to their work and is well received internally and by peers.

“Treasurers don’t really attract a lot of attention, either internally or externally. But as soon as they put up a green label on something everybody in the company wants to talk to them, about how they got there,” Harrison adds. “Treasurers have also told us that one of the great things they got out of issuing the green bond was greater collaboration internally […] these are just some of the intangible benefits treasurers can expect by issuing green bonds.”

Harrison says she speaks to 75-100 treasurers every year, and none has expressed regret in going through the process of issuing a green bond.

“They enjoy the process even though it can be difficult initially. They also see the activity of issuing a green bond as reason for them to audit all their activities, figure out what they’re doing and how they’re going to transition to be compliant with a zero-carbon future. Issuing green bonds is the first stage of that journey for a lot of treasuries.”

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