As the depth and size of the global green bond market has grown in the past decade, it is evolving towards a more regulated definition of "green-ness" and ability to achieve carbon reduction aims, according to BNP Paribas Asset Management.
BNP Paribas Asset Management takes a strict lens in identifying green bonds that meet tighter definitions of impact and scope when investing for its green bond strategy, noted Felipe Gordillo, senior ESG analyst at BNP Paribas Asset Management.
The standards, definitions and intentions around green bonds have evolved over the past decade from industry-led guidelines such as the International Capital Market Association (ICMA) Green Bond Principles and the Climate Bonds Initiative, towards regulation and legal definitions such as the European Union taxonomy for sustainable activities. Gordillo noted.
"The natural evolution in the market is that it's something started by actors defining the standard, and then evolving into a more regulated manner of defining what a green asset, what a green bond is," Gordillo said. "Is that movement only specific for European issuers? No. We have seen the emergence of different taxonomies across the world , and in Asia one of the most interesting is what the People's Bank of China has been doing, in updating their green catalogue, and we have seen the work of the Singapore Central Bank in taking the lead on institutionalising what a green bond is. That's a natural movement in the market."
At the same time, investors are also evolving their standards on what they consider to be green or sustainable bonds. BNP Paribas Asset Management has defined its internal criteria for green bonds around three pillars - "green-ness", "integrity", and "ambition", and green bonds will have to meet minimum standards for all three criteria to be purchased for the firm's global green strategy.
"What we thought is that it would be really useful to express this within our assessment framework what is the ambition of the issuer," said Xuan Sheng Ou Yong, green bonds and ESG analyst at BNP Paribas Asset Management. "We're trying to say, where is the issuer going in the next few years? Is the direction of travel aligned with the Paris Agreement, or some kind of international benchmarks for plastic recycling or waste management?"
The second part to measuring ambition is to see if companies' capital expenditures match with the stated ambitions.
"The issuer might say, yes, we'd like to be carbon neutral by 2050, but when we look at the five year business plan, you find that 70% of their full capex is in technologies or assets that are non-aligned or incompatible with that goal and then we have to ask, what are you trying to do here," Sheng said. "The final element is, how does a green bond contribute to the ambition. How does it contribute to forward capital expenditure? Does the green bond contribute 30% of the five year capex plan? If it is, perhaps we can say, ok ,there's a pretty good link."
Gordillo pointed to a 2020 study by the Bank for International Settlements that examined corporate issuance of green bonds to see if the company overall is reducing their emissions intensity. The study found that "overall, there is no strong evidence that green bond issuance is associated with any reduction in carbon intensities over time at the firm level."
"Our reaction was to say look, if you really want to see the transformational power of green bonds, you need to have more than one transaction," Gordillo said. "You need the transactions to be big enough, and you need to understand how much of those carbon avoidance related to the green bond is related to the company overall."
To qualify for investment in the green strategy, need to meet that strict criteria. Using the new methodology, around a fifth of green bonds in the market would not appear in the fund manager's global green strategy, Sheng said.
"One of the first reasons is due to the lack of sustainability credentials for the issuer," Sheng said. "We have big chunk of issuers that have the worst ESG scores, according to our own methodology, and therefore we have doubts about their capacity to implement the green bond framework," Sheng said. "Then we have another big source of exclusion - basically, those transactions that do not make our criteria because they don't meet with the four principles articulated within the ICMA Green Bond Principles. In order to be eligible, an issuer needs 50 out of 100 points. We have cases where they simply don't make it."
Bond issuance also has to meet financial criteria in additional to green credentials to make an investment case, Sheng noted.
"We also tend to do a post issuance engagement," Sheng said. "Starting last year we had between 50 to 60 calls with issuers. That's ex-post engagement. If the result of that engagement leads to a change in our recommendation, we will then tell the portfolio manager they have to sell out of that."
Within the green bond strategy, the priority is "to protect clients because we don't want them to be exposed to greenwashing," Sheng concluded.