Green bond investors left in the dark

Green bond investors find themselves navigating blind due to the lack of standardised emissions reporting methodologies, a specialist global asset manager has revealed.

These impact bonds, designed to finance environmentally beneficial projects, also suffer from a scarcity of post-issuance reporting data.

According to Insight Investment, the absence of a uniform approach results in vastly different carbon emissions data depending on which methodology is used, hindering transparency for investors.

Green bonds assist in financing the net zero transition and typically target climate mitigation activities such as renewable energy. They aim for positive, measurable environmental impact over a longer-term investment horizon.

Typically, issuers provide performance updates on the impact of green bonds, but do not provide information on the carbon emissions of financed projects.

This leads to investors either treating green bonds like conventional bonds for carbon assessments, thereby ignoring impact, or using a variety of methodologies to estimate a green bond's carbon impact.

The result? Green bonds can have the same reported carbon footprint as an equivalent conventional bond from the same issuer, despite being used to finance environmentally positive projects.

"Using a variety of different methodologies to estimate a green bond's carbon footprint can lead to significant variation between reported numbers," Annabel Jennings, ESG analyst at Insight Investment explained.

"Many investors create their own estimates using either the issuer's carbon footprint or simple techniques. This could lead to different investors reaching different conclusions and different reported numbers."

For example, in Insight Investment's analysis of Iberdrola's Scope 1 emissions based on data from Bloomberg, using MSCI's methodology saw a 97% reduction of a green bond's carbon footprint compared to using the issuer's carbon footprint, while Insight's own methodology saw an 80% reduction.

This is because MSCI's methodology uses averages for the project type identified, rather than considering the specific issuer or security.

This methodology estimates a 35% higher carbon footprint versus the overall issuer's reported footprint, highlighting the value of issuer-specific or security-specific methodologies.

"To ensure transparency and comparability, we believe it is important that a credible and robust market standard emerges for calculating the carbon footprint of green bonds. This will help to support investors, issuers and policymakers with regard to decisions about the distribution of and exposure to emissions, and tackle underreporting of emissions," Jennings said.

"Green bonds are a tool for financing the net zero transition and we believe that a standardised approach, with sufficient coverage, would lead to benefits for investors, issuers and policymakers pursuing wider sustainability objectives."

A standardised approach would mean that the carbon footprint of green bonds would explicitly reflect the carbon benefit of green bonds.

Jennings called on the International Capital Market Association (ICMA) Green Bond Principles guidance to be updated to provide standardisation to issuers, building on a standard from the Partnership for Carbon Accounting Financials (PCAF), and accounting for the lack of data reported for green bonds after issuance.

This would enable investors to target green bonds that finance climate mitigation activities.

"Even if the options today are imperfect, choosing and applying an estimation methodology means investors will more closely reflect the reality of carbon footprints in their portfolios," Jennings said.

"In the absence of widespread reported carbon footprint data of green bonds by issuers, an estimation approach is required. The widely used estimation approaches incorporate trade-offs between operational simplicity and specificity.

"We therefore seek to encourage collaborative industry groups to agree and establish a standard. This would support the role of green bonds as a key tool for financing the transition and a net zero economy and also help investors and issuers pursuing sustainability objectives, particularly net zero and decarbonisation goals."

Read more: Insight InvestmentMSCIAnnabel JenningsBloombergIberdrola