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Green bonds – putting them through their paces

Investment strategy

BNP Paribas Asset Management

According to the definition used in the Green Bond Principles (GBP), a green bond is any type of debt instrument where the proceeds are used to finance or refinance green projects.­

The GBP require that the bonds be aligned with four core components:

1. use of proceeds

2. process for project evaluation and selection

3. management of proceeds

4. reporting.

To evaluate the environmental and social benefits of green bonds, close attention must be paid to components 1 and 4. This means that it is important to look at the type of projects selected and financed by the proceeds, as well as their outcome and impact.

A green bond has a beneficial impact if the proceeds are invested in promising projects and if, once such projects have been implemented, they involve a comprehensive and robust reporting mechanism.

With this in mind, BNP Paribas Asset Management has developed an engagement process specific to green bonds, with the aim of avoiding any reputational risk associated with project implementation. Accordingly, bonds are analysed at issuance on the primary market and projects are evaluated based on their compliance with a list of eligible sectors and projects drawn up by BNP Paribas Asset Management.

Additionally, issuer reports on the green bonds are closely scrutinised to gauge the outcome and impact of projects. Throughout the engagement process, the team of analysts at BNP Paribas Asset Management’s Sustainability Centre is constantly at work to consult with and challenge issuers on the implementation of their green bond programmes.

Exhibit 1: Green bonds engagement process


Source: Sustainability Centre – BNP Paribas Asset Management

Use of proceeds

In their ex ante analysis, the analysts verify that the bond is in line with the “taxonomy” of the eligible sectors and projects defined by BNP Paribas Asset Management. This list currently includes the following sectors: renewable energy, energy efficiency, green buildings, transport, waste management, water management, natural resources and social initiatives. A certain number of criteria and standards are applied to each sector of the taxonomy to determine whether the financed assets are compatible with the development of long-term solutions.

When projects are intended to tackle climate change, the analysts only include assets that are in line with a scenario in which global warming is kept below 2 degrees Celsius. According to the International Energy Agency (IEA), for such a scenario to be possible, more investment must be made in biofuels and initiatives to increase the energy efficiency of the industry, building and transport sectors, as well as in renewable energies. At the same time, the volume of additional investment in the gas, oil and coal industries must be lowered.

We have therefore decided to exclude assets or projects related to fossil fuels from our green bond investment scope. Furthermore, although in some cases assets in the fossil energy industry can allow for a sizeable reduction in greenhouse gas emissions over the near term, our company is committed to supporting green bonds that are compatible with long-term climate scenarios.

Exhibit 2: Additional investment needs under the IEA 2°C scenario (vs. base case), globally and by category


Source: IEA, Crédit Agricole CIB (November 2016)

Meanwhile, to avoid any controversy or an increase in reputational risk, the ex ante analysis also assesses how the environmental and social risks associated with the financed projects are managed. Issuers are asked to explain the procedures that must be followed should a project have an adverse or unexpected impact, to clearly define the governance structure responsible for mitigating any undesirable repercussions and to describe the standards and frameworks used in this mechanism.

A green bond is beneficial to the environment and to society if any unexpected or undesirable impacts related to the implementation of a project have been clearly mitigated and offset by the issuer, and if the positive repercussions are consistent with a sustainable, long-term development vision.

In 2015, the United Nations brought into force a series of Sustainable Development Goals (SDGs). Governments and businesses can use these SDGs to measure their actions and contributions to the welfare and protection of the planet.

At BNP Paribas Asset Management, we have decided to incorporate green bonds into our investment universe precisely because they are an effective vehicle to advance the sustainable development agenda.

Exhibit 3: % of bonds contributing to the Sustainable Development Goals (SDGs)


Source: Sustainability Centre – BNP Paribas Asset Management (October 2017)

Most of the proceeds of green bond issues go towards financing SDG 7 ‘Affordable and Clean Energy’, with 67% of the bonds supporting this goal. The second most funded category — 15% of the bonds — corresponds to SDG 11 ‘Sustainable Cities and Communities’.

The bonds within our investment scope also support, albeit to a lesser degree, more socially-oriented goals, such as education and the fight against poverty.

Impact reports

Why is it important to ask issuers to provide impact reports? Because it is a way for investors to quantify and measure the positive repercussions of their investments, and it enables them to verify that the issuers responsible for the implementation of projects are delivering on the promises made at issuance on the primary market.

In their ex post assessment, the analysts examine the quality and transparency of the issuer’s disclosures. For this, they monitor how funds are allocated to environmental or social projects and examine information on the positive repercussions, in the form of outcome or impact indicators.

Exhibit 4: % of total amount issued by issuer type


Source: Sustainability Centre – BNP Paribas Asset Management (October 2017)

We have noted a steady increase in the number of impact reports. A report is issued for 95% of the bonds included in the scope of our coverage. However, there are still some disparities in the content of these reports, with 21.5% of them not supplying any information on the outcome of the projects.

For instance, in the case of some renewable energy projects, the issuer does not disclose the outcome indicator ‘installed capacity in megawatts per hour’. Furthermore, impact indicators measuring the benefits for society and the environment are missing in 20.7% of the reports on green bonds.

It is also worth mentioning the degree to which impact reports use external verification or audit. Despite this now being standard practice in the sector, 72% of the impact reports published contain no third-party checks.

Very little content is comparable from one impact report to the next, and this is currently one of the major challenges in the green bond market. Within a given business sector, issuers can apply very different indicators, frequencies and scopes in their environmental impact reports, for example.

We believe that harmonised reporting methodologies are needed to ensure the integrity of these reports and thus the confidence of existing and prospective investors. Indeed, development banks have recently proposed a common framework for impact reporting on renewable energy projects. Issuers could also build on existing standards that have been in place for years to report on companies’ ecological footprint.

The market has been undergoing constant change in the past 10 years. Just a few years ago, the simple issuance of a green bond was deemed praiseworthy enough, and the publication of an impact report was considered unnecessary. Now, it is the norm for issuers to provide evidence of the benefits of projects in the form of a report.

As we move forward, we are hopeful that the information disclosed in these reports will be sufficiently transparent and standardised to enable comparisons between bonds, as is already the case in other sectors (for instance, in the food industry, where consumers can easily compare the calorific, protein and sugar content of any product).

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