Green capex is not enough

While green, social and sustainability (GSS)-labelled bonds are providing assurance to the market, capex projects alone are not enough for a two-degree world. Amy West, head of sustainable finance at TD Securities in New York, discusses market growth.

Supranational, sovereign and agency (SSA) issuers have been at the forefront of financing sustainability-linked technologies and projects since the start of the market, including being pioneering issuers of GSS bonds.

But if the committed two-degree limit above pre-industrial levels laid out in the Paris Agreement on Climate change is to be fulfilled markets will have to keep evolving to a broader approach towards environmental impact, West says.

AMY WEST

IF AN ISSUER COMES TO MARKET WITH A GSS BOND, INVESTORS INTUITIVELY LOOK AT WHAT ELSE THE COMPANY HAS DONE IN THE ESG SPACE. IT IS NOT A SURPRISE THAT MANY OF THE WORLD’S LARGEST INVESTORS LOOK AT ESG BEYOND LABELLED GSS BONDS.

AMY WEST TD SECURITIES

Indicative of this, investors – having already turned in greater numbers to GSS bonds – are increasingly embracing a more all-encompassing appreciation of issuers’ environmental, social and governance (ESG) profile, taking them beyond the use-of-proceeds scope of GSS bond transactions.

“If an issuer comes to market with a GSS bond, investors intuitively look at what else the company has done in the ESG space. It is not a surprise that many of the world’s largest investors look at ESG beyond labelled GSS bonds,” West explains.

She continues:“While investors like the additional granularity of what GSS bonds are funding – and therefore may have added value – incorporating holistic assessments of companies’ ESG initiatives is a credible approach until supply meets demand.”

The emergence of a credible transition-bond market has a place going forward, says West. But she argues that this should be limited to issuers in higher-carbon industries transitioning to a two-degree world.

Acknowledging the efforts in other jurisdictions to establish definitive standards defining and monitoring green bonds, West also tells KangaNews the GSS market needs to establish a common language if it is fully to deliver on its potential to redirect capital flows.

“Differing standards from jurisdiction to jurisdiction complicate efforts to establish credibility and will increase the burden on investors to decipher impact,” she says.

In time, and given the size of the euro market, West believes the EU taxonomy will become “the de facto basis for global GSS markets”. As well as directing capital towards ESG-linked economic activities, West says the EU taxonomy will further encourage issuers, at a company-wide level, to focus on how they can make a real contribution to climate-change mitigation or adaptation.

“Ideally, these guidelines will provide credible benchmarks as well as practical recommendations on how best to report the impact that companies’ activities are having on the climate – as well as the impact of climate change on their businesses,” she explains.