Printing ESG frameworks after the bonds is too risky
Sustainability bond bankers are batting around the idea of subverting usual practice by letting issuers price themed deals and then follow up with their green or social bond framework document after issuance. The idea is to hasten market access for issuers battling the effects of the coronavirus. But it could weaken sustainability standards.
Standard market practice in the green and sustainable bond market is for a new issuer to spend time with a structuring bank to put together a sustainability framework document before printing themed debt.
The framework has all the answers for investors about how the money will be spent and how the company will make sure it remains compliant with sustainable bond guidelines.
But Covid-19 has touched everything, including the social bond market. Now, some market participants are floating the idea that companies should be able to print Covid-19-related social debt and then publish a framework later. The framework would need to be published within a year, so that investors could check that the borrower was complying with the use of proceeds it promised at issuance by the first annual reporting deadline.
The major advantage, according to proponents of the change, is that this will get money into borrowers’ hands faster. The pandemic calls for quick responses, and putting together a framework can take some issuers months.
But it is not clear why it is essential to cut this red tape out of the process, other than so that investment bankers can book fee-paying mandates more quickly.
Such has been the power of central bank quantitative easing that the conventional bond and syndicated loan markets have been able to mobilise billions of euros quickly, easily and in absolute terms cheaply, for companies and banks in almost every sector.
Companies or industries that cannot easily access the conventional markets, like European airlines, will not be able to print bonds just because they have a social tag.
Furthermore, loosening framework requirements today will store up problems for tomorrow. Capital markets have precedent in showing that once guidelines are relaxed, it can be all but impossible to put the genie back in the bottle and go back to the old, more stringent, ways. The high yield market is the clearest example: covenant-lite terms used to be something reserved only for top borrowers; now they are ubiquitous.
It is not clear, either, how long issuers will need to fund Covid-19 responses for, nor why they need a themed bond to do it. Globally, experts do not know when the health crisis is going to end, let alone what the financial implications will be.
Eroding standards now would open up the socially responsible investing (SRI) bond market to all sorts of near and long term abuses by opportunistic bankers and issuers.
Ultimately, the final say will rest with SRI investors. If a company tries to bring a deal without a framework, investors need to show their disapproval by not buying it. Vuying everything in sight that has SRI branding, simply to show they have invested the cash they are managing, is not good enough.
In this market above all, investors need to do the right thing and work to higher standards — that is, after all, the whole point of the labelled green and social bond markets in the first place.
Otherwise, they can expect the integrity of the market — and theirs — to be eroded, along with accountability and sustainability standards.