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Social bonds broaden GBPs’ vision

This year’s update to the Green Bond Principles has both expanded the scope of the market’s voluntary code, bringing in broader social bonds, and tightened it, by ruling some pure play transactions offside. The ‘use of proceeds’ concept is key to both developments, says Julian Lewis.

Leading green bond investors and bankers are hailing this year’s revision of the Green Bond Principles — the second since their launch in 2014. “I think the GBPs were a major step forward this year. I particularly appreciated the clarification of what a green bond is — the GBPs’ four pillars. Additionally, the classification of external reviewers was also very helpful,” says Christopher Wigley, senior portfolio manager, credit at Mirova in London. 

But most players describe the update as evolutionary, not revolutionary. It “refined” the GBPs, believes Ashley Schulten, head of climate solutions, fixed income at BlackRock. “It was not the intention to drastically change the GBPs as the concept and model was working, and we sought continuity with our existing framework. However, we do want to learn from experience and we were able to tweak some items based on feedback from market participants and also emphasise areas, like impact reporting, that we believe can strengthen the credibility of the ‘green’ in green bonds.” 

Besides recognising the Harmonised Framework for Impact Reporting (see separate article) in the GBPs, ICMA has also established its own working group on the topic, answering calls for further guidance. 

One striking element of June’s update was what ICMA terms “guidance” for issuers of bonds financing projects with social objectives or social and climate objectives. This generated significant discussion among market players.

“Some participants are focused on green, and social bonds are not key for them. But social bonds are very important for those at the other end of the spectrum,” notes Nicholas Pfaff, senior director at the International Capital Market Association and secretary to the GBPs. 

SRI 15.1

Three prominent SSAs triggered the measure — the Council of Europe Development Bank, the Inter-American Development Bank and Spain’s Instituto de Crédito Oficial. 

“A number of issuers in the space recognised that the ‘use of proceeds’ concept as defined by the GBPs worked for them, but needed the parameters of social bonds to be defined,” says Pfaff. “The discussions were complex, but I think it was a good solution to have a separate document attached to the GBPs that says ‘you can use the four components of the GBPs, but you need a definition of social bonds and social projects’. It gives a basis for the future.”

Already two new issues have emerged under the new definition. Holland’s BNG Bank was the pioneer. In July it issued a €1bn eight year bond to finance the country’s most sustainable housing associations. Proceeds were to be lent to 92 groups identified by Tilburg University. 

Japan International Co-operation Agency has also put its name to a ¥35bn ($340m) social bond. Like BNG’s deal, the 30 year also makes explicit reference to the guidelines.

“It’s great that JICA chose to align with us,” says Pfaff, who notes there’s limited ESG debt issuance from Japan despite the country’s retail and institutional markets for green and social-themed debt from foreign issuers. 

SRI 15.2

Nonetheless, some market players fear the initiative may dilute the GBP brand name and/or create confusion over the product’s focus on climate change mitigation. Others wanted a separate set of social bond principles. 

The GBP executive committee opted for parallel guidance “to confirm the relevance of the GBPs in this context and facilitate their application to provide transparency and disclosure to this market segment”. 

This was appropriate, argues Sfakianos at BNPP. “Social bonds add a huge amount of value, but are much more complex in terms of metrics and needed some clarity. Why re-invent the wheel for them when we already have a suitable architecture around green bonds?”

Ultimately, a set of bond guidelines may cover both products, says Doris Kramer, vice-president, investment strategies, sustainability at KfW in Frankfurt, but is unlikely to emerge before next year’s GBP revision. 

Pure plays

Other developments include the establishment of a GBP Resource Centre; a new section on use of green proceeds and an extended list of eligible categories; a new paragraph on verification against external criteria such as environmental standards on products or processes; and clarification on the ‘pure play’ deal category. 

“Green bonds are a very specific product: we don’t agree with use of the term in general corporate purposes bonds that are not consistent with the ‘use of proceeds’ concept,” says Pfaff.