Responsible investing extends beyond a green label

Contact Energy has announced its intentions to raise capital via a “green bond”.

Wednesday, February 20th 2019, 11:31AM

by Simon Pannett

Simon Pannett

A green bond is a debt security that has been verified to be backing assets, or projects, that have positive environmental or climate change benefits.

Green bonds can bring societal benefits by facilitating funding for projects with positive environmental impacts. Just as credit ratings indicate the likelihood of a bond defaulting, the green label can help sustainability-minded investors with limited resources to identify securities that adhere to their values.

On its website, Climate Bonds Initiative, one of the two green bond certification agencies, cites the following benefits of green bonds (Harbour’s emphasis added):

Highlights their green assets/business
Positive marketing story
Diversify their investor base (as they can now attract ESG/RI specialist investors)
Joins up internal teams in order to do the investor roadshow (environmental team with investor relations and other business)

Source

On the surface, these appear to be superficial rather than providing any substantive benefit to the environment. However, after hearing first-hand the change in management’s focus that occurred at both Auckland Council and Contact Energy as they went through certification processes, we do think there are more tangible, albeit subtle, benefits. In Auckland Council, where there are no shortage of projects competing for funding, green bond certification enhanced the focus on sustainability in the project evaluation process. Just as avoiding disposable coffee cups won’t change the world on its own, it is a start and makes a contribution.

We question however, whether investors should think of all green bonds equally.

Does a green bond backed by a bank’s lending to a recycling plant adhere to an investor’s values if the same bank also funds “sweat shops”? After all, green bonds are typically general obligations of the borrower.

It is likely to be a long time before investors can populate a portfolio exclusively with green bonds and, as above, not all green bonds are equal. Therefore, we believe professional investors need to look at issuers’ corporate behaviour more broadly.

While issuance of a green bond is a useful sign a company is doing some of the right things, we want to be comfortable with all their activities, not just the activities backing the green bond. We therefore assess the corporate behaviour of all issuers, and this applies regardless of whether they issue a green or colourless bond. Given their sustainability commitments and generation fleet that creates 80% of its output from renewable sources, Contact Energy passes that test.

This does not constitute advice to any person, See www.harbourasset.co.nz/disclaimer

Director & Senior Credit Analyst, Harbour Asset Management

Tags: Harbour Asset Management investment