Insight Investment predicts issuance of green bonds could hit close to US$300 billion in 2020, and the global fund manager is continuing its call for increased transparency and a “clear demonstration of positive impact.”
Josh Kendall, senior ESG analyst, Insight Investment
Adding to other expert analysis forecasting expansion and growth of the green bond market, Insight Investment noted that in 2019, the core sectors of financials, governments, utilities, energy and industrials all experienced significant growth in issuance in 2019, “with financials leading the charge, adding more than $78bn in green bonds over the course of the year.”
Overall, green bond issuance stands at more than US$747 billion, but Josh Kendall, senior ESG analyst at Insight Investment says there is still great need for transparency in reporting and use of proceeds.
“The market has grown, but it doesn’t mean that the growth has been met with comparable growth in transparency,” Kendall said. “Many issuers are still not meeting what we would define as a minimum level of transparency and effective use of proceeds standards.”
Insight Investment applies a traffic light score, which analyses a social or environmental impact bond on three categories – the ESG performance of the issuer, the structure of the bond including use of proceeds, and the bond impact assessment. A bond is then marked red, amber or green, depending on the strength of its reporting around those three criteria.
In 2019, Insight Investment evaluated 124 green bonds and impact bonds. Of that 124, Insight Investment gave 27 a red score, 33 a green score and the remaining 64 an amber light score.
“The process we go through is the combination of a qualitative assessment and quantitative assessment,” Kendall said. “We do apply our own judgement here. Whenever you’re evaluating any instrument, there’s always a level of subjectivity and there’s no difference in green bonds.”
A bond issuance earning an amber score suggests that the issuance has “good parts” as well as areas for improvement, Kendall said.
“We believe that reporting is a key part of an effective green bond program, and without that clear commitment to disclosure when reporting, it makes it difficult,” he said. “If we have transparency around governance, around use of proceeds, and its’ from a company that actually can make a tangible difference to the strategy through the bond, we would be happy to invest. When we do identify problems, we do feed back that information to the issuer. We will aim to be as proactive as possible with the company and with the syndicate that helps to promote the issuance.”
There is a “bifurcation” in the market, with some entities and sectors providing transparent reporting and other not, he said.
“Utilities in particular have been very strong at providing that transparency,” he said. “With utilities we know exactly where it’s going and what impact it’s having. That is relatively straightforward, but it’s amazing how few companies are providing us with even that disclosure.”
Insight Investment notes that the diversity of green bond issuance improved in 2019, with the telecommunication sector now part of the market. The Netherlands issued its inaugural green bond in 2019 and Germany said it intends to issue a green bond later in 2020. However, Australian issuance of green bonds stayed relatively level in 2019 – last year’s issuance was $4.5 billion versus $4.3 billion in 2018, Insight Investment said.
“Australia saw pretty much the same green bond issuance, whereas most of the other markets all experienced a significant increase in the green bond issuance,” Kendall noted. “This is an interesting observance – new sectors are issuing green bonds. This is critical for driving the market forward.”
Social and sustainable impact bonds issuance increased, adding $35bn in 2019, which, together with green bonds, brought total issuance of impact instruments over the year to almost $300bn ($299.8bn). Insight Investment also pointed to new types of impact issuance, citing Enel’s transition bond, which may present a model for further issuance from petroleum companies in 2020.
“There’s a huge amount of focus on impact,” Kendall said. “So many organisations now looking to frame impact, frame methodology, look at it by sector, and if I’m totally honest from a practitioner’s perspective, it can be a little bit overwhelming, because there are so many opinions out there.
“Often that’s the case with impact – it’s not so clean. As a result, its’ really critical, when we’re framing impact, that we’re really clear on our own definitions.”
Insight Investment manages AU$30 billion for Australian investors and AU$1.2 trillion globally
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