11. Okt 2019 Bonds

Green bonds – in search of truly green debt issues

Investors are increasingly allocating to bonds that finance environmentally friendly projects. But this rapidly growing sector has its own black sheep.

  • Green bonds raise finance for environmentally friendly projects.
  • But not every green bond lives up to its name.
  • Thorough analysis enables investors to understand whether the finance raised by a green bond does actually go to projects that generate the desired ecological benefits.
4 minutes to read

Not every bond with a green label is actually green.

Wind farms, solar plants and electromobility: these kinds of projects can be financed with the proceeds of "green" bonds. In Germany alone, green bonds worth EUR 5.2 billion were brought to market in the first half of this year. This means there is a good chance that last year’s total of EUR 6.6 billion will have been surpassed by the end of the year.[1]

Meanwhile, the German government is even examining the possibility of a green Federal bond that finances sustainable projects. That would give this emerging securities sector additional impetus.

A wide range of institutions act as green bond issuers. Public and supranational institutions are involved, as well as development banks and commercial banks.

Equally, companies can raise finance using this nascent bond class, to make their offices more energy-efficient, for example, or to switch their energy supply entirely or in part to renewable energy sources. A green bond issuer’s business need not be primarily  in the ecological sector. "What’s crucial is that the project being financed complies with green requirements," says Christof Breuer, who manages the DWS Invest Green Bonds fund.

Critical analysis can filter out black sheep

As Breuer knows, the boom also has a darker side. "The term 'green bond' is not legally protected,” he says. "This means that anyone who wants to greenwash their bond can theoretically do so." That means it's important for investors to eliminate the black sheep through critical analysis.

"That’s why we at DWS put every single green bond under the microscope," says Breuer. "Compliance with the Green Bond Principles is part of our analysis." These are voluntary guidelines published by the International Capital Market Association (ICMA) to promote minimum transparency, disclosure and reporting standards in the green bond market. "Any issuers that are not prepared to provide detailed reports on their projects do not meet our green bond standards," explains Breuer. "Then they don’t belong in our portfolio."

The European Union is also introducing a green bonds standard. Essentially, it seeks to define permissible project categories, as well as minimum requirements for reporting and transparency.

Green bond investments indirectly support bond issuers, as well as the actual projects.

Christof Breuer and his team examine the bond issuers alongside the purpose of their projects. "Ultimately, our investments indirectly support issuers – and not just green projects," the fund manager says. "Issuers that ignore the United Nations Global Compact, for example by violating human rights, are immediately filtered out by our analysis, no matter how environmentally friendly their projects are." The same applies to manufacturers of controversial weapons, such as anti-personnel mines, cluster bombs and uranium ammunition.

At DWS, the green bonds selection process is based on the DWS ESG (environmental, social and governance) engine, which allows securities issuers to be assessed against a variety of ESG criteria. This DWS analysis tool draws on assessments from several leading ESG agencies and rates every green bond on a scale of A to F.

According to Breuer, these strict filter categories still leave plenty of suitable investment opportunies. "The market may be in its infancy, but it is growing at breakneck speed," he says. The range of verifiably  green projects that are suitable for bond financing is also broadening all the time. Even very demanding investors can therefore find attractive investments on the green bond market.

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1. https://www.climatebonds.net/files/releases/media-release-germany-green-finance-deutsche-final-20190709.pdf

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