Green bonds: time for more pre-issuance clarity?

A frustration of some green bond investors has been the lack of pre-issuance clarity of what exactly companies intend to do with the proceeds when issuing green bonds.

30 Mar 2022

Questions from investors can include: “How do you expect to distribute the funds raised between different project categories? How many new investments into green projects are you making with the money, compared to just refinancing previous spend?” Asking issuers these kind of questions is important for investors for a variety of reasons, ranging from wanting to deliver on the sustainability objectives of their funds to trying to determine if the bond may be eligible for an index.

The eventual issuer allocation and impact report would then become more of a validation against these initial assumptions and would also clarify any significant deviations.

While companies are understandably wary of making forward-looking predictions (particularly in today’s volatile environment), several have started to provide guidance at time of issuance. This trend has been encouraged by the draft version of the EU Green Bond Standard (GBS), which asks for pre-issuance disclosures, such as the intended allocation of bond proceeds, as part of the proposed Green Bond Factsheet. Issuers will be expected to provide detail on the qualifying, including the expected, amount from bond proceeds (financing and refinanced) used for each project. However, the GBS will allow for issuers to only provide an aggregate view as long as they can explain why they are not sharing project-level information.

Corporate pre-issuance disclosure has taken various forms – listed here in terms of granularity:

Framework parameters: setting boundaries on the maximum amount of proceeds that can be linked to refinancing (i.e. expenditures undertaken prior to issuance). In certain cases, this figure has been 0%, meaning a bond is solely focusing on new financings (such as the recent American Honda green bond)
Investor presentations / engagement: indication of the expected allocation split between eligible project categories (quantitative approach), or broad guidance around the most material categories (qualitative approach)
Pre-issuance allocation and impact report: this is effectively a Version 0 of what is normally expected 12 months after issuance. Such a report provides details on the current make-up of the eligible green and/or social asset pool, typically accompanied by an external review (a case in point being AIB)

Investors will not only welcome but increasingly demand such granular pre-issuance disclosure as they develop more comprehensive approaches to evaluating the growing universe of green bonds. The case is clear: A detailed ante hoc (before the event) narrative on the green bond proceeds helps issuers to demonstrate commitment and, more broadly, is conducive for overall transparency in the sustainable finance market.

Green bonds: time for more pre-issuance clarity?

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