The Thames Water scandal is forcing investors to question whether it’s acceptable to hold green bonds from an issuer that is damaging the environment, even if the specific proceeds get channeled into green works. — Bloomberg
LONDON: Environmental, social and governance (ESG) funds that piled into green bonds sold by Thames Water Plc are now trying to figure out what the ESG disasters threatening the future of the utility mean for their holdings.
The company, whose mismanagement left Britain’s rivers fouled with raw sewage, has sold four green bonds since the beginning of 2022, for a nominal total of £2.8bil (US$3bil or RM13.96bil).
More than 200 ESG funds purchased some of the debt, with their holdings having a market value of roughly US$240mil (RM1bil) according to data compiled by Morningstar Direct.
Green bonds stand out in the world of ESG debt due to their strict use-of-proceeds requirement: Issuers promise investors that the money they get from selling the bonds will only pay for pre-defined green activities. Thames Water, which is the subject of regulatory and parliamentary probes and may be put into a special administration, has been a regular issuer of green debt. Its four most-recent issuances are still rated investment grade by Moody’s Investors Service and S&P Global, though S&P has said downgrades may be ahead.
The scandal is forcing investors to question whether it’s acceptable to hold green bonds from an issuer that is damaging the environment, even if the specific proceeds get channeled into green works. Funds at Goldman Sachs Group Inc.’s investment arm and Columbia Threadneedle recently ranked among the largest ESG holders, according to Morningstar.
“A green bond from a not-so-green issuer isn’t sustainable,” said Saida Eggerstedt, the head of sustainable credit at Schroders Plc. She dumped Thames Water’s green debt from her portfolio last year, as news of the sewage leaks dominated headlines.
Eric Pedersen, head of responsible investments at Nordea Asset Management, says he explicitly avoided bonds issued by Thames Water for similar reasons.
“We don’t want any so-called green bonds that are some kind of greenwashing exercise,” he said.
A spokesperson for Goldman Sachs declined to comment, while a representative for Columbia Threadneedle wasn’t immediately able to comment.
The UK Sustainable Investment and Finance Association (UKSIF), whose members oversee more than £19 trillion (US$24 trillion or RM111.66 trillion) and include JPMorgan Chase & Co and Barclays Plc, has also weighed in.
James Alexander, the association’s chief executive officer, said the Thames Water scandal makes clear that green bond investors can’t be “blindly ignoring all the other things that are going on with the company.” — Bloomberg
