ENVIRONMENTAL, social and governance (ESG) bonds tied to debt swaps arranged by Credit Suisse and Bank of America Corp (BofA) are being reclassified by the fund managers buying them, in a move they say is needed to protect their investment clients from mislabelling.
The ESG debt in question – known as blue bonds – was offered by the two banks in connection with debt-for-nature swaps. The bonds’ proceeds were used to help governments refinance existing obligations, in exchange for marine conservation commitments.
Stephen Liberatore, head of ESG and impact, global fixed income at Nuveen LLC, said that when bonds are marketed as “blue” or “green”, investors expect all the proceeds to go toward environmental projects.
Nuveen, which is a major investor in bonds marketed as blue in connection with debt-for-nature swaps, has put the instruments it bought into portfolios that are “environmentally focused” because “they’re not blue-bond specific and they’re not green-bond specific,” Liberatore said. They’re more of an environmental opportunity, he said.
“There is always the challenge and concern around greenwashing,” Liberatore said.
“You can’t rely on a label,” and “you have to take the time and evaluate each individual transaction.”
The issue of nomenclature around blue bonds tied to debt swaps was raised earlier this year in a Barclays Plc report. The analysts behind the research, Maggie O’Neal and Charlotte Edwards, said using the blue label in connection with debt-for-nature swaps represents a “real risk of greenwashing” in a market that may reach US$800bil.
Meanwhile, a growing number of banks has voiced interest in arranging debt-for-nature swaps, including HSBC Holdings Plc, Citigroup Inc, Barclays Plc and Standard Chartered Plc.
The blue bonds arranged by Credit Suisse and BofA were used to help refinance over US$1bil of debt for Belize, Barbados and Gabon over the past few years.
In all three cases, the proceeds of the bonds covered the refinancing operation, with only a small amount of money going toward marine conservation, documents attached to the deals showed.Spokespeople for Credit Suisse, which has since been absorbed by UBS Group AG, and BofA declined to comment.
In its prospectus for a US$500mil blue bond backing a debt-for-nature swap for Gabon, BofA said investors “should be aware” there’s no guarantee “as to the compliance of the notes with any blue, green or other sustainable investment criteria, principles or guidelines or market practice”.
And in its most recent debt-for-nature swap, done for Ecuador and completed in May, Credit Suisse opted for the first time against using the blue-bond label. Instead, the product was marketed as a “marine conservation-linked bond.”
The International Capital Market Association – the most widely followed global standard setter in debt markets – weighed in last month to say the blue-bond label should only be used if 100% of the proceeds goes toward marine conservation projects.
Issuers “are using the blue-bond terminology, but doing something completely different,” Nicholas Pfaff, deputy chief executive and head of sustainable finance at ICMA, told Bloomberg. That’s leading to “regrettable confusion”.
Liberatore, who helped draft ICMA’s green bond principles, said the onus is always on asset managers to justify the ESG claims they make to end investors.
“You have to be able to explain what you own and why,” Liberatore said.
“In this particular space, it’s critical because you’re looking not just for financial return, but you’re also looking to explain impact.”Pension funds buying the bonds directly from issuers have also opted to disregard the blue-bond label under which they were sold.
Swedish pensions manager Alecta AB categorised the “blue” bonds it bought under “other investments with social and environmental impact”, according to Carina Silberg, Alecta’s head of governance and sustainability.
Asbjorn Purup Andersen, senior portfolio manager at Danish pension fund Velliv, said “any clarification of terminology should be positive” and would ultimately help attract more capital. The blue bonds Velliv purchased haven’t been treated as use-of-proceeds instruments, despite the name under which they were sold, he said.
“These are essentially two different types of financing,” he said.
“Use-of-proceeds bonds focus on the notional amount, while debt-for-nature swaps focus on a long-term cash flow.”
Most of the bonds sold in connection with debt-for-nature swaps were done in collaboration with The Nature Conservancy (TNC) through its blue bonds for ocean conservation programme.
Earlier this year, the US nonprofit launched a nature bonds programme with a view to expanding the scope of its debt-swap programme to include terrestrial projects.
“Nature bonds better describes the new, expanded approach,” said Slav Gatchev, managing director, sustainable debt at TNC. “Perhaps there are also ‘co-benefits,’ if you will, in distinguishing our programmes from use-of-proceeds bonds.” — Bloomberg
Natasha White writes for Bloomberg. The views expressed here are the writer’s own.
