Investors must probe ESG credentials to deter ‘greenwashing’

Concerns emerge that sustainability objectives of issuers might not be as high, which could lead to abuse of greenwashing


GREEN bonds and investments are clearly in fashion among the business community despite less agreement on its universally accepted standard.

The pace of green bond issuance in the past year has accelerated as a by-product of the Covid-19 pandemic.

Governments are using the green concept as a catalyst to stimulate the economy and create employment, all while committing to cleaner and greener environmental targets.

However, as the pandemic pushes sustainability bonds from niche to mainstream, concerns emerge that asset selection standards or sustainability objectives of issuers might not be as high or as tight as they could be, which could lead to abuse and accusations of greenwashing, said Schroders Investment Management Ltd sustainable credit head Saida Eggerstedt.

Malaysia’s green finance market rose to US$1.3 billion (RM5.38 billion) in 2019 — the fourth-largest market in Asean, after Singapore,

Indonesia and the Philippines. According to BloombergNEF, globally, some U$200 billion worth of green bonds were issued for environmental projects in the first nine months of 2020.

“This is being met eagerly by institutional investors wanting to meet their own environmental, social and governance (ESG) objectives and seeking returns in an unrewarding global fixed income market,” Eggerstedt noted in a statement recently.

The heightened interest among investors and stakeholders for green bonds has resulted in some companies taking shortcuts to label every corporate exercise as environmentally friendly, even in the absence of impactful green initiatives.

“There are currently variations in standards and the lack of third-party verification on how the proceeds will be used, because it is not mandatory to have the bond issue certified at present.

“Some issuers have taken advantage of this gap in regulatory requirements to rename their products as ‘green’ even though they do not necessarily contribute to the environment, ie greenwashing,” Deloitte Malaysia innovation and regulatory leader Justin Ong told The Malaysian Reserve.

He added that the definition of “green” is too wide and has diluted the real-world positive impact that could be achieved.

“Some of the recent controversial incidents include a green bond issuance by the operator of China’s Three Gorges Corp in Europe, which has been heavily criticised for polluting water and damaging the surrounding ecosystems,” said Ong.

Similarly, asset managers in Malaysia seem to repurpose old unpopular company funds and mark it as ESG-compliant without providing supportive data for such claims.

This practice was further complicated by inclusion of companies in green index such as the FTSE-4Good. FTSE Russell has assessed some 148 companies listed on Bursa Malaysia for ESG ratings.

Three plantation companies namely FGV Holdings Bhd, Kuala Lumpur Kepong Bhd and Genting Plantation Bhd received an ESG Grading Band of four stars despite some of these companies having been subjected to allegations of deforestation and labour issues in the past.

There are also five utility companies in the F4GBM Index with three to four stars in ESG Grading Band despite their substantial carbon emissions, which suggest to some that the grading appears to be more of a spin than providing clarity and substance on environmental concerns.

Ong said it’s important for green bond buyers and ESG-driven investors to evaluate the environmental impact of the green bonds they are interested in investing in.

“Buyers can check if the bond is certified by an approved independent third-party verifier, check if the bank that underwrote the green bond is active in the certified green bonds market, as well as the bank’s selection process, which is publicly available,” said Ong.

He added that public disclosures of green metrics and targets that have been audited by a certified third party can also help overcome some of the challenges faced when evaluating the authenticity of the green bonds issued.

“For example, if the purpose of the investment is to minimise carbon intensity, a carbon reduction mandate imposed by local regulators will create a clear, objective target, and we can use established carbon-intensity indices developed for equity markets to construct a portfolio which quantifiably reduces carbon production,” said Ong.

Investors are advised to seek certified independent third-party companies in the market that can verify the reported carbon emissions metrics which will give insights to investors and stakeholders on the performance of the project funded by green bonds.

By considering these factors, buyers will be able to make informed decisions on whether the bond aligns with their interest and the impact they want to achieve through these investments.

Ong added that ESG’s fate hinges on the rollout of globally accepted and stricter green taxonomy that helps identify eligible green projects, companies and investments.

“Malaysia and Singapore who are at the early stage of capturing the green bond market, have adopted internationally recognised guidelines and tailored it accordingly to their local market requirements.

“As the expected demand for green bond increases, we are in view that the central bank should develop a taxonomy and a set of standardised criteria for the green bond market in their respective countries,” he said.

Ong added that there is also a need for country regulators to collaborate with each other to publish globally recognised standards to enhance consistency and uniformity of green bonds.

In Singapore, major banks such as DBS Bank Ltd has developed their own DBS green bond framework that sets out the guidelines for bond issuances in accordance with the four core components of The Green Bond Principles 2017.

Likewise, in Malaysia, the Green SRI Sukuk (an Islamic version of green bonds) was issued by the Securities Commission Malaysia and the guidelines adopted are based on the Asean Green Bond Standards.