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February 8, 2023

Why the CBI has rejected 25% of green bonds

The Climate Bonds Initiative excluded one in four dollars of green bonds in 2022 from its database for not being up to scratch.

By Daniel Flatt

green bonds, CBI, social bonds
I’m still standing. Only three-in-four dollar’s worth of green bonds issued in 2022 made the CBI cut. (Photo by Tero Vesalainen via Shutterstock)
  • The majority of green bonds that failed the CBI’s litmus test originated in China.
  • Only 8% of social and sustainable debt didn’t pass muster and were excluded.
  • A general lack of ambition and poor levels of transparency were the primary reasons to be rejected.

The Climate Bonds Initiative has excluded one-in-four dollars of green-labelled debt from its databases in 2022. Measured up until the third quarter of last year, this totalled $106bn of green debt the CBI believed did not fit it’s definitions of green, according to its own findings published in December.

The CBI has two major databases: the Green Bond Database (GBDB) and the Social and Sustainability Bonds Database (SSBDB), of which the CBI will only include bonds that fit its given criteria for both.

Fortunately, the headline might not be not quite a serious as the reality. Just over 50% of the debt – a hefty $54.3bn – originates from China where, prior to July, regulators allowed issuers the flexibility to commit a proportion of their capital raised to green projects.

Given this has subsequently been nixed by China’s National Association of Financial Market Institutional Investors (NAFMII), and now 100% of proceeds must go to green projects, it seems unlikely such a striking proportion will be excluded in future.

That said, one-in-four dollars of US-originated debt ($11.4bn) has been excluded from CBI’s database. CBI cites the main reason as lack of green ambition, a similar concern it has with Germany-based green debt.

The group says: “More than half of the excluded bonds originating from the USA cited buildings that were not aligned to sufficiently ambitious standards in the UoP (US$5.5bn). 70% of the excluded volumes originating from Germany (US$3.9bn) were also related to inadequate levels of ambition in building standards.”

Equally concerning is the amount of debt raised by financial institutions (defined by CBI as financial corporate) where green debt was excluded either because there was insufficient information (129 bonds) or the use of proceeds failed to hit the use of proceeds threshold (139). It will be interesting to see if this is still the case in 2023.  

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The percentage of social and sustainable bonds that have been excluded from CBI’s database is far smaller – only 8% of the total portfolio of bonds issued in 2022. Out of 116 deals, worth $174.9bn, the CBI analysed only $14.4bn failed the litmus test.

Given the far broader scope of what is considered sustainable or social could be a reason for why less debt has been excluded. That said, more than half (56%) of all excluded debt came from Japan, with the CBI claiming the vast majority specified the building of new roads as the primary use of proceeds.

The CBI says it does not consider roads as “climate friendly” but it does allow for some exceptions in emerging markets. It’s unclear whether the CBI has factored in the sustainable and social components of building new roads into its methodology but emphasised the need for issuers to be more transparent and ambitious in their objectives in future.

“Transparency and completeness of information from issuers are essential to determine a bond’s alignment with market standards and green taxonomies (a social taxonomy is yet to materialise) but the level of disclosure is often inadequate.”

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