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February 16, 2022updated 21 Feb 2022 5:32pm

The ways investors measure sovereign green bond impact

Active green bond investors articulate their reliance on close engagement with government debt issuers to ensure impact and post-issuance transparency meet expectations.

By Chris Papadopoullos

green bond impact


Knock-on effect: investors are getting to grips understanding how to measure green debt impact. (Image by choness via iStock)

  • Asset managers focused on impact are using pre-issue engagement to ensure bond proceeds are used effectively and to avoid post-issuance surprises.
  • Standardising impact reporting would help with aggregating but the market is not yet comparing impact across similar sustainable projects.
  • So while very granular detail is available (e.g. NN Investment Partners avoids 250,000 tonnes of CO2 per €1m), some investors just care about labelling.

As the green, social and sustainability bond market grows, so grows the volume of reports showing how bond proceeds have been allocated and their ultimate impact. For some investors a green label may be enough, but others want to further scrutinise impact data. One of those that prefers to dig into impact data is Nuveen, which manages $1.3trn for its clients. It publishes an impact report showing the aggregated impact of the projects supported by its green bond portfolio, with breakdowns by sector and geography.

One aspect of impact reporting is putting impact into terms investors can more easily digest. For example, in its publicly available 2021 report, Nuveen said that its renewables portfolio had an impact of 356 million tonnes of CO2 avoided, which it said was equivalent to 90 coal-fired power plants running for one year.

Remarking on the lack of standardisation within impact reporting, Stephen Liberatore, Nuveen’s lead portfolio manager for its $7.8bn ESG and impact fixed-income strategies, says varying approaches reflect the demand of the ultimate asset owners.

“What the asset management base is representing is where the investor base is. Some investors are happy with allocation reports – they want to know the proceeds are being directed to something they care about and are not as focused on impact data as we are.”

Jesús Martínez, who manages Aegon Asset Management’s global sustainable sovereign bond strategy, tells Capital Monitor: “We use [post-issuance reports] to evaluate if the promises made at the moment of issuance take place, or if they deviate from what was initially intended.

“These are [also] important… [to] contrast with the current set of government policies and evaluate whether there is a consistent, long-term approach towards tackling sustainability challenges.”

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Martínez adds that post-issuance reporting is likely to come under more scrutiny from investors with increasing regulation and reporting requirements on ESG funds, but that they will be less important for passive green investors, where the green label is more important.

Engage to avoid disappointment

For asset managers paying close attention to post-issuance performance, what happens when impact reporting disappoints?

Executives as Nuveen, Aegon Asset Management and NN Investment Partners, which run active green funds, all say that such a scenario could ultimately result in securities being removed from their funds, but that it is highly unlikely to occur as problems tended to be solved by engagement with issuers.

[It] includes both the pre-issuance engagement to discuss the potential reporting metrics and methodology and the post-issuance engagement to discuss further information needed and doubts on the impact assessments,” says Kaili Mao, green bond analyst at NN Investment Partners.

“Clients not only care about the environmental impact they can generate through investing in our fund, but also how we, as the fund manager, conduct impact tracking, assessment and aggregation and how we engage with the issuers to improve their reports.”

Biding their time

Some issuers will spend months engaging with investors before coming to market. The International Financial Corporation’s forest bond – the inaugural forest bond – took a year of conversations with investors before it was launched. The 2016 issuance raised $152m in a bid to prevent deforestation. The Seychelles blue bond, another innovative issuance, took a year and a half to come to market.

“The interactions and engagement take varying amounts of time, but what we’re trying to get across is really that focus on transparency and disclosure that we require for us to invest,” Liberatore says. He wants to see that sovereign issuers have thought properly about where the money is likely to go, what impact metrics are going to be used and the impact of projects on local communities.

Liberatore says that pre-issuance due diligence has largely prevented post-issuance surprises. One exception was a Mexico City green bond, which fulfilled its green criteria until a different administration cancelled the underlying project. In another case, post-issuance data showed a solar farm underperforming, but this was due to an initial installation hiccup that was quickly rectified.

Impact is not just about producing reports for clients – they are there to alert investors to when projects are underperforming and give an indication future cash flow may not be as good as hoped.

Impact: comparing greenness

There are some common metrics among issuers’ impact reports, such as CO2 avoided, but often, due to the nature of projects, it is difficult to bucket key metrics together.

“Issuers, including sovereign issuers, are adopting different methodologies on impact reporting. This makes our fund-level aggregation more challenging,” says Mao. In its latest green bond fund impact report, NN Investment Partners provides data on CO2 avoided, but also emissions avoided per €1m, a measure of how impactful its investments are.

Mao says more granular data is often needed, especially from sovereigns, where data can be split between departments. She adds that there is also a need to “adopt common impact metrics that are widely used across the market for each green category, and to incorporate detailed impact assessment methodology including both assumptions and baselines for the adopted impact metrics”.

Martínez says reporting is improving, and that “offering improved frameworks makes it easier for issuers to achieve negative green premium on the bond, as active green investors appreciate these more”. But he says there is still room for improvement. “In most cases we miss the percentage of new versus refinanced green and sustainable projects, as ideally these bonds should aim to achieve a higher impact than just refinancing existing projects.”

Liberatore says that standardised reporting would be especially useful if investors needed to compare sustainable projects but does not believe the market has got to that stage yet. “Right now, we’re not really evaluating renewables against one another but against the electricity grids they are going into, which are fossil fuel-heavy. So even the most inefficient solar project at this time is beneficial to the overall grid and in reducing greenhouse gas emissions.”

He believes the market may eventually reach such a stage, but not for the foreseeable future.

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