LONDON (BLOOMBERG) - Bond issuers appear to be reviewing the merits of tapping the environmental, social and governance (ESG) debt market, based on an assessment that the lower financing costs the label generally brings are not worth the risk of being exposed to greenwash accusations.
"There are a number of issuers that are reconsidering the cost-benefit trade-off," Mr Jason Taylor, managing director for sustainability advisory and finance at National Bank of Canada, said in an interview.
"When you define a successful sustainable finance transaction, there are a lot of dimensions by which you can analyse it," he said.
"One is the cost savings from the 'greenium' (green premium). But if it comes with a high level of scrutiny post-transaction, it can cause some people to really second-guess whether that one or two basis points is really worth the risk of having perhaps a couple of very uncomfortable articles written."
Sustainable debt issuance
For now, much of the regulatory crackdown on greenwashing has centred on asset managers. But the finance industry has itself repeatedly raised concerns about the risks lurking in some corners of the market for ESG debt.
Goldman Sachs Group's NN Investment Partners is among asset managers getting pickier and is increasingly rejecting ESG debt pitches, it said last month.
Ms Isobel Edwards, a green bond analyst at the firm, said she and her team are often incredulous when they see some of the claims issuers make.
"We tend to call it a greenwash when it comes to the market with everything 100 per cent aligned and everything is the greenest it can possibly be; the sustainability plan is the best on the market," she said in a July interview.
In June, a manager at JPMorgan Chase revealed his misgivings about many of the ESG loan pitches crossing his desk.
Issuers increasingly have to contend with the reputational risk of sending ESG debt to market that may not yet be fit for purpose.
Chanel - best known for its No. 5 perfume and iconic tweed suits - was recently called out for missing an interim renewable energy target for 2021 on a sustainability-linked bond.
Last year, it emerged that an ESG bond issued by Tesco, Britain's biggest grocery chain, was based on targets that covered only 2 per cent of its annual emissions.
In September, Bloomberg News published an analysis of more than 70 sustainability-linked revolving credit lines and term loans arranged in the United States since 2018, revealing that over a quarter contained no penalty for falling short of stated goals, and only a minuscule discount if targets were met.
"Greenwashing across the board is going to be more and more scrutinised as we head into 2030," Mr Taylor said.
With investors and regulators increasingly alert to the risk of exaggerated ESG claims, fund managers are also growing more cautious.
In Europe, a case in point is the evolving language that asset managers are using around a product called Article 8.
Defined within European Union sustainable finance disclosure regulations as a product that "promotes" sustainability, a number of investment managers are nonetheless choosing not to attach an ESG label.
"The whole industry across the board is perhaps becoming a little more cautious," Mr Taylor said.
He said that issuers are not necessarily forgoing labelling altogether, but taking their time to make sure that if they tap the ESG market, they have not overlooked any metrics that could morph into public relations embarrassments.
Some companies have expressed reservations about issuing ultra-long green debt in particular, citing a fast-changing regulatory landscape and reputational risks.
Green bond issuers can opt to reduce tenors to avoid jeopardising their green credentials as market thresholds tighten, according to Ms Maia Godemer, an associate at BloombergNEF.
The International Capital Market Association, a financial industry group, released more stringent - albeit voluntary - standards for sustainability-linked debt earlier this summer, and European lawmakers are in the process of creating a green bond standard.
But both issuers and asset managers need to navigate continuing changes to ESG rules, and firms risk inadvertently misstating their ESG metrics, according to Mr Taylor.
"Greenwashing is not necessarily always voluntary," Mr Taylor said.
"Standards are also developing at a faster rate so those grey zones are dissipating more and more. Over time, the market is going to tighten up on its own," he added.