Greenwashing is not prevalent in the green bond market, but ambition and materiality in the early development of the more recent sustainability-linked bond market may have been insufficient according to the International Capital Market Association (ICMA).
Dedicated principles for sustainability-linked bonds were first published in June 2020 and updated in June 2023.
They are not use-of-proceeds bonds, but instead have issuer level sustainability targets in the form of key performance indicators, with a penalty mechanism which is usually an increase in rates if the KPIs are not met.
Issuance of sustainability-linked bonds grew to approximately $100 billion at the end of last year, representing 10% of the overall sustainable bond market. Last year significant concerns were raised about the ambition of the KPIs and the materiality of penalties.
ICMA evaluated the 100 largest issuers of sustainability-linked bonds between January 2022 and September 2023, which was 82% of the sustainability-linked bond market in the stated period. The research found that transactions from 15 issuers representing $20.8bn, 19% of the total amount issued during this period, had elicited some form of controversy.
The association detailed its research in a report, ‘Market integrity and greenwashing risks in sustainable finance,’ which was also based on the association’s response in January 2023 to the call for evidence on greenwashing from European Supervisory Authorities.
“Market feedback and our research based on reported controversies and Science-Based Targets initiative (SBTi) alignment points, however, to a positive trend in the sustainability-linked bond market in the last 12 months,” said the report. “We concur that wider concerns in the sustainable fund industry exist, for example, regarding investment methodologies and fund naming.”
ICMA said its analysis shows a declining trend in absolute and relative terms of the number of controversy reports over the last 12 months (see graph).
“Based on our sample, we have otherwise determined that the number of issuers obtaining SBTi approval for their SLB targets has increased on average since 2021 while issuers obtaining SBTi approval for their sustainability targets reached 70% in Q2 2023,” said ICMA.
The report acknowledged that SBTi approval does not necessarily protect against controversy. ICMA continued that 15 issuers in its sample had controversies reports and more than half, 8, asserted in their documentation that their targets had received SBTi approval.
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