Green, Social and Sustainable

Professor Kevin Haines
February 2022

We are all becoming increasingly familiar with ESG (Environment, Society and Governance) based behaviour and investing. This doesn’t mean, however, that there are no gaps in our knowledge and understanding – far from it. In an effort to increase our knowledge, close the gaps and reduce the possibilities for greenwashing, the ICMA, arguably the leading authority on all matters green, social and sustainable, have produced a set of principles that are intended to inform, populate and regulate the Green, Social and Sustainable Bond industry (there are also principles for Sustainably-linked bonds, but these are too woolly to be included here).

According to ICMA, a Green Bond is:

“Green Bonds are any type of bond instrument where the proceeds or an equivalent amount will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible Green Projects (see Use of Proceeds section below) and which are aligned with the four core components of the GBP [Green Bond Principles].” 

The four core components for alignment with the GBPare:

  1. Use of Proceeds
  2. Process for Project Evaluation and Selection
  3. Management of Proceeds
  4. Reporting

What are Social Bonds?

“Social Bonds are any type of bond instrument where the proceeds, or an equivalent amount, will be exclusively applied to finance or re-finance in part or in full new and/or existing eligible Social Projects (see Use of Proceeds section) and which are aligned with the four core components of the SBP.” 

What are Sustainable Bonds?

“Sustainability Bonds are any type of bond instrument where the proceeds or an equivalent amount will be exclusively applied to finance or re-finance a combination of both Green and Social Projects. Sustainability Bonds are aligned with the four core components of both the GBP and SBP with the former being especially relevant to underlying Green Projects and the latter to underlying Social Projects.” 

For bonds to be classified as Green or Social etc they must conform to the above definitions and are regulated (e.g. through Second Party Opinions) as such.

Although laudable in its intentions, there are some significant weaknesses with the approach adopted by the ICMA.

We have argued elsewhere that language matters and the ICMA’s choice of language (labelling) is quite idiosyncratic. For example, Green is not synonymous with the E in ESG and their definition of Sustainability (combining Green and Social) is but one of many, often quite divergent, definitions – thus potentially adding further complexity and confusion to an already challenging field and increasing, rather than decreasing, opportunities for greenwashing. We need a lexicon of consistent language (and labels – delabelling as far as possible) if we are to increase certainty in our decisions and actions (thereby reducing opportunities for greenwashing).

The ICMA also tends to slice the Green and Social cake rather thinly. In other words, it defines and divides Green and Social Bonds into rather specific and narrow types. This has two immediate consequences: 1) it leaves gaps (not all potential Green or Social bonds are included when there are advantages, for companies and investors, to their inclusion) and 2) it creates distance between the ICMA principles, our (developing) understanding of ESG and the (increasing) use of the SDGs by companies pursuing a positive ESG agenda – thus necessitating some complex and unconvincing attempts to knit these together.

Despite being all about Governance (in the form of regulation) the ICMA principles are actually rather silent and weak on matters of Governance – especially if one understands Governance in an ESG context. This is a serious weakness for no other reason than without effective Governance there is no effective Green, Social or Sustainable business.

Finally, there is insufficient attention paid, in the principles and their assessment, to outcomes and impact. In our experience both companies seeking investment (through bonds) and potential investors are increasingly thinking, talking and acting in terms of outcomes and impact – precisely because these are easier to articulate and measure, providing clear benchmarks for company performance and demonstrable achievements to interested investors. This may well be a missed opportunity or, alternatively, it may be part of the next evolution of ICMA principles.

Despite an attempt to add coherence to the Green, Social and Sustainable Bond market, regrettably, ICMA has added further complexity to our definitions, understanding and assessment of these crucial instruments. We are, as yet, some way off being ‘all for one and one for all’.

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