The Emerging Markets Investors Alliance (EMIA) has released what it calls an “enhanced” set of principles for green, social, sustainable and sustainability-linked bonds, claiming that there has been a “loss of confidence” in the labelled-bond market.
Consultation with industry participants “confirmed that there is lack of credible and detailed guidance for the creation of labelled bonds”, which was exacerbated when bonds were issued by less-sophisticated emerging markets issuers, the Alliance said.
Abby McKenna, a Strategic Advisor at EMIA, said that there had been “a greater realisation that there are gaps in the existing framework and that there’s ambiguity sometimes in some of the language that has been used, which has raised concerns about the potential for greenwashing”.
Barbara Oldani, an EMIA Director, said that the new principles went further than existing standards in both issuer transparency and accountability for external verifiers.
“The lack of standardisation and the lack of transparency in the labelled bond market represents a big challenge, especially for emerging market investors,” she said.
The Alliance, a non-profit formed in 2015, aims to help emerging market investors “support good governance, promote sustainable development and improve performance” in portfolio companies and governments. It claims to have more than 2,200 asset owner and manager participants, including BlueBay, T. Rowe Price, Baillie Gifford and Barings. Former Chilean Minister for Finance Felipe Larrain sits on its board.
Currently, green, social, sustainable and sustainability-linked bond frameworks are assessed by second-party opinion providers against the relevant set of principles issued by the International Capital Market Association (ICMA).
Oldani said that the standards were intended to be “more rigorous” than existing standards. On a number of points the principles are stricter than their ICMA equivalents; for example, issuers abiding by EMIA principles cannot use the funds raised from use of proceeds bonds to refinance non-labelled bonds.
In addition, issuers are required to produce annual publicly available impact reports, carried out by independent external verifiers – for sovereign issuers this should be a multilateral development bank or international financial institution. Where the verifier finds that funds raised have not been spent on eligible projects under the framework, issuers must report this to ESG data providers and scoring agencies.
ICMA declined to comment on the launch of EMIA's principles.
When asked by RI whether EMIA intended second-party opinion providers to ditch ICMA principles in favour of the new standards for emerging market bonds, Oldani said that EMIA appreciated and recognised the value of existing guidance.
“Second party opinion providers generally assess issuer frameworks against ICMA standards because those are the most widespread and recognised standards in the markets,” she continued. “What we are trying to introduce here is enhancements on existing standards […] and that would definitely help any of the stakeholders to raise their credibility. Any more rigorous examination or reports would definitely help asset managers and investors for their due diligence.”
The EMIA principles also include guidelines for sustainability-linked bonds, which have received greater scrutiny from investors than use-of-proceeds bonds. Investors are concerned that issuer penalties for missing sustainability targets are too small, and come into effect too late in the life of the bond.
Under the new principles, the ‘trigger point’ for penalties must be no more than halfway through the life of the bond, and issuers cannot re-use KPI targets from previous bonds. However, there are no provisions relating to the step-up or step-down which issuers are subject to for missing or meeting targets.
Oldani admitted that the principles were just a “starting point”, and said that the Alliance would continue to consult with asset managers and stakeholders.