Analysis: As NGOs renew attacks on the Green Bond Principles, are they right?

The Green Bond Principles, the set of voluntary guidelines put together by a group of leading banks in early 2014 to help develop the green bond market, are under renewed attack from a coalition of 17 NGOs.

“Without a clear definition of what is green, our fears that the Green Bond Principles may be associated with the financing of destructive projects have already been realized,” the NGOs said in a letter to the Principles’ organisers and member organisations at the end of last month. The NGOs, led by Netherlands-based group BankTrack, had originally warned about the Principles’ credibility just over a year ago.
The new letter focuses on a €2.5bn green bond issued by French utility GDF Suez last year, that was structured by French bank Credit Agricole and assured by ESG research house Vigeo. The proceeds, the NGOs claim, partly went to finance the Jirau mega-dam in Brazil which the NGOs say has had “egregious environmental, social and human rights impacts”.

The International Markets Capital Association (ICMA), the Zurich-based trade association which acts as secretariat for the Principles, told RI that the letter is being reviewed by the principles’ Executive Committee. BankTrack is one of 45 organisations with official observer status to the Principles, alongside groups such as Sustainalytics, Ceres, Oekom research and the Principles for Responsible Investment (PRI).

The Principles’ members include 18 leading institutional investors, including major asset owners such as British Columbia Investment Management Corporation, the California State Teachers’ Retirement System (CalSTRS), Dutch giant PGGM as well as the likes of BlackRock, Al Gore’s Generation Investment Management, and State Street Global Advisors to name a sample.

There are also issuer members such as the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the World Bank’s IFC and Unilever. There are also 51 underwriter signatories – major banks such as Citi, SEB, Goldman Sachs and Morgan Stanley.In March, the Principles were updated to state that projects should provide “clear environmentally sustainable benefits” – alongside a strong recommendation that issuers get independent verification of a green bond.

But these changes are too vague, according to the NGOs. They say it’s “unlikely” that the Principles, will, in the short term, take the form of a set of (voluntary) commitments or agree a definition of “green”. And they fear the “enlarged membership” makes agreement over a satisfactory definition of green more challenging.

Last year, Amazon Watch, also a signatory to the letter, protested at GDF Suez’s annual shareholder meeting about the Jirau project, with indigenous leader Sonia Guajajara calling its actions “toxic to the environment” and destructive for indigenous peoples.

The NGO letter cites labour and human rights violations, complaints that indigenous people in the area have not been consulted, and claims the project has led to “disastrous floods” which has displaced tens of thousands of people.

It adds that the dam is on the verge of bankruptcy and that main contractor Camargo Correa is implicated in the corruption scandal that has rocked Brazilian state oil giant Petrobras.

GDF Suez did not respond to inquiries. A spokeswoman for Vigeo said it is not involved in project selection and did not provide opinion on the project eligibility of the GDF Suez bond. It said it evaluates the issuer’s commitments at project level based on defined eligible green categories and ESG criteria for project selection concerned with fundraising.

In a recent report, GDF Suez states that green bond projects “must respect the criteria determined by GDF Suez in conjunction with Vigeo”. The eligibility criteria include assessment of project impacts on local population, health problems and cultural heritage and appropriate measures to limit, mitigate or compensate negative impacts when appropriate.

Referring to the GDF Suez issue, the NGOs conclude that the revised green bond principles was “unlikely to head off further such issuances of green bonds for destructive projects, making civil society scrutiny of the market as it develops all the more crucial”.

They recommend that the Green Bond Principles take steps to make clear that projects which come at the expense of human rights violations and significant negative social and environmental impacts should not be considered ‘green’.

The letter also notes that there has been a drop in self-labelled green bonds getting a second party review and recommends that the principles explicitly require that information on second party assurance, use of proceeds and annual reporting be placed in the public domain.

The NGOs end the letter by saying they will focus on scrutinizing the green bonds market over the coming year, and will draw attention to any example of green bonds which finance projects with negative environmental or social impacts.

Dutch-based asset manager PGGM, an investor member of the principles, said the reaction of BankTrack was understandable, but said the green bond market was “in evolution”.

Sevinc Acar, Head of Beta Investment Grade Credit at PGGM, told Responsible Investor: “BankTrack’s worries about transparency and disclosure are understandable but BankTrack also has to take into consideration that this market is still in its infancy.

“It’s a market in evolution and we cannot create a revolution because this asset category is complex and new. People consciously speak of ‘different shades of green’.

“In principle the Green Bond Principles are open to any party, because the reach of a select group is too small.“And we think that it is very hard to give a good definition of what really is a green bond because this market is in evolution. In practice we see the second opinion given as a rule and not as an exception.

“The Green Bond Principles purposely opted for voluntary standards because this market is in development. Restrictive standards scare companies and investors. In panels and presentations companies share worries about their reputation. The downside risk of issuing green bonds or investing in green bonds is a lot bigger than the issue of a normal (brown) bond.”

Sean Kidney, founder of the Climate Bonds Initiative, the not-for-profit advocacy group, said it was great that NGOs such as BankTrack were engaging with green finance. But he added that the principles “never purported to address the green credentials of assets and appropriate standards by participants”.

He said, rather, they were guidelines. He went on to say that the criteria for green bonds should not be an issue decided by the finance industry: “Decisions about appropriate investment needs should be science-based,” he said. “Not opinion-based from investors, investment banks or NGOs.”

Alluding to GDF Suez, Kidney said indigenous people displacement was not a direct climate issue, but that climate issues could lead to enormous people displacement.

On the alleged methane leakage and climate impact of the dam, Kidney said he was planning to release criteria around the right kinds of investment for hydro. He said it was necessary to address the issue of methane leakage, saying it was problematic to call a number of tropical dams with methane leakage ‘green’.

But he added he didn’t think this was the case for the GDF Suez project in the Amazon. “It seems to be well designed from a methane perspective,” he said.