ICMA finds ‘clear declining trend’ in SLB controversy reports

The International Capital Markets Association (ICMA) has found a “clear declining trend” in controversy reporting on sustainability-linked bonds as it publishes a position paper on greenwashing and integrity in the sustainable finance market.

The paper, which builds on ICMA’s response to a consultation on greenwashing by European regulators, includes an analysis of media reports around sustainability-linked bonds by the 100 largest issuers in the market from the start of 2022 to September this year.

The analysis finds that transactions from 15 issuers amounting to $20.8 billion in issuance had attracted some sort of controversy in the media, accounting for 16 percent of total issuance by volume in the period.

While the number of controversy reports peaked in Q4 2022, it has declined each quarter since then, a trend ICMA says is clear both in absolute and relative terms. The number of issuers obtaining SBTi approval for their SLB targets – which ICMA says is a good proxy for ambition – has risen since 2021, but more than half of controversial issuers had still received SBTI approval for their targets.

Nicholas Pfaff, deputy CEO and head of the sustainable finance unit at ICMA, told Responsible Investor that the data showed a “clear positive trend”.

He cautioned that relying on media reports means there is a risk findings could be driven by declining newsworthiness of SLB controversies.

However, he said he thought the trend was down to a “combination of issuers and underwriters taking on board feedback and efforts we’ve made to provide additional advice and clarify and underline the importance of getting materiality and ambition right”.

“I think there was enough clamour that [the message on quality] got through and I think this refocused issuance on quality,” he continued. “I do think the work that we’ve been doing has been helpful. The feedback from the market is our KPI registry has really become the primary resource for guidance, not only for the bond market but also for the loan market.”

Definitions and actions

The ICMA paper also warns against regulator efforts to create exhaustive definitions of greenwashing, noting these “can create more issues than they solve as they risk market paralysis or regression because of excessive reputational or litigation fears”.

“In the worst case scenario, you get into a situation where, for a company, you’re either damned if you do or damned if you don’t,” Pfaff said. “If a company feels that in sustainability, it risks being guilty until proven innocent, that’s not a great incentive for action.

“If you disincentivise companies from starting on that path, that’s self-defeating.”

The paper argues that unpacking greenwashing into areas of actual concern, such as lack of ambition for sustainable bond issuers or misleading ESG fund naming, is more “actionable” that expanding definitions.

It says that existing laws and regulations already cover misrepresentation, including that relating to green topics. Pfaff raised concerns that the term greenwashing is being used to cover both actual wrongdoing as well as “strategic inconsistency”.

“The difficulty with greenwashing as it’s used today is there’s no difference [using the term to] identify at worst fraudulent behaviour versus highlighting that a company doesn’t have an ambitious sustainability strategy or its projects are light green,” he said.

“Unpacking greenwashing is extremely important in order to make a distinction between what is potentially fraudulent behaviour versus arguments, for example, around strategic consistency and ambition. Calling a company to task because its sustainability strategy is not up to speed is a very legitimate action but it’s not tantamount to fraudulent behaviour or active misrepresentation on part of the company.”

The report finishes by setting out five recommendations to regulators and policy makers. It calls on them to concentrate on “actionable areas of concern” instead of catch-all definitions, improve availability of data and analysis on market integrity, reference existing legislation where enforcement may be needed, implement current initiatives with a focus on interoperability and continue to use the positive contribution of market best practice such as the ICMA bond principles.