Assessing the credentials of eligible green projects and the feasibility and meaningfulness of ESG targets, as well as corresponding penalties, is hence valuable when deciding to invest in these instruments. It is also key in deciding whether to favour a green or sustainable bond over the rest of a company’s debt structure, particularly while there is a green-premium. Will such bonds have a meaningful positive impact to a company’s sustainability goals or could they be a tool of greenwashing? Is the company receiving cheaper funding for unsubstantiated or misleading ESG claims?
In answering these questions, our Responsible Investment (RI) team plays an important role both in assessing the merits of green projects and in considering the likelihood of companies reaching sustainability targets and whether the targets themselves are meaningful. Furthermore, if the RI team consider green projects and sustainability targets as positive and meaningful, it is also important for the credit research team to consider the impact upon the rest of the business and hence the rest of the capital structure. For example, if a company has a meaningful CO2 emissions reduction target that will benefit the overall business and all bonds equally, is it more valuable for the investor purchase the non-green bonds instead of the green bonds, which are more expensive simply owing to being labelled as green?
The intentions of the European Central Bank (ECB) are also an important factor in determining value, as this may play a central role in corporates’ decisions about which type of bond to issue, as well as potentially providing technical support to the ESG-targeted market. For example, we need to consider whether purchase programs of the ECB will include: the bonds of energy companies such as Equinor, Total and BP; only the sustainable or green bonds of energy companies, or; no debt of energy companies. If the ECB decides upon the second option, this could lead to a division of debt from these companies with newly issued bonds being ESG-targeted and old bonds remaining without ESG objectives, with potentially significant differences in returns.