ENVIRONMENTAL, social and governance (ESG) bonds tied to debt swaps arranged by Credit Suisse and Bank of America (BofA) are being reclassified by the fund managers buying them.
It’s a move they said is needed to protect their investment clients from mislabelling.
The ESG debt in question – known as blue bonds – was offered by the two banks in connection with debt-for-nature swaps. The bonds’ proceeds were used to help governments refinance existing obligations, in exchange for marine conservation commitments.
Stephen Liberatore, head of ESG and impact, global fixed income at Nuveen, said that when bonds are marketed as “blue” or “green”, investors expect all the proceeds to go towards environmental projects.
Nuveen, a major investor in bonds marketed as blue in connection with debt-for-nature swaps, has put the instruments it bought into portfolios that are “environmentally focused” because “they’re not blue-bond specific and they’re not green-bond specific”, Liberatore said. They’re more of an environmental opportunity, he added.
“There is always the challenge and concern around greenwashing,” Liberatore said in an interview. “You can’t rely on a label,” and “you have to take the time and evaluate each individual transaction”.
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The issue of nomenclature around blue bonds tied to debt swaps was raised earlier this year in a Barclays report. The analysts behind the research, Maggie O’Neal and Charlotte Edwards, said using the blue label in connection with debt-for-nature swaps represents a “real risk of greenwashing” in a market that may reach US$800 billion.
The blue bonds arranged by Credit Suisse and BofA were used to help refinance over US$1 billion of debt for Belize, Barbados and Gabon over the past few years. In all three cases, the proceeds of the bonds covered the refinancing operation, with only a small amount of money going towards marine conservation, documents attached to the deals showed.
Spokespeople for Credit Suisse, which has since been absorbed by UBS, and BofA declined to comment.
In its prospectus for a US$500 million blue bond backing a debt-for-nature swap for Gabon, BofA said investors “should be aware” there’s no guarantee “as to the compliance of the notes with any blue, green or other sustainable investment criteria, principles or guidelines or market practice”.
And in its most recent debt-for-nature swap, done for Ecuador and completed in May, Credit Suisse opted for the first time against using the blue-bond label. Instead, the product was marketed as a “marine conservation-linked bond”.
The International Capital Market Association (ICMA) – the most widely followed global standard setter in debt markets – weighed in last month to say the blue-bond label should only be used if 100 per cent of the proceeds goes towards marine conservation projects.
Issuers “are using the blue-bond terminology, but doing something completely different”, Nicholas Pfaff, deputy chief executive and head of sustainable finance at ICMA, told Bloomberg. That’s leading to “regrettable confusion”.
Liberatore, who helped draft ICMA’s green bond principles, said the onus is always on asset managers to justify the ESG claims they make to end investors.
“You have to be able to explain what you own and why,” Liberatore said. “In this particular space, it’s critical because you’re looking not just for financial return, but also looking to explain impact.” BLOOMBERG
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