Under the hood: What to do with a renewable energy bond with a dash of coal? Ooooh .... tricky.

By Beate Sonerud, Climate Bonds Policy Analyst

This post marks the beginning of a series of “under the hood” blogs where we will do deep dives into issues we see in the green bond market.

What prodded this particular post is a recent bond issuance from Hero Asia Investment, a wholly owned subsidiary of China Longyuan Power Group, a Chinese power company, which brands itself as a wind company. In a recent blog, we highlighted that bond issuances from pure-play companies (mostly solar and wind) could also benefit from labeling their bonds as green, as it makes it easier for investors to identify the investments at a bond-market-speed glance. Hero Asia’s bond provides a great illustration why this is necessary for a credible green bonds market.

Hero Asia issued a US$500m, 3-yr bond with 2.875% coupon bond in a private placementrated BBB by S&PThe proceeds of the bond will be used for renewable energy operations, general corporate spending and working capital. So, the big question is – does this qualify as green? Since it’s not a labeled green bond, there has been no second party review, and no marker making it clear to investors if it is green. At first glance, this doesn’t seem to be too problematic: China Longyuan is branded as wind energy company, which would make it pure-play and the recent bond issuance would enter our climate-themed bonds universe. Seems simple enough. In fact, so simple that we blogged about a previous issuance from China Longyuan as a wind bond a couple of years ago.

However, unfortunately, it’s not actually that simple, and we cannot define Longyuan's bond as a climate-themed bond. Why? Despite calling itself a wind company and having close to 12GW of wind capacity, 13.3% of the company’s installed generation capacity is actually coal-fired power plants. So, it’s close to 87% green, but that is not enough for us to include it in our climate bonds universe – we can’t do this by halves, and green bonds should not be issued for coal. However, if China Longyuan decides to start earmarking bonds for their renewable energy operations only, and going through the verification processes to ensure credibility of such a framework, then yes, we are of course happy for these bonds to be called green. Our standard for wind sets out what we’d expect for a labelled green wind bond.

So, what’s the lesson learnt? Robust green bond markets require taking a closer look at the underlying assets and going through the best-practice processes of proper verification, labeling and reporting. The importance of this has been emphasized for corporates with mixed assets (i.e. the Unilevers and the Toyotas) but has not been encouraged as much for renewable energy companies. Clearly there is an opportunity here for companies to start issuing labeled green bonds by explicitly earmarking issuance for renewable energy projects, and following the recommended verification processes. Labeling is useful also for companies with 100% green assets as, without verified labelling, it's difficult for investors to identify which seemingly pure-play companies are, in-fact, pure-play, and which have, like Longyuan, also fossil fuel assets when you take a look under the hood.

Look out for another “under the hood” post shortly discussing the difference between green bonds and ESG-bonds, another type of thematic bonds that has entered the market.

(P.S. In case you were worried: Despite our 2012 blog blunder about China Longyuan, their bonds have never been included in our database on climate bonds)