Bank of America Merrill Lynch (BAML) joined the list of first corporate entities to issue a labelled green bond, and set a new model for commercial banks. We're expecting this to be the beginning of a long line of commercial bank green and climate bonds.
The detail:
- The bond is linked to a subset of their $50bn Environmental Business Initiative. The fairly broad lending criteria they use have been developed as part of consultations they’ve held with NGOs and research centres such as Ceres and C2ES.
- An auditing firm provides a further signoff and assists with tracking funds and project selection
- According to the use of proceeds document, eligible green projects include renewable energy "such as” solar, wind and geothermal. Technically this leaves the bond open to some of the other areas in the environmental business portfolio as defined by the BAML CSR report - that report includes hydropower, biomass and biofuels. However BAML have verbally confirmed that the renewable energy portion of the bond will include only wind, solar and geothermal assets. It would be good to have that in print.
- Energy efficiency projects are included in the bond – at the moment there is (unfortunately) no threshold/hurdle rate for energy/carbon, but performance metrics will be included in reporting.
- Projects/assets funded through the green bonds will be reported on (including performance metrics) in detail via a separate website. Each project will be reported on rather than on an aggregate basis – that’s an excellent precedent for the industry.
BAML's bond was also one of the first non-development bank bonds to be issued without any explicit mention of a third party certification to assure investors that bond proceeds will be used to fund ‘green’ assets. This got us a little worried as we didn’t want the first bank issuance in the space to open up the possibility of a decline towards greenwashing - we see credible third party certification as essential immunisation against that prospect.
We did speak to BAML about our concerns; the conversation reassured us and we are generally happy with the bond, but we do think better transparency on criteria and certification would set a good precedent for the market.
There are some excellent points about this bond:
- The commitment to project-level reporting - we will follow the progress made on this and hope that others will make similar commitments.
- Renewable energy investments will avoid controversial technologies like biofuels (at least until there are clear standards) and focus on solar, wind and geothermal.
- Auditor tracking of funds sets an important precedent for the market.
What could be better...
- Further clarity on inclusions before the fact rather than after (reporting), including a public commitment (but not necessarily in SEC docs) stating which types of renewable assets are included in the bond. At the moment, the document says ‘such as wind, solar and geothermal’. The broader ‘environmental business’ commitment this bond sits within includes areas which could raise red flags for investors (nuclear, biomass, biofuels etc.), so bond investors either need further criteria on these tricky areas or to know that they aren’t included in the bond.
- Third party sign off on criteria and bond: Currently, some organisations (Ceres etc.) have “input” into broad environmental business inclusion criteria, but they don’t publicly sign off on either the criteria for the bond or environmental business. Inclusions should be in line with trusted, public standards and verified as such by an independent body/auditor, so there are no surprises down the line.
- Specify exclusions, especially if there are any in the energy efficiency business – e.g. unlike the World Bank Green Bond, we don’t know here whether coal power retrofits could be included or not within the energy efficiency criteria.
- EE investments should have hurdle rates for efficiency improvements – IFC and others have them because:
- Very low % improvements in energy/carbon are barely enough to offset the lifecycle emissions of the technology installed (manufacturing etc.)
- For many projects (e.g. EE retrofits in buildings) EE investments may only take place once in a decade or longer – so if only minor retrofits (with minor climate impact) are made, these are likely to remain static for decades before further improvement takes place – this can leave a building hopelessly out of line with what is required for a low carbon economy.
It's a good start to the commercial bank green bond market, but in future we would hope to see clearer criteria and third party review for BAML and for any other commercial banks joining the party.
