By Justine Leigh-Bell, Manager of Standards and Certification Scheme
The exciting opportunities of the Green Bond market are causing a stir and enlivening the interest of potential issuers as well as some of the leading professional assurance providers. EY, KPMG, PwC, and Bureau Veritas (the “assurers”) have joined forces with the Climate Bonds Initiative to help develop an assurance framework for the Climate Bond Standard with the objective of developing better reporting and assurance practices in the Green Bond market.
Last month, we kicked off the first assurance roundtable in London as part of a series of discussions on how the green bond market can best provide investors with assurance of the green credentials of their investments. We wanted the assurers’ input to help inform the upcoming revised version of the Climate Bonds Standard (V2.0) and the assurance work that will support the Climate Bonds certification process.
A multitude of options currently seek to provide investors confidence in the environmental performance of green bonds to the market.
It’s a hot topic - any green bond event these days will lead to discussions on the role in the growing market of the Green Bond Principles (GBPs), second opinions, standards, verification, attestation and assurance.
But what does it all mean? Are they equivalent? The assurance firms say no; they are not on equal footing from an assurance point of view.
So, how do the different options differ in the assurance they provide to investors around project selection, use of proceeds, management of proceeds and reporting for green bonds?
To date, the market has seen a proliferation of ‘second opinions’ issued mostly by environmental advisors providing some comfort to investors about the green credentials of the bonds. They have responded to the questions raised by investors as to whether a bond (or issuer) is green; and the needs of issuers for assistance in the promotion of bonds. The variation in quality of the second opinions, together with more specific concerns in the market regarding transparency of the investment objective and the post investment impact of the bond being raised, has brought the professional assurers together with the Climate Bonds Initiative to clarify the nature of assurance that can be provided.
It is all part of a reporting ladder: second opinions expressed in terms of best practice guidelines are an important first step for the nascent green bond market – no doubt about it - but as the market grows, a higher level of assurance will be required to satisfy the demands of management and stakeholders, as well as respond to those who might seek to criticise the market. Professional, independent attestation – a step beyond second opinions in terms of approved methodology and depth of assessment - is typically conducted in accordance with national or international assurance standards. This is the professional use of the term ‘assurance’, and it has a specific meaning.
Professional assurance is about checking the evidence underlying what is being reported against set criteria
This requires, amongst other things:
- A responsible party (the issuer) who reports performance against a set of agreed industry assessment or measurement criteria;
- Criteria which is clear, objective and suitable for the purpose of assessing and reporting performance;
- Sufficient, appropriate evidence to support what is being reported; and
- An assurance framework or professional assurance standards governing the performance of the assurance work, including underlying quality and competence.
Agreed, consistent reporting criteria has numerous benefits, not least that it allows for independent assurance and comparability between reporting entities – the same reason why this level of assurance is used to provide investors with confidence in companies’ financial statements all over the globe.
In the context of Green Bonds, the issuer would report in accordance with the predetermined criteria, decided by an independent standards body, of what is green, and the assurer would assess the evidence available to support this report.
Reporting and assurance against set criteria makes it easier to provide confidence to a market at scale. Issuers and investors are all struggling to see how the current models will cope when green bond issuance and outstanding total continue to ramp up. Sure, the market is still small in absolute terms, but we expect to see at least US$70bn of issuance globally this year compared to US$36.7bn of issuance in 2014.
So how can the reporting and assurance model be applied in the market?
According to the assurers, it is difficult to apply professional assurance to current market practices.
The new version of the GBPs released this past March was a step in the right direction by explicitly recommending that “assurance should be provided against the GBPs and the assurance should cover the tracking of funds.” But there’s a niggle: to provide assurance, independent assurers first need objective, consistent assessment criteria to be established. From the roundtable, it emerged that it is not clear how the GBPs can provide assurers the set framework that is a pre-condition for professional assurance, as the GBPs only give recommendations and principles, not criteria.
The Climate Bond Standard offers an assurable assessment framework option
The take home message from the roundtable session was the Climate Bond Standard has come a long way providing the most advanced third party standards in the market, but more needs to be done, which is why EY, KPMG, PwC, and Bureau Veritas have vowed to work together with the Climate Bonds Initiative to help establish a common set of assessment criteria and procedures under the next version of the Climate Bond Standards.
The aim is to have a robust, efficient and operational process that will offer the right level of assurance needed in the market at the right time: supporting the Climate Bonds robust ‘certification’ process at the beginning of its lifecycle confirming its green credentials against clear standards; and a transparent ‘statement of proceeds’ assurance - post investment - confirming its ongoing investment profile and impact.
The role of the assurer would therefore be two-fold: to provide confirmation of the bonds’ credentials to the Climate Bonds Standard Board in order to assist the certification process prior to launch; and then to provide a public assurance opinion over the ‘statement of proceeds’ post investment.
Whilst there still may be an opportunity for current market practices to remain, the move towards standardisation will assist the market maturity through the robust identification of bonds that are green.
Any input and ideas to make the Climate Bonds Standard even more suitable for assurance, get in touch!
