A green prospectus make-over
“How do I know whether this bond is green?” is a recurring question I get asked.
Your typical port of call – the prospectus – does not always offer solace. The “greenness” is often hidden in a few sentences, outlining the use of the proceeds and capturing the risk factors, which could potentially hinder the delivery and success of the sustainability projects the green bond will help funding. Often, the information raises more questions than it provides answers.
European regulators advocate greater disclosure in the prospectus
European regulators are now looking to change this. The French and Dutch financial market supervisory authorities (AMF and AFM) issued an interesting announcement at the beginning of April, advocating greater green bond structural disclosure within the prospectus.
The position paper, which was sent to the European Commission, states that if an issuer chooses to qualify its bond issuance as ‘green’, the prospectus should include:
- additional information regarding the use of proceeds,
- the selection of funded projects, and
- the management of proceeds
The issuer should also specify whether it intends to:
- comply with green bond standards,
- publish a reporting on the use of the green bond proceeds,
- mandate a third party verification.
Legally binding green information highlights “greenness” for investors
Essentially, the proposal aims at transferring more of the green information from the voluntary and non-binding framework into the legal documentation. This step could lead to a number of positives for the green market: In my experience investors take their investment decisions largely based on the information contained in the prospectus. As the “greenness” becomes a significantly more important investment consideration, embedding the green information relating to the offering in the prospectus will help promote the green angle to ESG investors.
Legal disclosure could boost green retail debt
A greater amount of legal disclosure and protection is particularly relevant if we want to grow the sub-segment of green retail debt, targeting less sophisticated investors. Those investors increasingly focus on ESG parameters, but of course require more information and guidance, which a more green-detailed prospectus could deliver.
Finally, this trajectory of improved legal disclosure could also help more market participants consider green bonds as a serious asset class - a major motivation for the regulators’ proposal - and not just a “gimmick” to drive better pricing. This in turn could support the drive for further structural developments, such as:
- green-related covenants, as approximately 48% of European investors have told us they would like to see in a recent survey,
- capital benefits for purchases of clearly demarcated green assets, and
- simplifying other “demarcations” of greenness, whether provided by listing authorities (“green listing”) or market data providers (green structural fields in Bloomberg, Dealogic, ThomsonReuters etc.).
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10th June 2019
Dr Arthur Krebbers
Head of Sustainable Finance,