Litigation fears reduce green issuers’ appetite for the US market
“Why is the $ green bonds market still so small?” is a question clients regularly ask us, pointing to the fact that, while the US is the world’s leading green bonds issuer with more than $24 billion outstanding in mid-2016, the market share of green bonds only comprises 0.061% of the overall US bonds market (Climate Bonds Initiative 2016); a significantly lower percentage than in China, India and many European countries.
Market participants often argue that cultural differences between the US, Europe and Asia explain the differing appetite for green bonds, claiming that US corporates feel less pressure than their European or Asian counterparts to go green. However, when talking to green issuers, they cite the potential legal challenges that could be brought against them, as the reason why they are still hesitating to tap into the US market for funding.
US Securities laws make sustainability credentials a legal matter
We understand from discussions with [market participants?] that green bonds issuers may have concerns about investors potentially bringing legal action under US securities laws based on possible misstatements or omissions by the issuer (in a prospectus) about how the proceeds of a green bond offering are used. The concern is that if an investor loses money on the purchase of a green bond, they may try to pursue a legal action by claiming a misrepresentation or omission in the description of the “green” use of proceeds. This type of litigation for misstatements or omissions in connection with a securities offering is not as common in most other jurisdictions.
The general concern is that the more information a green bond issuer discloses in a prospectus about the expected environmental impact of the use of proceeds and then fails to fully live up to this standard, it could be exposed to a law suit challenging the accuracy and completeness of the disclosure –if the green bond underperforms.
Europe has catch-all risk factors
In the European market, issuers and lawyers generally consider an additional risk factor clause as sufficient to cover potential challenges by investors. This often includes wide catch-all statements, such as: “There is no clear definition yet of green”; “This green bond may therefore not be suitable for an investor’s green requirements” and “The second party opinion may also not give suitable comfort for an investor’s needs”.
This US-European discrepancy could discourage major US firms from making detailed impact reporting promises. In turn, the lack of such clarity may render US investors more reluctant to differentiate between green bonds and regular bonds
Detailed reporting – an investment well worth it
This will remain an area to monitor. A clarification or intervention from the regulatory or legislative sphere could potentially help tackle this issue, thereby lowering the threshold for many US firms to issue green bonds
Needless to say, NatWest Markets continues to closely advise issuers on the emerging USD green bond market structural trends. And we remain at the forefront of new transactions in this space. For instance, this month we priced a debut Sustainability US Private Placement of £175 million for a UK drinking water supplier.
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8th April 2019
Dr Arthur Krebbers