USA, Florida, Industrial Smokestacks
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Let’s move past the debate over ‘who can do green’, says Jacob Michaelsen

Nordea’s Head of Sustainable Bonds explains what’s wrong with the recent debate over so-called “transition bonds” and where the real focus should be when it comes to the future of sustainable finance.

Should only green companies be allowed to issue green or sustainable bonds?

That’s the basic question at the heart of the current debate over a proposed new type of bonds referred to as “transition bonds”, designed to allow not-so-green companies to finance their gradual shift to a cleaner way of doing business.

The debate peaked earlier this year when one of the world’s biggest beef producers, Brazil-based Marfrig Global Foods, issued a $500 million “sustainable transition bond” to finance their purchase of cattle from suppliers committed to not destroying more Amazon rainforest. While the deal was oversubscribed, it also caused controversy, with critics doubting Marfrig’s claims that it could fully monitor its supply chain.

Concerns over “greenwashing” – making misleading claims about environmental benefits – were what gave rise to “transition” bonds as a possible separate bond type, distinct from green bonds, in the first place. They have been billed as a way to allow the so-called “brown” sectors such as oil, coal and agriculture to become a lighter shade of brown, even if they couldn’t get to a full green. Yet the concept of transition bonds has also come under greenwashing criticism, for potentially giving cover to companies not fully committed to real environmental change.

Jacob Michaelsen, Head of Sustainable Bonds, Nordea Markets

Jacob Michaelsen, Head of Sustainable Bonds, Nordea Markets

Jacob Michaelsen, Head of Sustainable Bonds at Nordea Markets, says the current narrative of the “transition bond” discussion has been too simple. The real discussion should be around the broader governance and direction of the market, as he explains below.

Read the full version of Michaelson’s top-read article published in Environmental Finance: A nuanced perspective on “transition bonds”.

You have previously described the recent discussion around transition bonds as overly simplistic and misleading even. What’s wrong with it?

First, we risk getting stuck in the nitty gritty details of “who can do green” instead of focusing on the much bigger discussion of moving capital in the right direction. It’s somewhat hollow to say that an oil company can’t issue a green bond if you would buy a green bond from any of the major banks (most of whom have significant oil-related exposure on their balance sheets).

As one client pointed out to me recently, “Every company in the world has always been in transition – and always will be. It’s inherent in the capitalistic model.” As I see it, there’s only finance – either sustainable or not. “Sustainability” will always be a transitory concept. Furthermore, by separating “transition finance” from “green finance,” we inadvertently increase the risk of “greenwashing.”

“Transition bonds” have mostly been discussed as a potential alternative to green bonds, without becoming an actual thing yet. “Transition” is clearly a relevant topic. However, I’m unsure whether a separate label for such bonds is the appropriate way forward for us as a market. It seems to me there are potentially more downsides than upsides of doing so.

“Every company in the world has always been in transition – and always will be.”

Jacob Michaelsen, Head of Sustainable Bonds, Nordea, quoting a client

Without a label like “transition”, how can brown companies finance environmentally-friendly projects and avoid claims of greenwashing?

When I look closer at the market and the ‘transition bond’ discussion, it is evident to me that there is real appetite and interest in being able to talk green even, in fact especially, in controversial sectors. To me this is an opportunity for us as a market to help support the transition and make profits along the way. Obviously, we need to maintain a high degree of integrity and sensibility when going about the difficult topics of defining positive impact. But it seems clear to me that we could all benefit from a market structure and governance model that would be supportive of a more nuanced discussion of green/sustainability.

Still, it is important to remember that feasibility and a market orientated approach will need to be at the core of the labelled bond market going forward. When speaking to both issuers and investors I clearly get the sense that the ones who tend to be most up-in-arms when a controversial or transition bond discussion is brought up are either fund managers with dedicated green labelled funds or issuers from sectors where the green discussion is more straightforward – and maybe the occasional NGO or sensationalist journalist looking for controversial topics.

If we as a market truly want to support the global transition to a low-carbon economy, we need to move forward from the situation where the only thing it seems that we can focus on is the controversy of ‘who can do green’ – I am sorry, but this is peanuts. Yes, we need a focus that at the end of the day shifts capital away from ‘brown’ investments – however, that shift should not be binary but rather a progressive push that helps everyone on the way, regardless of the label.

Do you think the Green Bond Principles, which have become the leading global framework for the issuance of green bonds, are no longer adequate?

Let me be clear; I believe the Green Bond Principles and Social Bond Principles, with their simple and flexible structure, have been the perfect model for the labelled bond market to go from niche to global – an impressive achievement indeed. However, we should not be blind to the fact that the underlying modus operandi of the labelled bond market has evolved from a static market, characterised by a homogenous asset pool (mostly Renewable Energy) and supply base (mostly SSAs), to a vibrant and dynamic market, characterised by a variety of Green assets and a much faster pace. In such a market, the simple and flexible governance structure might still work, but maybe it will not be the most efficient or best-suited to address the challenges we face.

We’ve seen a spate of new labels for sustainability-related bonds lately, such as “SDG bonds” for initiatives tied to the UN Sustainable Development Goals and “blue bonds” to finance marine projects. What do you make of this, and where do transition bonds fit in to the picture?

In my view, the “transition bond” discussion is just the tip of the iceberg of a much bigger and more pertinent discussion concerning the direction of the labelled bond market (and sustainable finance more broadly). We should not be focused on, say, whether a shipping company should be able to do a green bond, or a cattle rancher a sustainability bond. Rather, we should focus on whether the current governance and structure of the labelled bond market is adequate to address the flurry of these labels we have seen recently, including “SDG bonds,” “blue bonds” and “gender diversity bonds.”

Instead of discussing ‘transition bonds’ we should focus our attention on addressing the current approach to, and governance of, the labelled bond market. In the long run we might very well need to disregard labelling altogether and only refer to ‘use of proceeds’-style bonds where the targeted impact is always disclosed – regardless of the proceeds.

In the long run we might very well need to disregard labelling altogether and only refer to ‘use of proceeds’-style bonds where the targeted impact is always disclosed – regardless of the proceeds.

The European Commission in 2018 adopted an action plan on sustainable finance, setting out a comprehensive strategy to connect finance with sustainability. Part of that action plan is to establish a classification system, or taxonomy, for sustainable activities. This June, the technical expert group on sustainable finance (TEG) published the climate-related part of that taxonomy. There, they acknowledged that the taxonomy covers a wider investment universe than currently available under traditional “green” investment criteria. It also covers activities that make a substantial contribution to carbon-mitigation objectives but are not low-carbon today, such as the manufacturing of iron or steel. Is this new body of regulation from the EU the answer to this debate?

Transitioning in the global economy also requires us to transition within the financial market – that is, the transition from “use-of-proceeds” style labelling to a broader realisation that sustainability needs to be integrated across the entire financial market value chain. This is in essence what the European Commission’s Action Plan for Sustainable Financing is all about.

The main goal of the labelled bond market should not be simply to increase the volume but rather to serve as a stepping stone for us to transform the entire financial market. Labelled bonds have shown us the value of transparency – that should become the norm, regardless of a label. Further, we need to pay closer attention to the link between use-of-proceeds and overall ESG integration – and how both aspects are important tools to help us in moving capital aligned with a low-carbon economy. Fleshing out what ‘strategic alignment’ means might be a good place to start.

We need to make some big and bold steps in the months and years to come. What exactly that will look like I won’t claim to know today. However, considering the impressive momentum we have seen in recent months, it wouldn’t surprise me if the answer is to be found, at least partly, in the European Commission’s Action Plan. Regulation will also likely be an important component of this, but it won’t be enough – the regulators might set overall rules of the game, but it will be up to us as a market to figure out how to raise our game to the next level.

Read more about the European Commission’s work towards providing policies and guidance for sustainable finance.

And find out about the dramatic rise in green- and sustainability-linked loans.

Jacob Michaelsen is Head of Sustainable Bonds at Nordea, the largest Nordic bank and leading Debt Capital Market house in the region. Through this role, he is in constant dialogue with investors, issuers and the broader market on all matters related to the green bond market. In so doing, Michaelsen’s focus is on raising awareness of green bonds and contributing to building not just the Nordic, but the global green bond market. Prior to working with green bonds, Michaelsen was a part of the Bond Syndicate team at Nordea where he led the execution of a broad range of new issues.

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