By Hamlin Lovell, NordicInvestor

Following our recent roundtable (read or watch it here), we interviewed Douglas Farquhar Client Portfolio Manager, Green Bonds, NN Investment Partners, who previously worked as a verifier of green bonds, to discuss different opinions around classifying green bonds.

Different standards, frameworks and opinions mean that some bonds currently self-labelled as green by the issuers, or that bear various independent green bond labels, can be somewhat controversial, and might not be labelled as green by some asset managers and various other organisations. There are even allegations of “greenwashing” in some cases.

The EU Green Bond Standard (EU GBS), which should be firmed up in late 2020, may help to harmonise disparate definitions: “the proposed EU taxonomy is pretty prescriptive on what issuers need to do in terms of use of proceeds, independent external reviews, post-issuance reporting and eligibility standards. Some uncertainties remain over the scope of coverage, such as whether it is Euro-denominated bonds, or sovereigns/corporates domiciled in Europe, or any issues offered to investors in the EU”, explains Douglas Farquhar – Client Portfolio Manager, Green Bonds, NN Investment Partners. Whatever the legal scope of the rules turns out to be, issuers in other countries could voluntarily follow them, as Japan has already committed to.

The new rules might declassify significant numbers of bonds. A gap analysis between the proposed new EU rules and existing labels (such as the 2019 Green Bond Principles, the Climate Bond Initiative (CBI), the Greenfin label, and the Febelfin label), suggests some issues currently labelled as green would not be eligible against the EU Green Bond Standard

NN has built a proprietary database based on external data and internal analysis that classifies about 83% of the current green bonds universe as green, thereby excluding 17%. This is potentially lower than the EU definition for some rather nuanced technical reasons. “The difference between the proposed EU definition and the current NN definition is due to thresholds that define eligibility, and the moving target nature of the rules in terms of permissible trajectories or glidepaths for reducing emissions”, says Farquahar and adds;

Bonds that were eligible when issued a few years ago would no longer satisfy the criteria as the bar gets raised….

Holistic assessment of issuers’ activities and intentions

Acquisitions as well as organic corporate projects can be acceptable use of proceeds”, says Farquhar.

One controversial category of green bonds is where a company or government has a flat or growing overall carbon footprint, but issues a green bond for a specific project. “For instance, Amsterdam’s Schiphol airport issued a bond to fund green buildings, but has done nothing about its core activity which facilitates emissions. We therefore do not view this as a green bond. If Schiphol had raised funds to invest in biofuels, we would have viewed it more positively”, says Farquhar.

Oil and gas transition is another contentious area. “NN does not exclude sectors beyond weapons, gambling and adult entertainment, and recognizes that

green bonds can help oil and gas companies to make a transition to renewables…..

Some asset managers create a separate category for “transition bonds” while others will group them under the umbrella of green bonds.

Where companies are raising capital to fund offset activities – such as airlines planting forests, or simply buying carbon emission credits – then arithmetically, carbon footprints could be going down, but the company may not be changing its core activity. NN would not classify such issues as green bonds.

Some qualitative assessment can also be needed where companies’ scope 1 and 2 emissions are moving in the opposite direction of their scope 3 emissions. Then a judgement call needs to be made on the materiality of the different sorts of emissions.

Reporting of level 3 emissions is often a problem in terms of limited and inconsistent disclosures. “Additionally, reporting obligations may only come into force after bonds are issued. Therefore, investors need to form a view on companies’ prospectus commitments to reporting, and data gaps may need to be filled by third party services”, explains Farquhar.

Ongoing monitoring and “green default”

Continuous monitoring is also needed to ensure that issuers remain green. “Bonds issued by Australia’s Queensland government were classified as green based on use of proceeds for electric vehicles, but we removed them from our green database after the government authorized the largest coal mine in the region”, points out Farquhar.

The potential for bonds currently labelled as green to be declassified and lose the label, gives rise to the concept of “green default”, which could arise if projects related to bonds were not completed. There have been at least two cases, in the US and India, the latter of which also happened to be a financial default.


Even if everyone agrees that an issuer and proposed projects are green enough, the question remains as to whether the activity would have gone ahead anyway, absent the bond issue. The criterion of “additionality” – that bonds finance projects that would not otherwise have been financed – can be interpreted in different ways.

“Refinancing of existing projects is acceptable to us. It is also fine for companies with net cash to issue green bonds: they may be doing so to broadcast their green credentials and sustainability strategy, and to access deeper pools of capital”, says Farquhar.

Re-labelling bonds

Many infrastructure debt bonds could meet the “green bonds” label, but do not bother to get it….

The green bond universe has grown to EUR 650 billion as of September 2020 through an accelerating volume of issuance, and could grow further through re-labelling of bonds not currently classified as green. “There is no restriction on re-labelling, though it may raise credibility issues”, says Farquhar.

For instance, “Sustainability” bonds can also overlap with green bonds. “We are happy to classify them as green if at least 90% of proceeds are used for green activities. Sustainability bonds can often straddle the green bond category, though social bonds rarely do”, says Farquhar.

“The Climate Bonds Initiative (CBI) has looked at the amount of un-labelled green debt that could be labelled as green, and much of it is infrastructure-based. Many infrastructure debt bonds could meet the “green bonds” label, but do not bother to get it”, he points out.

Asset backed securities, such as mortgage-backed securities and covered bonds, can also be labelled as green. For instance, Norway’s Sparebank 1 (an alliance of 14 banks, covered bond issuers and financial services companies in Norway) issued a green bond on a covered pool of mortgages based on property in the top 15% on energy efficiency. However, obstacles to further issuance and/or relabelling include data gaps. “The quality of energy-linked certificate databases is an issue in some markets”, points out Farquhar.