In prior articles we have written about options to maintain the structural integrity of Sustainability-Linked Bonds (SLB) post-issuance. Such “re-benchmarking” is also relevant in the context of green bonds. How can issuers ensure their eligible green assets continue to match investor expectations?

This is not a hypothetical question. Corporate green bonds tend to be issued for medium or longer tenors. During the 5-year+ period, your firm’s strategy is likely to evolve, resulting in you developing, and potentially divesting of, parts of your (green) asset base that you set out to finance at the time of the green bond issuance. Over that same period, investor expectations will most likely continue to evolve, too.

How then to future-proof your green bond strategy?

The most commonly applied approach, particularly for issuers in asset-intensive sectors, is to have a wide-ranging underlying green (or sustainable) finance framework – as, with such an inclusive approach, you are less likely to run out of assets. Furthermore, by following a “portfolio” philosophy (i.e. matching your entire green debt stack with a portfolio of green assets) there is less onus on updating stakeholders on disposals of individual green assets as they happen. However, you need to be mindful that this approach could risk diluting your green asset selection standards, but at the same time EU Taxonomy alignment (and similar taxonomies) should reduce this risk. Furthermore, proactive investor engagement is key to avoiding alienating those financial supporters. For example, ESG investors buying into a green bond focused on electric vehicles, may assess a building retrofit programme differently – this would need explaining.  

Another solution to future-proofing green bonds is to regularly seek to update the framework. This could happen in response to corporate events. For instance, if your company acquires a green hydrogen plant, you should add this category to your framework. While regular updates might prove to be quite labour-intensive – such updates also require appropriate investor engagement – this approach recognises that frameworks are “living and breathing” documents and signals that the issuer is proactively seeking to continuously adapt to market expectations.  

A third option is to return to your investors through a Liability Management (LM) exercise. We have explored such “greenification LM” before. The idea is, that if you lack sufficient eligible green assets, you can offer investors to buy back (part of) your green bond (as ACS recently announced) or amend the use of proceeds terms through a consent solicitation. While there is no legal requirement to do so (given the quite flexible green bond language in most prospectuses), there are obvious Investor Relations and reputational reasons to opt for this route.

So, there are multiple strategies in an issuer’s toolkit to ensure green bonds remain ‘state of the art’. Each has distinct merits, and they are all certainly better than the “ostrich approach” of ignoring that your green debt has stopped living up to your at-issuance commitments.

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