The Race to Zero

Thu, Jun 18, 8:04 AM ET, by , BlackRock

A critical project I have taken on during the coronavirus quarantine is measuring and reporting on the impact of green bonds. A key traction of investments in green bonds is that they deliver positive environmental benefits that are measurable. Investors want to quantify how their green bond investments are contributing to their environmental objectives. Asset managers, pension funds and insurers also want to report the environmental benefits of their green bond investments to their end investors, plan participants and customers. The impact reporting exercise addresses exactly that. The million-dollar question I want to answer? What is the impact, the positive environmental and social outcomes, of $1 million investment in a portfolio tracking the Bloomberg Barclays MSCI Global Green Bond Index?

As I set off to engage with over 200 issuers as COVID-induced lockdown measures around the world are put in place, a parallel became clear. Tracking the impact of green bonds has many similarities to containing the coronavirus - they are both races to zero. In the case of the former, it's the race to a zero-carbon economy. Leveraging the framework for best practices on containing the coronavirus as guide posts, I present here my key takeaways on the exercise of green bond impact reporting.

1. Containment and lockdown

Just as countries and cities have adopted virus containment measures with varying degrees of control, individual green bond issuers have also applied different measures to 'lock down' the impact of their projects.

Some have joined forces to figure this out. International finance institutions including the Nordic Investment Bank, Asian Development Bank, European Investment Bank, among others, signed onto a harmonized reporting framework for project-level greenhouse gas emission accounting. Nordic public sector issuers like Kommuninvest, SEK, Kommunalbanken and MuniFin carry out their impact analysis based on the recommendations of the Nordic Position Paper on Green Bond Impact Reporting (2020). This makes sense, as these groups of issuers share commonalities in the way they provide financing.

Investors also want to understand green bond impact figures at the portfolio level. To do so, the indicators need to be scalable and aggregable, issuer-agnostic. We locked down a list of 50 commonly tracked quantitative indicators. These are measures in absolute terms, like tonnes of waste treated/collected per year, tonnes of CO2 emissions reductions or avoided/year, annual renewable energy generation (in MWh), annual energy savings (in MWh), and the number of jobs created, to name a few.

We then do an annual impact reporting exercise for green bond issuers whose bonds we hold. In our attempt to align issuers' reported impact figures to our set of commonly tracked indicators, we asked each of the issuers to complete a template based on their latest available impact and allocation data. Within hours, my inbox was flooded with responses.

2. Expanding testing capabilities and diligent ongoing monitoring

Based on the endless streams of live COVID updates in my notifications, once everyone has been warned to stay home to prevent the spread, it seems that phase II hammers hard on expanding virus testing and tracing capabilities.

Similarly, in our impact tracking, we want to know how much of their green bond money issuers have spent, understand what projects they have financed, and how much impact these projects have. Our template did streamline and scale the process, but it further highlights the complexity of this exercise, and the variability across issuers. Oftentimes, our verification of their provided figures led to more questions and us digging even deeper.

As an example, green bonds from issuer A and issuer B both finance energy efficiency improvements on buildings. How can $1 billion in green bond allocation from issuer A result in 300,000 megawatt-hours in annual energy savings, while the same allocation from issuer B only translate to 10,000 megawatt-hours? In the case of green buildings, the base energy consumption in each country and region varies, and the baselines for comparison used by the issuer can also vary. Thus, context matters when looking at impact figures, even within the same sector.

Another key consideration is to ensure that impact is attributed proportionally to an issuer's participation in the project. In cases when green bond issuer A and green bond issuer B both finance the same project, they each should only claim the project impact for their share of financing to avoid 'double-counting'. In our due diligence process, we take care to engage with issuers where the share of project financing is unclear and provide feedback for the next iteration of their impact reports.

The diligent tracing, engagement and tracking that this exercise has unlocked is unprecedented, but this is still by no means clean and straightforward. However, there is progress towards transparency and standardization. Increasingly, we see better and more commitment to impact reporting from players in all sectors of the market. With every iteration, we as investors are also refining our own approach to tracking impact figures at a portfolio level. As with anything, practice makes perfect.

3. Making a breakthrough into a sustainable long-term solution

The world is racing towards a vaccine, because no matter how successful containment and tracking measures are, there needs to be a viable long-term solution. The 'vaccine' for impact reporting, to make this a more seamless and scalable exercise for the green bond community is an open source, transparent platform.

This is why, in 2020, BlackRock has partnered with Cicero and Stockholm Green Digital Finance to support Green Assets Wallet, an independent platform for green securities. The platform gives issuers the opportunity to transparently and efficiently communicate their green bond offerings and achievements, and gives investors the capability to track our portfolio impact over time.

We have pushed issuers to leverage the platform to disclose their impact figures and use the tool to streamline their green bond impact tracking procedure. The network effect of scaling up transparency and reporting is certainly going to be a game changer in the sustainable finance market, starting with green bonds.

How did we do?

As an illustration of your possible impact on the world, for a hypothetical green bond portfolio that tracks the Bloomberg Barclays Global Green Bond Index, the graphic below summarizes key metrics such as the amount of renewable energy generated, energy or water saved and emissions avoided per $1 million invested[1].

Emily Weng is a member of the Global Fixed Income Responsible Investing team.

[1] In this exercise, we capture a representative majority but not all of the hypothetical portfolio's impact. There are 228 issuers represented in this portfolio, who together have a total of $529 billion in green bonds outstanding. Of these issuers, 79%, representing 91% of total assets, reported on environmental impact in 2019. Investing involves risks, including possible loss of principal. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of June 2020 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. ©2020 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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