Labels like this are important as they explicitly distinguish which financial products are sustainable according to a specific set of verifiable criteria.
The European Commission is currently developing the technical specifications for such an ecolabel. In December 2019, a draft proposal for the product scope and criteria was published and, over the course of 2020, we expect progress on this.
The criteria for the EU Ecolabel for bond funds focus exclusively on so-called green bonds that are compliant to the (still to be developed) EU Green Bond Standard. Triodos Investment Management sees designated green bonds as providing an important vehicle for companies to raise money for new projects with green benefits. By issuing green bonds, the balance sheet of the issuer becomes more sustainable.
However, we also believe that ‘vanilla’ corporate bonds of leading green companies are very important. Under the EU Ecolabel, these bonds do not qualify as green. We consider this to be an important omission. After all, it is better if corporates meet the label requirements across their whole business instead of just what can be earmarked for a green bond. The Nordic Swan Ecolabel, for example, also recognises the importance of “vanilla” corporate bonds issued by companies with a strong ESG performance, by requiring that at least 50% of the portfolio be invested in such corporate bonds or designated green bonds.
Moreover, the proposal does not consider any criteria for the issuer of these green bonds. They can be issued by any company. It therefore provides no incentive for companies to focus on the ‘greenness’ of their entire business and could tempt it to develop green pockets within its organisation. Such green pockets do not say anything meaningful about the total ‘green’ performance or long-term sustainability strategy of a company.
The Triodos way
Triodos Investment Management applies strict investment criteria to all its investment funds. All companies and issuers that are selected for investment, across all asset classes and instruments, need to actively contribute to positive change.
For our bond portfolios, we first identify companies that contribute to positive change and that meet our strict minimum criteria. If a company meets these, we can invest in all of the bonds it issues. We can also invest in designated green and social bonds if the capital is earmarked for projects contributing to positive change; the issuer must still meet our minimum standards. By applying the minimum standards at corporate level, we ensure that green investments made in one part of the organisation are not offset by ’brown’ activities in other parts of the organisation.
Sustainability through the entire business
Summing up, we see two important omissions in the EU Ecolabel with regard to bonds. First, corporate bonds of sustainable companies are not considered as green under the label. Secondly, no criteria apply to the issuer, meaning that green bonds can be issued by any company or organisation, no matter how unsustainable they are.
Investors need to completely stop funding companies that are not equipped to serve society. Our request to the European Commission is to enable and incentivise the market to fund companies that are prepared to participate in a clean, humane, and sustainable future through their entire business. To meet the urgent calls of the UN Sustainable Development Goals and global Climate Agreements, we need more than just green pockets.