Failing Up: The Fraud of the Green and Sustainability-Linked Bond Market
For those who aren’t familiar with the term, greenwashing is the act of making investments which only superficially appear to fit a sustainability mandate. By doing so, a manager may have many clients who don’t notice that they have a number of irresponsible issuers in their portfolios.
But portfolios of green and sustainability-linked bonds are fine, right? Unfortunately, it’s not that easy. Portfolios that rely on such labels may be the most greenwashed of them all. Why? Because the decision as to what constitutes a green or sustainability-linked bond is mostly left to the capital markets process.
This is where Philip Morris International hopes to fit in. Philip Morris International (PMI), the non-US manufacturer and distributor of the Marlboro cigarette brand, announced in August 2021 that it would be issuing an ESG bond. Yes, you read that right.1 They have no business issuing ESG bonds, and managers who claim to offer ESG strategies have no business buying these “business transformation” bonds. Issuers like PMI will seek to opportunistically raise capital with the lowest cost and fewest restrictions possible. The financial sector’s socially responsible bonds are a prime example of this. Many banks issue bonds which are marketed as requiring them to use the proceeds to provide services to underserved communities. But a careful reading of the language in the indentures show that they simply “aim to” use a like amount of capital. There is no earmarking or restriction on the capital raised, and without the ability to verify or be held accountable, there are no real consequences. We discuss this more later; suffice it to say here that a commitment without consequences is at best a promise and most likely just a marketing ploy.
The banks have what some consider a valid argument for creating this loophole: Restricted capital cannot get the same regulatory liquidity credit as unrestricted capital. However, just as with Phillip Morris International, this response caters to optics. The truth is that not every issuer can or should be allowed to participate in markets which are intended to fund ESG progress if that issuer cannot make a sincere and enforceable commitment. Sometimes, the best way to contribute to progress is to recognize that we are not the star in every story, show some empathy and just get out of the way. These issuers would be well-served to learn this lesson: This market is not about you.