The average use of green bond proceeds is only 64% aligned with the EU taxonomy.
That’s according to analysis of $2 billion (€1.89 billion) of outstanding green, social and sustainability (GSS) bonds by ESG advisory and portfolio analysis firm MainStreet Partners.
The study showed that renewable energy projects have the highest average alignment of activity level with the taxonomy (77%), while elsewhere clean transportation projects were only aligned at 55. % on average.
Indeed, renewable energy businesses tend to have less stringent requirements than other businesses, according to Jaime Diaz-Rio Varez, research analyst at MainStreet Partners and co-author of the GSS Bonds report.
“Some activities, such as wind and solar, are very easy to assess their alignment because there are no thresholds from the technical selection criteria. For other activities, such as sustainable water management, there are specific thresholds,” Diaz-Rio Varez said. Citywire Selector.
“For bioenergy electricity generation, the savings in greenhouse gas emissions must be at least 80% compared to a fossil fuel comparator. Without this information, we are unable to determine alignment. But most of the time, issuers won’t provide those specific details.
Diaz-Rio Varez also pointed to water and pollution prevention as activities with large information gaps and limited disclosure among issuers.
He said this should improve over the next six months as the remaining environmental pillars of the EU taxonomy will include more detailed criteria on pollution prevention control and sustainable activities related to water.
Diaz-Rio Varez expects issuers to increase their disclosure as investors increasingly opt for taxonomy-aligned investments, which could disadvantage issuers lacking disclosure. He noted that many have already stepped up from last year.
“European investors are going to be particularly keen to find bonds that disclose this information, so that they are able to assess their alignment with the taxonomy.” I think that will incentivize issuers. They will want to step up disclosure, absolutely.