- Eleanor Matley-Waite
As aspiring commercial lawyers, we must think ahead as to what our role will be in protecting the future of our planet, with the ever-pressing issue of climate change threatening the Earth. Commercial lawyers will become increasingly involved in environmental and energy work, as new regulations and methods of financing sustainability emerge. In December 2020, the UK Government delivered the Energy White Paper entitled ‘Powering Our Net-Zero Future’, building upon the Prime Minister’s Ten Point Plan for a green industrial revolution. Green bonds are a sustainable financing instrument being used to finance the energy transition, dedicated to environmentally friendly business activities, projects and assets. The UK government are to issue a sovereign green bond, raising money to finance projects which will produce environmental benefits. The green bond market is projected to grow rapidly to reach $1 trillion in 2021.
Green bonds are important for supporting environmentally and socially sustainable commercial activity and are expected to play an important role in the response to the existential threat and devastation climate change engenders.
The importance of the existence of green bonds can firstly be traced back to the growing demand for sustainable investments. This demand constitutes a proportion of the broader trend toward ESG (Environmental, Social and Corporate Governance) investing. ESG investment can even be seen to be preferred at the expense of investor’s portfolio’s, by investing in a green bond that may have lower returns than other bonds, but is lucrative for the environment.
Another motive of the green bond is to create a way of distinguishing an issuance from other bond issuances. Media and investor hype can be encouraged through the semantics of ‘green’ and ‘sustainable’, the consequence being an easier way for an issuer to raise a larger capital for lower costs.
The growing political and social pressure placed upon companies to do more for the environment may be appeased and ameliorated through green bonds. The issue of a green bond sends a flare signalling to society that the company cares about the environment and the pressing issue of climate change. The company is, therefore, able to avoid being subject to political scrutiny and can better sustain a customer base who care about sustainability.
How are Green Bonds Issued? The Role of Commercial Lawyers
Companies can raise money mainly through raising equity or debt. When the company takes out debt, the lawyers in the banking and finance team of the firm will draft the loan documentation between the company (borrower) and the bank (lender).
The first stage of issuing a green bond is the creation of a written framework, outlined by the prospectus which is a general document provided for investors which provides an overview of the company as well as reasoning as to how the capital raised from the issuance will be used. For a green bond, it is important that the framework explains how the bond relates to a business activity or project which is beneficial to the environment and promotes sustainability.
Secondly, the process requires third-party review which involves another actor, such as a sustainability consultant, providing some reassurance that the bond is being used for an environmentally sustainable project.
Commercial lawyers will be able to provide the required legal documents for the transaction. This includes firstly the offering document, whereby the issuer will explain how the capital raised will be used to finance sustainable business activity, as well as elucidating any risks involved. One such risk may be a late withdrawal of third-party verification. An underwriting agreement with any relevant banks will also need to be completed.
Once the above steps have been completed, the issuer may issue the green bonds on the market. Depending upon the particularities of the agreement, they may have to meet certain ESG-related targets, otherwise, they risk paying a higher interest rate.
Greenwashing – the Impact of Green Bonds on the Legal Sector
The green bond market lacks government regulators and instead relies upon decentralised, private governance regimes, such as investment standards, certification schemes, ratings and third-party assessment. These regimes compete with each other or will collaborate for market adoption. Private governance is beneficial in the sense that it is more responsive to the needs of market participants and can implement them more quickly than public regulation can.
However, there is a large risk of greenwashing and illegitimacy due to the lack of accountability and consistency provided. According to Park, greenwashing is “profit-or brand-enhancing ‘environmental rhetoric’ by individual firms despite neural or even negative CSR commitments”. With no global standard for sustainability criteria, accusations of greenwashing arise as there is much difficulty in attempting to compare various products and providers.
Reputational risk arises due to additional scrutiny from the media looking into the issuer. It is easy to allege that a particular project is not sustainable enough and such scrutiny may stain the reputation of the firm. Legal risk is also involved as an investor is able to challenge the issuance for using the term ‘sustainability’ if it is not clearly proven. The issuer may also be accused of lack of compliance with relevant sustainability and disclosure frameworks, consequentially engendering delay or cancellation of the issuance and thus the company would not be able to raise capital until later.
With no single authoritative body to approve of green bonds, lawyers may find this problematic when advising their clients, relying instead upon the aforementioned third parties such as sustainability consultants for approval. Lawyers will also increasingly be called upon to mitigate the risk of legal action due to companies’ disclosure of sustainability. Due to disclosure requirements, companies will have to consider their own sustainability and impact upon the environment, companies who do not monitor such risks may expose themselves to regulatory action or civil proceedings. The impact of ESG standards upon financial markets must be monitored by law firms who will be required to keep up to date with the developing legal and regulatory landscape.
An emerging subset of the green bond is the blue bond, which is used to finance projects which protect our oceans. Blue bonds have enabled private-sector capital to be mobilized to support the blue economy.
In 2018, the Republic of Seychelles launched the first-ever sovereign blue bond, raising $15 million to advance their islands blue economy. Arunma Oteh Vice President and Treasurer of the World Bank who helped to design the bond explained how the project elucidates the importance of ‘capital markets in connecting investors to projects which support better stewardship of the planet.’ Blue bonds help to raise funds for projects which will ameliorate pollution and the amount of plastic in our oceans, promote sustainable fishing and can even help to revive coral reefs. Commercial lawyers are likely to advise many governments and companies in the future who are keen to invest in ocean-friendly projects. Such investments are also of great economic importance, with the ocean’s annual value estimated at $1.5 trillion, making the blue economy the seventh-largest economy in the world.
Such innovative financial solutions to tackling climate change bring a great level of excitement and responsibility for commercial lawyers of the future, and it will be interesting to see the growth and importance of environmental legal sectors in the coming years.