Companies face intensifying scrutiny over greenwashing

Before we begin today, I want to point out this research featured in the FT yesterday that found more Americans are aligning their political views with their investment holdings.

“The politically driven divergence of how Americans invest is striking and in sharp contrast to the overall convergence of portfolio composition that one would expect,” the researchers found. This is especially true given the benefits of low-cost index investing. “It raises the question of what causes this divergence and what the consequences might be,” the researchers said.

For today, I’ve delved into a new Greenpeace report on the green bond market. An obscure segment of the market in Brazil could be in trouble, according to its investigation. Thanks for reading — Patrick Temple-West

Greenwashing: Scrutiny turns to Brazilian companies

As companies are becoming increasingly involved in green financial products — from carbon offsets to green bonds — the threats they face from greenwashing allegations are increasing as well.

Through August, green and sustainable bond funds recorded $24.5bn of inflows globally, beating the $22bn inflow for all of 2022, according to an October report from Bank of America. This demand came amid higher borrowing costs globally and a slowdown in inflows for conventional funds, BofA said. Green and sustainable bond funds now comprise 12 per cent of the wider fund market, up from 10.6 per cent at the end of 2022, the bank said.

As investors gobble up green debt, companies and their underwriters are under scrutiny. The latest investigation into questionable green debt comes from Unearthed, Greenpeace UK’s investigative journalism division, which shone a light on an obscure corner of the green debt market in Brazil.

In recent years the Brazilian government has popularised Agribusiness Receivables Certificates (CRA), which are debt securities issued by a securitisation company backed by agribusiness credit rights, according to a definition by the IMF. But there is little public information available about them.

Greenpeace’s Unearthed investigation found that funds raised by CRAs were financing controversial companies including deforesters, land grabbers and ranchers accused of slave labour in Brazil.

In October 2021 Caramuru, a Brazilian processing company for soy, corn, sunflowers and canola, issued £56.4mn in a green deal structured as a CRA. And the CRA issuing document lists 310 suppliers that Caramuru said it would work with.

Unearthed investigated those suppliers and found some controversial people involved, for example people and organisations listed as potential suppliers.

In a response, Caramuru said none of the company’s sustainability commitments were violated by the deal and that none of the green CRA funds were bought from suppliers linked to the Unearthed allegations.

“The producers who supplied Caramuru complied with [its] sustainability policy, [and] did not put the credibility of the green CRA’s operations at risk,” the company said in a statement.

Not all of the suppliers listed in the offering documents ended up working with the company, Caramuru said. “It is possible that soy was not acquired from places with issues of illegal deforestation or land grabbing, nor from farms with work similar to slavery,” Caramuru added. 

The CRA deal was underwritten by UBS. In a statement, the Swiss bank said it did not comment on client relationships, but added that it offered examples on agricultural sector standards on its website.

Unearthed also investigated green CRAs issued by other Brazilian companies and international banks.

Sustainability-linked bonds have provisions that increase borrowing costs for companies if they fail to hit specified green targets. While initially touted as the “next big thing” in impact investing, SLBs have not achieved widespread use by impact bond fund managers, Morningstar said earlier this year. SLB issuance has dropped 44 per cent to $12bn this year, according to Morgan Stanley. “We think investors want SLBs to work, but challenges with the structure amidst high greenwashing risk are deterring [companies],” the Wall Street bank said in August.

Increasingly, environmental activists are not the only ones investigating green bonds. Regulators are on the hunt too.

In May, the UK’s Financial Conduct Authority launched an investigation of the market for sustainable loans. The FCA started interviewing bankers and borrowers about loans that potentially reward borrowers with lower rates but fail to have a significant environmental impact.

And this month, the European Parliament approved new standards to fight greenwashing in the bond market. All companies that choose a green label for debt will be required to disclose more information about their proceeds. And green bonds should align with a company’s overall transition away from carbon emissions, according to the EU rules, which are expected to come into effect next year.

The greenwashing challenges with green bonds fall primarily on banks, which underwrite the debt, but are also big issuers themselves. 

“From the banks’ perspective, they can just view [green bonds] as fee collecting activities,” Aaron Yoon, a professor at Northwestern University in Chicago who researches green bonds, told me. “However, we have to note that they are also signatories of all sorts of ESG-related initiatives.”

Banks would be wise to start following up with companies about the sustainability of the proceeds from green bonds, Yoon said. “Sooner or later, the banks will also be scrutinised.” (Patrick Temple-West)

Smart Read

In the mood for something sweet and crunchy? Snack on this in-depth report from our colleague John Gapper about growing a climate-proof apple. Catalonia, Spain’s top apple-growing region, is much hotter, with far less rain. Catalan growers had come to New Zealand in search of new varieties that would be capable of flourishing in their climate.