In a startling development, bond deals orchestrated by Credit Suisse and Bank of America Corp. linked to debt swaps for emerging-market issuers are facing renewed scrutiny. This comes after the International Capital Market Association (ICMA) issued fresh labeling guidelines, casting a shadow of doubt over their previous transactions.
These bonds, sold over recent years to facilitate debt-for-nature swaps, where nations refinance their debt in exchange for marine conservation commitments, were originally labeled as “blue” by Credit Suisse and BofA to signify their environmental dedication.
Nicholas Pfaff, Deputy Chief Executive and Head of Sustainable Finance at ICMA, expressed concern, stating that issuers are “using the blue bond terminology but doing something completely different,” leading to “regrettable confusion.” Both Credit Suisse and BofA declined to comment.
ICMA, a widely recognized global standard setter in debt markets, is followed voluntarily by investors, issuers, and underwriters. The blue bonds arranged by the two banks were sold before ICMA established clear standards for labeling such financial instruments.
Blue bonds, although a smaller segment compared to green bonds, are growing in the sustainable debt market. To qualify for a green or blue label, bond issuers must allocate all proceeds from sales toward environmental (green) or maritime (blue) objectives, as per ICMA’s guidelines.
The blue bonds arranged by Credit Suisse and Bank of America played a pivotal role in refinancing over $1 billion in debt for Belize, Barbados, and Gabon as part of a blue bond program initiated by The Nature Conservancy (TNC), a U.S. nonprofit. However, documents associated with the deals reveal that only a fraction of the proceeds actually went towards marine conservation.
ICMA defines green bonds as instruments exclusively financing or refinancing eligible green projects, with blue bonds considered a subset. Simone Utermarck, Director of Sustainable Finance at ICMA, stressed that blue bonds for debt-for-nature swaps represent “a completely different construct.”
Amidst the confusion, ICMA aims to address the terminology discrepancies. The blue bond market remains unregulated, and analysts at Barclays Plc have previously cautioned about the misuse of the blue label, warning of potential greenwashing.
Bankers involved in these transactions have acknowledged the risks investors face, with BofA stating in its prospectus that there’s no guarantee of compliance with sustainability criteria, principles, or market practices.
Despite the risks, ICMA is vigilant about market participants potentially entertaining ambiguity about the nature of these bonds, which could have a significantly negative impact.
Accurate labeling is crucial, given that these bonds contribute to the broader sustainable debt market, estimated at around $3 trillion by ICMA. Numerous banks, including HSBC Holdings Plc, Citigroup Inc., Barclays Plc, and Standard Chartered Plc, have shown interest in arranging debt-for-nature swaps.
Some investors, like Swedish pension fund Alecta AB, are treating bonds tied to such swaps with caution. Alecta categorizes these bonds as “other investments with social and environmental impact” rather than under green bonds in its disclosures.
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17th August, 2023
Delino Gayweh
Serrari Financial Analyst
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