Green Bonds: Second Party Opinions and Upfront Assurance

Green Bond Guidelines for the Real Estate Sector (Guidelines) to provide further guidance to market participants regarding green bonds that are related to real estate. The GRESB Green Bond Working Group (GBWG) was established to make the Guidelines come alive: its main objective is to connect market participants (e." data-share-imageurl="">
Sunday, October 25, 2015

Earlier this year, GRESB released the Green Bond Guidelines for the Real Estate Sector (Guidelines) to provide further guidance to market participants regarding green bonds that are related to real estate. The GRESB Green Bond Working Group (GBWG) was established to make the Guidelines come alive: its main objective is to connect market participants (e.g. REITs), source input for future development of the Guidelines and catalyze green property bond transactions. The Working Group had a successful kick-off in mid-October, with participation from a large number of active members, comprised of listed property companies, institutional investors and banks. Content was shared by ABN AMRO, Mirova and guest speaker, Suzanne Buchta of Bank of America Merrill Lynch. In addition, GRESB investor members joined the call to learn more about this rapidly developing market and investment opportunities.

The focus of the first meeting was second-party opinions and upfront assurance. The Green Bond Principles (GBPs) recommend use of external assurance to confirm alignment with the key features of Green Bonds. Second party review, audit and third-party certification is referenced.

Insights from market research

In order to provide GRESB Members with an overview of market trends, GRESB has conducted in-house research and data analysis on the topic of second party opinions. A summary presentation can be viewed here.

The research identifies several noteworthy trends:

  • The recent increase in the number of opinion providers had no effect on the overall proportion of second party reviews engaged within the green bond market;
  • In the past three years, an average of 51% of yearly unique issues had a second party review attached to it;
  • Considerable differences between regions persist:
    • The majority of Europe based issuers (more than 90%) obtain second party opinions, while only roughly 20% of North American issuers obtain such reviews.
    • Approximately 75% of corporate issuers engage a second party opinion, while only roughly 20% of state and local agency issuers engage a second party opinion.
    • Both shifts are driven by an increased amount of issues from North American municipals, which rarely obtain second party review.

Within the real estate sector, the majority of green bonds issued by corporates utilize second party opinions, though the regional dichotomy described above persists. While both European and Asia-Pacific issuers tend to engage a second party review, North American counterparts do not. Furthermore, within the greater universe of green bonds that dedicate some part of proceeds to green buildings, the majority (60%) uses a second party review (this proportion is slowly increasing). 

Insights from the Working Group dialogue

Discussion between the GRESB Green Bond Working Group members and industry experts revealed interesting and noteworthy trends in the evolving perspective on second party opinions. Some highlights from the conversation included:

  • A second party opinion can be helpful in indicating how a green bond is aligned with the GBPs;
  • Second party opinions are not necessary for a successful green bond issue, yet the process of consultancy on project selection and sustainability framework building, may prove helpful for an issuer. Such input is especially useful prior to an issuer’s first green bond issue, as it informs future strategic decisions and aligns with these the evaluation and assessment of use of proceeds;
  • Second party review is unlikely to improve the issuer’s ability to diversify its investor base. The green bond, itself, provides opportunity for investor diversification;
  • A second party opinion may prove useful to investors, especially if in-house analysis is not conducted. However, second party review is not a stamp of approval per se. It does not mitigate the information asymmetry that is present within the green bond market, especially in cases where the reviewer does not provide an analysis of the possible impacts associated with each project. Also, an opinion is not legally binding; it is usually provided by an ESG scoring agency or other similar type organization;
  • There is cross-pollination of investors within the debt capital markets. Many investors buy green bonds both with and without second party opinions. Regional differences are therefore not so much a function of investor preferences, but rather, those of issuers;
  • Industry experts agreed that there is considerable disparity between second party opinion providers. Introduction of strict standards could resolve this issue, but such standards would be premature given the market still needs space and time for innovation and development.
  • The majority of participants agreed that, especially in the case of real estate, third party certification is preferable to second party opinions. Industry accepted, third-party certified, green building rating schemes provide a level of comfort to investors when considering a particular green bond issue.

The next GRESB Green Bond Working Group will take place on November 17 at the start of the GRESB Investor Track at the Greenbuild Conference in Washington D.C.

Click here to learn more about the GRESB Green Bond Working Group, which is open to all GRESB Members. If you would like more information on how to become part of the Working Group, please contact Sara Anzinger at s.anzinger@gresb.com.