Drop in ESG bond reporting standards not helping sector

03 April 2025 | REDD CEEMEA

by Roberto Barros

“While most issuance reporting is not mandatory, it is required to meet the conditions of many frameworks and standards and most investors consider reporting to be critical, therefore if issuers fail to report there could be consequences” – Climate Bonds Initiative report on Transparency & Reporting in the GSS Bond Market.

In addition to the obvious political headwinds facing bonds tagged under the environmental, social and governance (ESG) label, these instruments face another issue: the quality of the data reported by their issuers.

ESG investing is deeply politicized in the US, while sustainability and green investing are being “regulated into a corner” throughout Europe, according to a recent report by Nuveen, a global investment manager. And yet, “in spite of political and regulatory headwinds and an inconsistent and overwrought lexicon, investor opportunities to steer capital [into ESG] … while seeking to generate excess returns, have never been as vast or accessible as they are today.”

Nevertheless, once a green, social, and sustainability bond is issued, issuers are expected to provide reporting around the use of proceeds and the sustainability-related impact of the financing, according to principles of the International Capital Markets Association (ICMA), for example.

According to a study of deals priced from 2020–2023 involving 75 entities analyzed globally, totallng USD 1.4tn in amount issued, several improvements in terms of reporting are required for issuers, the Climate Bonds Initiative, a not-for-profit organization, reported.

A total of 70 of the 75 issuers (24 issuers were from emerging markets) in the report committed to reporting both allocations and the impacts of the investments. Disclosing the frequency of reporting post-issuance was more common than not, with almost 90% of issuers using public frameworks that committed to annual reporting. About 30% added that they would report within one year of issuance.

However, post-issuance reports are still difficult to track over time as bonds are moving to their second or third years of maturity, which has led to data integrity issues in the secondary bond market, Christina Sewell, an analyst at S&P Global, said during a recent Climate Bonds Initiative webinar. S&P acts as a second party opinion (SPO) that assesses an issuer’s compliance with targets associated with such instruments.

Another problem with post-issuance reporting relates to the reports being published promptly, either on an issuer’s website or on a stock exchange, said Samuel Gan, head of debt capital markets, global sales and origination at exchange SGX Group. Investors have dedicated sustainability teams that monitor such disclosure, though it is not always easily accessible.

Perhaps, unsurprisingly, in the ratings agency's experience, regions with larger and more mature markets have more mature and sophisticated reporting. The Nordic countries and Europe are more sophisticated in their reporting, which is driven by regulations, including the EU’s Corporate Sustainability Reporting Directive, which will come into play this year. In addition, the EU’s Green Bond Standard aims to create a "gold standard" for green bonds, ensuring that the money raised goes to green activities, and is also a part of this drive, Sewell added.

In contrast, practices in North America are evolving and catching up with Europe, she said. There has been less consistency across the board in the US among issuers. “The reporting is more based on outputs through qualitative and narrative case studies as opposed to long-term projected impacts,” Sewell said.

At the same time, standardization is necessary for taxonomies, a classification system defining economic activities and investments considered to be environmentally sustainable. “There are dozens of taxonomies and harmonization at the regional level, but we need more convergence in terms of ESG rating and SPO provider to understand how all these taxonomies fit together to assess issuer progress,” SGX’s Gan said.

The use of standardized methodologies and transparent reporting platforms is necessary for the ongoing development of the ESG bond market. “More standardization is what will get us to ... more financial flows,” Sewell said. Yet much of this drive will inevitably need to be pushed by asset managers who invest in such issuances. “Asset managers should make it more clear how important data quality is for making that decision, both for regulators and their investors,” she said.

The global asset management industry uses several approaches and philosophies to ESG investing, “confusing clients of all sizes and sophistication levels,” Nuveen notes. At least when it comes to fixed income issuers, organizing the ESG bond space through harmonization of reporting standards and methodologies—for example, through initiatives by ICMA or the Climate Bonds Initiatives—is crucial for the integrity of the sector.

The REDD Insight is a market comment produced by senior members of the REDD Intelligence newsrooms. The views expressed in this report are solely those of the author(s) and are not necessarily shared or endorsed by REDD.