Green bonds turn sour after airport project is cancelled.
When Mexico City Airport Trust issued $6 billion of green bonds in 2016 and 2017 in order to finance the construction of a new airport, the New Mexico City International airport, the investor community welcomed a green issuance from a sector that hadn’t been linked to sustainability and the green financial markets before. The bonds exceeded ICMA Green Bond Principles (“GBP”) standards, obtaining a second party opinion from Sustainalytics as well as green instrument evaluations from rating agencies Moody’s and S&P.
However, in October 2018, the newly elected Mexican government shocked investors when it announced to halt the construction of the airport, following a public referendum in the same month that had resulted in a majority of voters demanding for the new airport not to be built.
After the shock outcome, the green airport bonds unsurprisingly underperformed the market – by as much as 200 basis points in November. Upending market confidence and receiving harsh critique from investors for an initial offer, the government launched a buy back package, capped at $1.8 billion of $6 billion outstanding, with a buyback price of par plus accrued and unpaid interest.
While this offer placated investors concerned about the value of their investments, the green evaluators involved in the project took immediate action: Moody’s lowered its green bond assessment from GB5 (highest score) to GB1 (lowest score), noting that the proceeds (40% of scoring) no longer constitute qualifying environmental projects. S&P withdrew its green evaluation report, emphasising that the residual bonds were different to what had been evaluated at the time of the initial bonds offer.
Continuous independent assessments vital to ensure green stays green
Despite market observers welcoming these steps and some investors appreciating the tender opportunity after their holdings lost their expected environmental benefits, the high profile project has renewed some investors’ scepticism towards green issuances.
With independent assurance companies mitigating the risks of bonds-“greenwashing”, the focus has now shifted towards measures that ensure a green bond remains a green bond until the end of its maturity and that issuers’ reporting about the developments of their green projects is in fact true.
Hence, in addition to “at-issuance” verification, green market players now discuss the need for external assessors regularly reporting back to investors on the development of the projects underlying a green bond. This will almost certainly become a requirement for issuers, who aren’t already providing such on-going external assurance, and will become a standard question in the long list of queries green investors demand an answer for during their due diligence.
Another challenge remains: Mexico City Airport Trust’s residual bonds are still technically labelled as green – the proceeds are still specified to be used for sustainability improvements – and hence likely still appear in various green bond indices. This sheds a light on the risk of such “fake green bonds” muddying the waters of green indices. To maintain the integrity of the green label, banks, portfolio managers and other capital markets players equally have to commit in this context to stringent standards and controls when selecting green bonds for their indices and swiftly remove bonds that have lost their “greenness”.