Bond markets: After Volkswagen, trust is key for green growth
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Bond markets: After Volkswagen, trust is key for green growth

Green market verdict on VW fall-out; scandal ‘presents opportunity’ for green bonds.

by Catherine Snowdon and Tessa Wilkie

After Volkswagen admitted in September to fitting 11 million cars with ‘defeat device’ software to help vehicles pass emissions tests, market participants said any issuer without an established record could find it harder to enter the green bond market — which has already suffered a big drop in volumes this year.

Global green bond volumes so far in 2015 have lagged last year, which was a record year for the sector. Green bond issuance in 2015 stands at $23.8 billion via 77 deals, down from $30 billion via 70 in the same period last year, according to Dealogic.

Euromoney in October polled a select group of issuers, investors and bankers in the green bond sector, asking their opinions on key issues affecting the green bond market and what, if any, impact the VW scandal would have on climate finance projects.

Will the VW scandal make investors more or less likely to buy green bonds?

Less likely – anything climate related will be considered toxic for now


Investors will be wary but they will continue to buy trusted names


More likely – investors will be even more keen on buying debt with a segregated use of proceeds




Source: Euromoney Research Group

Asked whether the scandal would make investors more or less likely to buy green bonds, 45% said that investors would be wary but would continue to buy trusted names. Some market participants think the scandal could boost demand for green bonds, as 36% said investors would be keener on buying debt with a segregated use of proceeds.

VW itself might even look to issue a green bond, at a cheaper funding level than it could achieve with a regular bond, one market participant suggested.


No one thought that anything climate-related would be considered toxic for now.

Asked if the emissions scandal would damage the growth of the green bond market, 27% said trusted names would be fine but it would be harder for new entrants outside the sovereign, supranational and agency sector.

However, many thought the scandal would be an opportunity for issuers to showcase their green credentials. Some 32% said the scandal would help to strengthen the market as investors look increasingly to issuers that have made a voluntary commitment to climate mitigation.

The remainder felt that as VW is not a green bond issuer, the scandal would not harm the overall sector.

But market participants clearly are worried about the scandal. Some 30% called it a “big blow” to efforts to combat climate change, fearing it would make people “cynical” about such projects.

This is firm-specific. Some investors may need to invest more to make sure they know what they are doing, but the VW case is really one of fraud, which is almost impossible to detect

MSCI respondent

“Extrapolation from what is a case of deliberate fraud around a specific piece of technology in the context of specific incentives to a much broader space of sustainability practices [is my biggest worry],” said one leading green bond investor.

Contagion The idea that the drama might not be over is also playing on people’s minds, with 20% saying their biggest worry was that similar scandals could emerge from other carmakers soon.

A further 10% said that only the most sophisticated investors would be able to show they had the nous to buy green bonds.

Further reading

Green _bonds_160px

Green Bonds Survey: What investors want

The majority of respondents, 72%, felt that investors would not be more likely to insist on a green rating on a bond in the wake of the scandal. Almost half, 45%, said that if regulators can be fooled, so can the ratings agencies, so investors will have to do their own homework. This was in response to the question of whether investors would be more likely to require a rating on a green bond. Another 27% said that those issuers that have voluntarily engaged in a green bond are still as trustworthy as ever.

When asked what the scandal would mean for impact reporting, 68% of respondents said that it would increase as it will give investors more faith that their money is doing what it is supposed to.

Not all were convinced, however, as 23% said investors should revert to good old-fashioned due diligence.

There was also division over the issue of whether this market needs regulation. Asked if green bonds should be regulated, 45% said no as regulation would stifle market growth, while 36% said the market should be but that regulation needs to be taken slowly.


The scandal has highlighted the need for investors to carry out thorough analysis of a company before buying debt. VW had well-publicised trouble at the top, with infighting and rivalry among the board often reported.

MSCI publishes an index with environmental, social and governance (ESG) factors at its core and, even before the emissions scandal, VW’s corporate governance score was lower than 72% of companies globally.

Respondents said there was no black-and-white answer to whether investors would have to dedicate more human resources to the green bond selection process.

“This is really firm-specific,” said one. “Some investors may need to invest more to make sure they know what they are doing, but the VW case is really one of fraud, which is almost impossible to detect.” 

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