When green bonds turn brown: Thames Water kicks up a stink

By Chris Bowman, Associate Director

Thames Water has been on the front pages for all the wrong reasons, discharging millions of litres of undiluted sewage into two rivers and earning itself a £3.3m fine – only the latest in a litany of such headlines.

It has also been on the business pages, ostensibly for all the right reasons: it has issued around $2.8 billion of green bonds across four issues since the start of 2022.

It doesn’t take an expert to notice a discrepancy here. And in fact, the some 200 ESG funds that eagerly snapped up the green bonds seem to be suffering some buyers’ remorse, with prices plummeting.

This will be music to the ears of the anti-ESG crowd, who will pounce on any opportunity to decry the whole concept as a woke folly, motivated for all the wrong reasons, and irretrievably flawed.

And you know what – far be it from me to argue with investment experts on what constitutes a good investment. If your focus is on making money and these bonds lose it, then who can argue that poor decisions haven’t been made?

However, it strikes me – as an admittedly lowly comms professional – that if we zoom out a little, this is arguably a prime example of ESG as a concept doing exactly what it’s meant to.

ESG at root is a movement about information and data, not values – at least, not a prescriptive set of values. ESG gives the data to make decisions based on principle, but is in itself principle agnostic.

To wit, ‘ESG’ is not about some vague yet specific set of ‘woke’ principles applied to an investment strategy. It may be the case that there is broad consensus that climate change is bad and civil rights are good, but fundamentally ESG does not require that you agree. If you think the opposite – e.g. that climate change is a hoax and the oil companies that stay the course will rake it in – then you can use the same data, information and analysis to inform your strategy.

ESG is about providing a broader set of information for investors to factor into their decisions. It is about free markets and free choice. Want to apply some specific criteria to your portfolio? Go for it. Don’t care? Equally, no problem – but with increasing ESG data disclosure – such as that mandated by the EU’s SFDR – you can make an informed choice.

So, back to Thames Water. What are we to make of these green bonds turning brown? Is it a searing indictment of the very notion of ESG? No, this is exactly what we want to see – companies putting out ESG related data and instruments and being punished by the market when they turn out to be effluent. Accountability. Proof that greenwashing can’t get all the stains out.

It is a childish idea that every ESG/sustainable/green investment would turn out to be squeaky clean, and I don’t think anyone ever really believed it. It is therefore a strawman to use incidents like this as evidence that the whole concept is bunk. What we have is a movement to provide access to a broader, deeper set of data to inform investment decisions from a new angle, and people changing their decisions when new information comes to light.

ESG has come in for a kicking in the media recently, with the op-ed pendulum seeming to swing behind the naysayers for now. However, there is real value in firms improving their ESG performance and communicating about doing so. It would be a shame if anti-ESG clamour around events like this scared communicators into leaving this value on the table – though care should always be taken.

No doubt ESG will continue to evolve. Maybe the name will even change. But the genie is not going back in the bottle – people accustomed to a greater degree of data and transparency will not happily revert to a less-informed view. That deserves pointing out and defending.

All investments involve risks including possible loss of principal, or your green bonds turning brown. Past green performance does not guarantee future green performance. Discretion is advised.