(Bloomberg) -- Investors for Paris Compliance, a climate change activist group, is asking bond and loan industry trade associations to tighten principles used to issue environmentally-friendly labeled debt that they say currently enables some borrowers to effectively increase pollution.

The Canadian advocacy group is asking a committee overseeing principles for ethical financing including sustainability-linked bonds at Zurich-based International Capital Markets Association to issue guidance to actually reduce overall admissions, the organization said in an April 25 letter.

“This loophole is exploited by participants through the use, for example, of ‘intensity based’ targets that let overall emissions rise,” the group’s director of corporate engagement Matt Price said in the letter addressed to Denise Odaro, chair of ICMA’s hosted executive committee on sustainable bond principles. “We believe this issue poses an existential risk to the entire sustainable bond enterprise.”

Sustainability-linked bonds generally penalize issuers with higher borrowing costs if they don’t meet certain environmental, social and governance metrics. If the borrower meets or exceeds targets, coupons remain unchanged. In contrast to green or sustainable bonds, whose use of proceeds are allocated according to a set range of project types, companies can use sustainability-linked bonds as part of their general funding plans. 

“The problem is germane to all three of the sustainable-themed bond principles but is particularly acute with regards to the sustainability-linked bond principles, since these are not use-of-proceeds instruments,” Price said.

Among the examples cited in the letter, Tamarack Valley Energy’s issuance of sustainability-linked bonds earlier this year was partially used to acquire another oil and gas company, enabling the borrower to expand production, the group said. A Tamarack executive didn’t reply to requests for a comment.

The advocacy group is also sending a separate letter to the Loan Syndications and Trading Association’s executive director Lee Shaiman asking the industry group to update its Sustainability-Linked Loan Principles to preclude deals that go toward “activities that are increasing greenhouse gas emissions during the climate crisis – the opposite result of that intended.”

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