Green bonds: Is the climate really greener on the other side?

Published on November 2, 2017 by Prashant Gupta

Climate change, as highlighted in the previous part, is one of the major challenges facing mankind whose mitigation requires huge investments. Concerns over this environmental issue led to the evolution of ESG investments, which spurred the growth of green bonds. However, as the market for green bonds began to grow so did the confusion about what exactly allows a bond to be labeled “green.” Ascertaining what counts as green becomes a major challenge, predominantly when conventionally heavily polluting industries seek funding. Apparently, any entity that wants to raise funds via green bonds can do so by just convincing investors through its stated intention, as there are no universally verifiable standards. For example, in China, green bonds are being used to fund “clean” coal projects. Similarly, fossil-fuel companies around the globe are funding their projects by labeling them green.

Green Movement or Greenwash?

Investors have now started asking whether green bonds have any positive impact on the climate or whether they are just a case of “greenwashing” – the risk that funds raised are used for activities that do not have a direct and positive environmental impact. Is this innovation really protecting the environment?

Addressing Issues

While there are no regulatory bodies to address the issue, a group of issuers, investors, supranational agencies, and environmental organizations has created a set of voluntary standards, named Green Bond Principles, for the benefit of investors. Moreover, rating companies have started to track the environmental effect of projects funded by green bonds, such as reduction in greenhouse gases or impact on air pollution. These initiatives will bring transparency and provide assurance, which will help investors rely on bond-sale promises, which are hard to verify by investors alone.

Further, agencies, such as The Climate Bonds Initiative, have been organized to establish standards on what is green. They have identified independent verifiers, who perform independent environmental due diligence and provide a second opinion by way of certifying whether a particular project is green or gray. Issuers are also actively working to address investor concerns by enhancing transparency. According to Bloomberg New Energy Finance, by the end of 2016, about 80% (up from about 70% during Q1 2015) of issuers had promised to report the use of bond proceeds and the environmental impact else they would be willing to undergo external review. Quantification and reporting of the positive environmental impact will provide more credibility to these bonds. So far this is a work in progress, and awareness of these standards or principles among investors will take time.

Conclusion

We agree that green bond is not a “magic wand” to tackle the climate change problem, but it is certainly moving market participants in the right direction. To help green bonds reach their full potential to abate climate change, active government or regulatory involvement and continued private engagement are essential. Nevertheless, as an investment tool, this is a great opportunity to realize our common goal of sustainable development that would help protect our planet in the long run.

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