How Green Is Your Bond?
- Mar 31, 2021 10:40 pm GMT
A long-simmering problem in the green bond market is coming to a boil. Even though there is record interest in green finance and bonds, no one seems to know the specifics of green.
I have written about this problem before. Back then, the market was only beginning to gather speed. The pandemic accelerated the shift to green technologies, leading to a flood of green and ESG bond offerings in the market. A Bloomberg news report states that offerings of green, social, and sustainability debt has made up more than one in five sales in Europe this year. Last year, it was 7% of the overall debt market.
Unfortunately, while the pandemic has accelerated the shift towards green bonds, it has produced a mismatch with the prevailing economy which still runs on fossil fuels. Corporate organizations and countries have issued green bonds to finance renewable energy and energy efficiency projects but there is little oversight of the process.
Greenwashing is common among such projects and it takes the form of a sheen of ESG-speak for regular projects. Poland, a country which still generates three-fourths of its electricity from coal, issued green bonds but it still refuses to commit the stated EU goal of climate neutrality or zero emissions by 2050.
Indonesia stuck a label of Islam-compliant green bond on $1.25 billion of debt in 2018 but did not provide investors with a list of projects it was planning to fund. Prius manufacturer Toyota issued “Woven Planet” notes earlier this month to create “new services and products by connecting goods, information and cities through software and connected technology centered on people.” As you can probably imagine, that could mean anything – from a service that uses Internet of Things technologies to a human-centric design. Not surprisingly, an investor in the Bloomberg piece linked above said he passed on the chance to invest because it “stretched” the concept of sustainability.
The problem, as one can imagine, is that of oversight. The SEC earlier this year announced the creation of a climate and ESG task force to “identify material gaps or misstatements in issuer’s disclosures of climate risks under existing rules.” The European Union is attempting to draw up a taxonomy of sustainable finance investing so that it can stringently enforce its green investing rules. Even then the problem may not be solved.
According to a report by the Imperial College Business School, green bond rules are skewed towards developed countries, which have mandated stringent standards based on the state of their economy. Developing countries, on the other hand, need fossil fuels to power their growth because it is still cheaper and easier to transport. The business school’s report argues for sustainability-linked bonds, in which interest rates vary based on sustainable targets, and transition bonds, which help finance the transition towards greening of a project.
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