Green Bonds Green bonds are bonds whose proceeds are used towards financing projects that have a positive environmental impact such as renewable energy. The first green bond was issued by the European Investment Bank in 2007. Since then, the green bond market has ballooned to $1 trillion, with Europe leading the growth in green bond issuance, as investors demand for more sustainable financing deals, based on data from BloombergNEF. The bond markets have also seen green bond issues from supranationals, sovereigns and corporates such as the recent green bond debut from JP Morgan.
“This reflects growing focus from companies and investors on environmental, social and governance (ESG) considerations and how companies can drive outcomes against the UN 2030 sustainable development goals,” said Leon Saunders Calvert, Head of Sustainable Investing & Fund Ratings at Refinitiv. However, it is difficult for investors to assess the effectiveness of green bonds in meeting the environmental aims they were created for, given the lack of globally accepted standards to govern how green bond work. While the International Capital Market Association (ICMA) has established voluntary process guidelines on the key components involved in launching a credible of green bonds, known as Green Bond Principles (GBP), adherence to the guidelines is not legally binding. This has resulted in “greenwashing” cases where issuers raise capital under the pretext of promoting environmental sustainability, when in fact the projects have minimal or even detrimental impact on climate change efforts. For instance, China had drawn flak in 2015 when it included clean coal projects in the list of projects eligible for financing by green bonds.
There is also no consensus over the level of environmental commitment required from issuers since the proceeds from green notes are only channelled to specific projects. It remains debatable whether an issuer is also required to maintain the same level of environmental-friendly practices in its overall activities. According to a report from the Bank for International Settlements, the lack of evidence of that green bonds help to improve firms’ carbon footprints underscores the need for firms to be assigned credit score-style “green ratings�. This would help investors to perform their own due diligence to assess the true environmental impact of green bonds, while giving firms an incentive to lower their carbon emissions.