The article in the url below discusses the pros and cons of green bonds, financial instruments that "channel funds raised towards environmentally friendly projects." Immediately apparent is how popular these investments have become in recent years:
"Green bonds are the stars of climate finance … [having] raised $271bn in 2019. … That is only about 4% of total bond issuance worldwide, but it easily makes green bonds the most popular form of eco-friendly debt. Covid-19 has only slightly slowed the rise. On September 2nd Germany issued green paper for the first time. The European Commission is mulling using them to fund just under a third of its €750bn ($888bn) stimulus package."
Yet, in spite of this success, the article notes there are several reasons to question whether green bonds are advancing the cause of reducing carbon emissions, at least to the extent that the companies issuing the bonds would like us to believe. First of all is the issue of who issues the bonds:
"… a new study by the Bank for International Settlements … looked at 200-odd large firms that issued them in 2015-18. They found that firms that issue the most tend to be cleaner in the first place—ie, they produce the least carbon for a given amount of revenue. … Large polluters rarely issue such bonds for fear of being accused of greenwashing, and because the bonds would be excluded from green funds."
This suggests the bonds are being used for projects that would have gone ahead anyway with traditional fundraising (if green bonds did not exist):
"Another finding was that green-bond issuance did not seem to lead to decarbonisation. In the years after issuance, the average carbon intensity oscillates wildly, but the changes are not statistically significant. Moreover, though some issuers claim that tapping the green-bond market lowers their cost of borrowing, data from the IMF suggest a discount is rare (see chart)."
Even though these bonds do not seem to be used for new projects and do not necessarily reduce costs, the article concludes these fashionable investments have other useful applications:
"Some green bonds fund worthy projects that do not reduce carbon footprints, such as improving water management. This is the case for at least a fifth of the stock of green bonds by value, reckons HSBC, a bank. Moreover, many bonds are used to refinance genuinely green projects."
And, of course, green bonds also send an important signal to investors:
"Issuing a green bond sends virtuous signals to regulators. … the green label may also attract a wider pool of lenders than conventional bonds. Green bonds can also make life easier for institutional investors pressed by clients to become more climate-conscious. They could invest directly in green projects, which often take the form of infrastructure. But a failed project may default on its repayments to direct investors. … Issuers also typically disclose the details of projects, such as their size and location. Such morsels are otherwise hard to come by."
More encouraging, it seems, is the emergence of new types of bonds that genuinely do encourage the reduction of carbon emissions:
"Big polluters can use the proceeds of 'transition' bonds to decarbonise. In March Cadent Gas, a British firm, raised a €500m note to reduce leakages from its pipeline, among other things. 'Sustainability-linked' bonds tie interest payments to the achievement of a target. The first of these was issued by Enel, an Italian electricity firm, last year, and is linked to increasing the share of renewables in its generation capacity."
As with many aspects of sustainability, therefore, some progress and lots of good intentions, but nothing nearly as far or as fast as we need:
"For now, climate-conscious investors may have to stick with green bonds—and doing less good for the planet than they may have claimed to their clients."
Take care
David
David Chandler
© Sage Publications, 2020
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The meaning of green
September 19, 2020
The Economist
Late Edition – Final
70
