Connecting financing from investors to climate and environmental projects

Green bonds have been around since 2007, when the European Investment Bank issued its Climate Awareness Bond, and the World Bank issued its green bond after a phone call from Swedish pension funds looking for climate investments in 2008. Since then, we have seen a noticeable increase in the issuing of green bonds – particularly over the last couple of years and particularly in Europe. In 2019, the wider European market accounted for 45% of global green bond issuance.

Global green bond and green loan issuance reached USD 257.7bn in 2019, marking a new global record.

Green bonds are part of the strengthening of the global green transition, which especially aims to reduce carbon emissions, as well as being an answer to the increasing investor interest for sustainable options with a measurable effect. This investor interest in a social and environmental purpose of their investments reflects a fundamental shift in the bond market.

Using debt capital markets to fund sustainable solutions

A green bond, or climate bond, is a fixed-income instrument designed specifically to fund green, i.e. climate or environmental, projects or investments, such as renewable energy, energy optimisation and other green projects, which contribute to reducing CO2 emissions. The bonds can be issued by both public and private companies.

The majority of green bonds issued has green use of proceeds or are asset-linked bonds. Proceeds from these bonds are set aside for green projects, but they are backed by the issuer’s entire balance sheet. Also, the same credit rating applies to the green bonds as for the issuer’s other bonds.

As requirements for green bonds are different than regular bonds in terms of tracking, monitoring and reporting on use of proceeds, green bonds have some additional transaction costs. However, the Climate Bonds Initiative, a non-profit international organisation, states the following advantages of green bonds: They highlight the issuer’s green assets/business, create a positive marketing story and diversify issuer’s investor base (as the issuer can now attract ESG/RI specialist investors).

The lack of regulations for green bonds

When is a “green bond” truly green? Despite the definition of a green bond above, there is not an official set definition of a green bond or a sustainable investment. As of now, the green bond market is unregulated, however, certification schemes and guidelines, such as the Climate Bonds Standards, the Green Bonds Principles from International Market Capital Association and Bloomberg Barclays MSCI Green Bond Indices are available to issuers and investors, but on a voluntary basis and without explicit definitions.

Since March 2018, the European Commission has been committed to create standards and labels for green financial products. As part of the EU’s 2020 strategy for sustainable finance, the EU will launch a Green Bond Standard, which will set up minimum safeguards that activities have to comply with in order to qualify as environmentally sustainable, however, the Standard will most likely be voluntary and non-legislative.

Bonds that are issued in the green segment of big stock exchanges, such as the London Stock Exchange, need to have a green label, which must be certified by an agency. But again, there is a lack of legislation in terms of third-party rating agencies and green bonds together with the variable definitions of green bonds.

And one thing is the green bond itself – another factor is the issuer; how green is the company issuing the green bond? Currently, it is very difficult to assess and compare the sustainability level of a company. One way of doing it is through a company’s ESG rating (Environmental, Social and Governance) – but as with the bonds, there is an issue with varying approaches to the ESG ratings by the rating agencies. ESG ratings simply lack regulated methodologies.

With no legislation the green capital market is to a large degree based on self-regulation, market demand and investor research. Today, nothing prevents companies from pollution-intensive industries to issue seemingly “green” bonds.

Greenwashing green bonds

With the lack of regulation on the market of green bonds, there is a risk of greenwashing. The increased global focus on the environment and sustainability leads to a tremendous marketing potential in presenting your company as green.

Greenwashing is the process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound.

The temptation of a new green logo might be bigger than the reality of how green one company operates. The same goes for the green bonds due to the increased investor demand for green investments. The contradictory term “clean coal” is one that clearly shows how companies and industries urge to appear green – but it also makes the need for regulation on the market for green bonds stand out.

Purpose matters more than ever

With the noticeable change in investor interest, where the purpose of the investment has become significant, there seems to be endless possibilities for bonds of all the colours of the rainbow. A great place to go from could be the UN’s 17 Sustainable Development Goals, which each focuses on a global goal, such as poverty, inequality, climate change, environmental degradation, peace and justice – each goal with its own colour symbol.

We have already seen social bonds that raise funds for projects with positive social outcomes, as well as blue bonds that finance marine and ocean-based projects with positive environmental, economic and climate benefits.

What colour will be next?