Green Bonds Do More Harm than Good
Green Singapore, Photo by Assaad W. Razzouk

Green Bonds Do More Harm than Good

We Should Fix This While We Still Have Time

These days, green bonds seem to feature prominently in the news, with investors from Europe, the US and Asia flocking to them and banks building brand value from their environmental sheen. Designed to fund businesses and projects that have positive environmental benefits and around for some 10 years, they account for a tiny 0.4% of the $100 trillion global bond market. Over-hyped, they are being misused and do more harm than good.

Consider that Poland recently raised €1 billion from a second green bond, after its 2016 €750 million green debut. Poland’s “green” bonds, however, fund token projects that distract from the Polish government’s public (and loud) policy to promote coal and deforestation. Yet the banks involved apparently were fine with what must be the antithesis of green investing: Using green labels to obfuscate environmental irresponsibility and destruction. 

Or consider Indonesia, the first Asian country to sell bonds labelled “green” in a US$1.25 billion deal. Indonesia’s “green” bond paperwork commits the country to nothing except vague promises that all will be green and well. That’s from a country famed for out of control palm oil production driving massive deforestation and haze as well as for an energy sector addicted to oil and coal even though Indonesia is endowed with plentiful, free sun and wind.

Banks underwriting these “green” bonds are responsible for other outrageous outcomes, including “green” bonds funding clean coal (there is no such thing as clean coal) or bonds issued by fossil-fuel powered utilities. “Green” is being promoted as the minuscule exception to the general rule; and an abused exception at that: Ninety-nine point six per cent of the bond market (green bonds account for just 0.4%) is functioning very nicely with no concern whatsoever to whether the money raised is exacerbating climate change and the environment.

Countries and companies don't have to turn responsible or green at all to issue a “green” bond, and that’s just wrong. All they have to do is to sign up to cheap and cheerful voluntary standards such as the Green Bond Principles. Once a bond is issued, there are neither penalties if companies or countries subsequently break their green promises, nor robust ways of measuring and verifying whether these are kept. There isn’t even a consistent definition of what is ‘green’, which suits the market very well: Everyone from oil companies to banks are piling in with questionable deals. It must be incredibly convenient for corporations and sovereign issuers that money is fungible by its very nature, and therefore no one knows where it’s really going.

Meanwhile, we are far from mobilizing the climate finance necessary to keep global warming below 2 degrees centigrade: According to the IEA, we need to invest $1 trillion-a-year to transition the world to clean energy. We are investing, at best, $330 billion. However, despite the rather large volume of hot air from institutional investors about responsible investing and climate risks, it turns out that, for example, they contributed a minuscule 1 per cent to global renewable energy investments in the last three years.

To achieve the necessary impact, all bonds should be green and what we should be developing are solutions for ensuring this is gradually the case. To get there, green bonds should be phased-out so that the fig-leaf investors, issuers and banks are hiding behind to pretend they are making a difference is taken away.

At the same time, corporations, investors and banks should push for the large-scale adoption of an alternative approach recently pioneered by Philips, the Dutch healthcare technology group, French food major Danone, state utility EDF and branded cheese company Bel Group: All have introduced environmental, social and governance (ESG) criteria into their banking lines of credit. The interest rates these groups pay goes up or down depending on how they perform on agreed ESG criteria, periodically checked by a third-party.

The same can be done for every bond (not just “green” bonds), if the corporates and the sovereigns issuing them are genuinely concerned to do the right thing. Issuers would be financially recompensed or penalized based not only on their credit strength during the life of the bond, but also on their contribution over time to the fight against climate change, water stress, pollution, deforestation and ocean acidification. Criteria would be tailored to each company or country (for example water usage would be emphasized in the case of bottling companies whereas greenhouse gas emissions would feature more prominently for electric utilities) and all would be judged on how they perform over time against their ESG commitments.

We have maybe five or ten years to upend how we do business, before climate change takes an irreversible, brutal path. Meanwhile, green bonds are standing in the way of effective climate action.

First published by Eco-Business

Few points: -Green/Climate bonds are here to stay, obviously, number of issues on definition/taxonomy (green), greenwashing, etc., expected, the scrutiny by public and practitioner (stakeholders) will result in iterations and tighter definitions. Anything transformational is not perfect at early stage. Recall, we went from negative screening (SRI/Ethical/faith based) to positive screen over time (ESG), yes, this is gets more air-cover from media than the fixed income counter-part. -Look into exchangable and convertible green bonds, hence, get the equity (ensuing shareholder activism play). Linkage to ESG will cause more problem the cure the problem. -Provisions in the bond contract on use of proceeds (hearing about reference to blockchain use in impact investing), compliments Green Bond Principles, and others. -Now, if I wanted a diversified sustainable portfolio (as along term investor), do I have enough diversification to reduce concentration risk...

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Alter Ego

Senior Principal Managing Investment Wanker at Silverman Sucks, Investment Wanking Division

6y

Thanks for sharing your views. The more debunking of the rotten financial services industry, the better. Especially in countries like Indonesia where in addition to the banks you have corrupt policy makers as well.

11 years ago was first time when somebody used term green business and it was told by chemical factory representative. I asked myself how on earth chemical factory can be green when same factory is one of top pollutant resources in my town. After that way too often all were using same term and competing who is greener. Same started happening with sustainable development. Green and sustainable is way to often abused everywhere. Everything went "green", it is used even in social projects, art, political programs and most of it never had any contact with real sense of "green" nor sustainable or were lies used for campaign. Fancy terms and all use them, all want to be as such without really doing it. Green bonds I guess are for making profit from fancy cover-up actions. Chemical factory can become green only and only if it does not pollute any longer and even then it can't be fully green because of products which may pollute further. Am not one who understands bonds market but I do understand pretending to be something else. I do hope you will find solutions.

Nisheeth Srivastava

Senior Sector Specialist - Energy

6y

What can now or needs to done apart from ESG compliance, also aren’t the evaluation results of these bonds should be made public, so that there should be transparency ...

Gagan Sidhu

Director - Centre for Energy Finance at Council on Energy, Environment and Water

6y

One workaround to limit green funding being routed toward non green use would be to limit use of proceeds for only refinance rather than general corporate purpose type fund raising that is pushed down for both debt and equity use across difficult to trace paths.

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