As the green bond market hits its stride, investors need to be aware of the how “greenwashing” can plague the field. Although touted as environmentally friendly, many green bonds are not as “green” as they appear. Impact investors must ensure they don’t stray into “greenwashed” products and drive capital towards irrelevant or harmful projects.
As noted in Boundless’ new Conservation Finance Market Overview, green bonds have been growing rapidly over the past decade, hitting about $160 billion in 2017 vs. about $4 billion in 2010. Bloomberg notes that returns on the bonds have outpaced those delivered by conventional investment-grade debt in the past year. And green bonds provide a relatively low-risk way for investors to add sustainable securities to their portfolio.
While the green bond market is a welcome addition to the suite of environmentally minded impact investing strategies, institutional take-up has been slow. First, a majority of green bonds are located in Europe. “It is interesting from a global perspective (that) there is more issuance in euros than dollars — it is the only universe I know of to be the case,” said Matthias Dettwiler, head of index fixed income at UBS Asset Management in London in an article for Pensions & Investments.
Secondly, many of these green bonds are falling short in terms of environmental impact. Boundless expert, Ben Guillon of WRA, Inc. notes, “In the absence of recognized standards for green bonds, it is critical for investors and their advisors to conduct a due diligence on the environmental claims of a specific bond issuer, in parallel to the usual financial due diligence. Without that, impact investors may end up supporting profitable ventures but with a very dubious, if not negative, environmental impact.”
A power producer in China, for instance, issued “green bonds” worth 1 billion yuan ($150 million) to finance a 2,000-megawatt (MW) coal-fired power plant. “Clean” coal projects were deemed eligible for green financing in late 2015, a move criticized by both environmental groups and conservation finance experts. “Clean coal is not a solution to lowering the carbon emissions that endanger our climate… it is unwise to use green bonds to support any coal projects, especially coal power and coal chemical projects,” said Huang Wei a Greenpeace energy and climate activist in Beijing.
The green bond concept was developed in 2007 by the Skandinavska Enskilda Banken (SEB) and the World Bank as a response to increased investor demand for climate-related opportunities. Green bonds allow development banks, municipalities, investment funds, non-profits, and other qualified organizations to raise capital for environmental projects by issuing bonds with either fixed or variable rates of return. They are no different from other bonds in that they are driven by interest rates, so risk and returns will behave in the same way.
Boundless expert Gabriel Thoumi, CFA, FRM of Climate Advisers notes the importance of investing in green bonds to conserve precious natural resources. “The 21 companies in the S&P 500 Food Beverage & Tobacco Index have a market capitalization greater than $1.1 trillion with $225 billion in long-term debt and $44 billion in short-term debt outstanding. Given that these companies derive their economic wealth from agriculture resources, much of this debt could be issued as green bonds. The companies could then sustainably manage their natural resources while at the same time mitigate their material deforestation risks.”
Green bonds provide a low-risk opportunity for investors to achieve environmental outcomes and generate substantial returns. But they must look beyond the label to determine if these outcomes are in fact, “green.”