In an era where the climate crisis looms larger than ever, it is heartening to see a growing interest among investors in leveraging their financial resources to combat this global challenge. What is even more intriguing is the recent entry of some major corporate players, including the likes of Apple and Pepsi, into the realm of sustainability finance through green bonds. If nothing else, this helps with mainstreaming sustainability which in itself is a positive. In The Netherlands, my home country, numerous examples abound of organisations that demand pension funds and banks to accept this financial approach and some are already enthusiastically embracing it. Also on the issuer side of the bond, The big Dutch government-owned energy-transmission company Tennet recently sold €3.85bn worth of green-bonds.
Green bonds as a 'good' investment
As we embark on this green finance journey, it is essential to pause and ask ourselves: just how green is ‘green’ finance really? In this short essay green bonds' potential and pitfalls will be discussed in an effort to encourage (retail) investors to delve deeper into what initially may appear as ‘good’ investments and furthermore to critically challenge the value we ascribe to labels such as ‘green’ when navigating the intricate landscape of finance and investment.
In short, a regular bond is a debt instrument that functions as a loan between an issuer and an investor. The investor agrees to give the issuer a certain amount of money for a specific period of time. In exchange, the investor receives periodic interest payments. Enter green bonds, a financial innovation with a distinct purpose – to direct every dollar raised towards projects with clear and tangible environmental or climate benefits, hence the name 'green'. These funds can fuel a range of initiatives, spanning from renewable energy endeavours and energy efficiency enhancements to cleaner transportation systems and responsible waste management projects.
The inherent ambiguity in the ‘green’ of green bonds
However, upon closer scrutiny, it becomes evident that the conditions governing green bonds carry an inherent ambiguity. After all, what exactly qualifies as carrying ‘positive’ environmental or climate benefits? Additionally, the utilisation of (green) bonds within the capitalist framework perpetuates the notion of decoupling, implying that economic growth and climate crisis mitigation are not mutually exclusive but can coexist harmoniously. This perspective stands in stark contrast with some notable environmental scholars like Jason Hickel and Kate Raworth who advocate for alternative approaches, including postgrowth, degrowth and the doughnut-economics paradigm.
Contrarily to ‘normal’ bonds, the primary incremental benefit that green bonds provide investors is as an impact investment; the investor knows they are directly funding green projects and that their capital is directly contributing to environmentally responsible projects. Accordingly, green bonds often command high regard due to their transparency element, a quality that is partially incorporated into the Green Bond Principles.
Green Bond Principles facilitate greenwashing
The Green Bond Principles lay the groundwork for trustworthy bonds, by emphasising the requirement for transparency, accuracy and integrity of the information that will be disclosed and reported by issuers to stakeholders through core components and key recommendations. Regrettably, the language used in these principles, which are meant to safeguard green bonds from misuse, lacks in necessary assertiveness. Terms like ‘should’, ‘encourage’, and ‘recommend’ leave considerable room for interpretation, potentially rendering the initiative susceptible to exploitation.
Besides the language, improvement in the current system of disclosure that ought to assist in transparency accuracy and integrity is necessary for the growth of green bonds as an instrument. To bolster the effectiveness of the GBP and preserve the integrity of the green bond label while simultaneously filtering good-use from bad-use of green bonds, a shift toward more resolute language such as ‘it must’ or ‘it is required’ is imperative. In addition, the label ‘green bond’ would be better safeguarded making it more trustworthy and thus accessible for investors.
Furthermore, research shows that '’companies issuing green bonds do not substantially enhance their capacity for green innovation but instead focus on strategically pursuing green innovation'’. In other words, green bonds can currently be misused as instruments for greenwashing rather than for genuine environmental progress. An example of this is the Spanish gas and oil company Repsol that has announced in a flashy news article filled with green arrows and dense forests that it issued a green bond for technological improvements. Repsol follows the Green Bond Principles and pledges to use the majority of the proceeds for energy-efficiency. In other words, the proceeds of the green bond will be used to extend the life of oil refineries. Effectively syphoning money back into unsustainable energy production. After all, the use of fossil fuels will never become sustainable or green. This indicates that, alongside the potential risks on the issuers side of the green bonds, green bonds are also sub-optimally safeguarded for a greenwashing-motive by investors.
Realising the potential of green bonds
The point here is not to wipe green bonds off the table. On the contrary, green bonds hold tremendous potential to syphon capital from the asset market and channel it towards environmentally responsible investments. The objective here is to challenge the principles governing green bonds in an effort to make them more robust and effective, enabling money to work in favour of climate control, mitigation, and adaptation rather than against it. Undoubtedly, many issuers and investors utilise green bonds for their intended purpose, but it is vital to address those who do not.
To do so, the wording of the Green Bond Principles must move from directive to regulation. This will safeguard green bonds from misuse as well as give clear guidance to what actually is sustainable. It is paramount to adopt smart policy mixes that both incentivize and reward responsible business decisions, especially within the capitalist, market-driven realm of financial assets. It is then possible to create an environment that not only regulates current emissive structures–in all forms– but simultaneously encourages transformative change toward a greener, more sustainable future, effectively creating change while regulating orthodoxy.
This blog post is a part of our student blog series under the elective Sustainable Business, Finance and Circular Economy, University of Oslo.
