Green Bonds and Socially Responsible Investing

The 2016 Paris Accords highlighted the need for immediate and decisive action in resolving the still-worsening climate crisis. The Accords’ main goals were to reduce the global temperature rise below 2°C above pre-industrial levels, to decrease carbon emissions by 50 percent in 2030, which would prevent a global temperature increase of 1.5°C, to increase the ability of countries to deal with climate change, and to direct finance flows to projects aimed at greenhouse gas reduction and other sustainability efforts.  That last goal of financial reforms enabled companies, governments, and retail investors alike to support environmental protection and sustainable development projects anywhere in the world, and one key facilitator of these environmental reforms has become the green bond market. In this article, we’ll explain what green bonds are and examine their role in the fight against climate change.

What Are Green Bonds?

A bond is a fixed-income instrument that represents a loan made by an investor to a borrower. Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations. Green bonds are just like bonds except that the money raised from investors exclusively finances renewable energy resources, green buildings, and other projects that have a positive environmental impact. They are similar to, but not exactly like, blue bonds, which are bonds for financing water-related and ocean conservation efforts. 

Green bonds are attractive to investors because unlike traditional bonds, the purpose of the green bond must be made apparent.  For example, let’s say Company Corp issues its own bonds in a financing move – its bonds could simply say “for corporate purposes”, not specifying its intended use case.  Company Corp could be using the funds from the bond to pay a fine, but investors would likely never know.  On the other hand, green bond investors will usually know what projects their investments support. Green bonds can sometimes come with tax incentives that also make them more attractive to investors.

A Green Bond History Recap

The concept of the green bond was created in response to the climate crisis.  The first green bond was issued in 2007 by the European Investment Bank, under the label Climate Awareness Bond. The World Bank was next to issue its first green bond in 2008. In 2010, the International Finance Corporation issued its first green bonds following up three years later with the market’s first global US Dollar-benchmark-sized green bonds worth $2 billion. The US government issued its first green bond later that year.  The adoption of green bonds very slowly but surely grew in those first few years, with the first five seeing less than $200 billion in cumulative issuance. 2016 to 2017 was a different story, seeing as much green bond investment in one year as they had in the previous five.  The explosive growth of the green debt market hit a new high in 2020, seeing $1 trillion in cumulative issuances for the first time, with one out of every $5 going to investments in emerging nations.

So Do Green Bonds Really Work?

Green bonds have helped unlock financing for environmentally friendly projects that may not otherwise be available.  Green bonds often require certification by a third party such as the Climate Bonds Standard Board to ensure the bonds finance projects that are beneficial to the environment.  These verified and vetted bonds have enabled many nations to fund projects that put them closer to cleaner air, safer food, and better living standards.  Egypt, for example, was able to secure financing for its transition to green energy by issuing $100 million in green bonds to the International Finance Corporation.

While the third-party guarantees and tax incentives for green bonds are nice, they aren’t the only reasons for the growth we see in the green bond market.  Post-Paris Accords, people of all backgrounds, investors and employees and owners alike, became more aware of the impact of climate change on their lives and began to take it more seriously. As a result, people had another reason to support green bond initiatives.  Much like ethical investing, green bond investing comes with a built-in mission that benefits people around the world.  

The availability of credit for environmental reforms, combined with tax incentives helps make carbon neutrality, and even carbon-zero status a possibility for everyone.  China is currently one of the largest carbon emitters, but the Chinese government has pledged to be carbon neutral by 2060, and green bonds may play a pivotal role in transitioning the billion-person nation toward a more sustainable future. The United States, the biggest cumulative polluter historically, has also turned to green bonds to finance environmental and sustainability efforts.

Green bonds generate much societal benefit that is often not considered.  Traditional investors and companies are often forced to consider profit as a performance metric.  By that standard, chemist Thomas Midgley Jr.’s decision to create cheap, high-quality fuel by placing lead into gasoline would be considered sound, even though doing so killed millions of people and poisoned virtually everyone else. Socially conscious investors recognize the positive impact these green bond-funded environmental projects can have on their investments and in their lives.  If China manages to reach carbon-neutral status by 2060, the projected rise in average global temperature could be lower by 0.2 to 0.3°C.  Everyone around the globe would literally be able to breathe easier.  Millions of dollars normally spent on treating respiratory ailments could be saved. More green bond issuances and project completions can create a snowball effect of value to mankind.  

Green Bonds & Greenwashing

While the majority of green bond projects have been positively received and uncontroversial, several scandalous issuances have created doubts about whether green bond projects really benefit society and the environment.  For instance, in 2015, a green bond was issued by GDF Suez (now the multinational utilities company ENGIE), and a portion of the funds went to the development of the Jirau Dam in Brazil.  In this case, green bonds that were meant to fund environmentally friendly projects contributed to the flooding of over 300 kilometers of rainforests and the disruption and displacement of indigenous communities.  Similarly, the Climate Bonds Initiative reported that 26% of the proceeds from the 2016 green bond issued by China’s Industrial Bank went to funding “clean coal” projects. Clean coal technology refers to any technology that aims to reduce the environmental impact of coal, and clean coal power plants are still net positive on carbon emissions. In other words, green bonds meant to reduce the emission of greenhouse gases directly funded projects that would increase mankind’s carbon footprint. 

Nigeria is the first African country to issue green bonds to fund sustainable projects. The country issued two green bonds worth about 25 billion naira between 2017 and 2019 for environmental projects. However, no significant outcome has been achieved with the proceeds from the bonds. Solar power stations were to be installed at nine Nigerian Universities under the green bonds program. However, as of last year, only two solar power stations had been installed, and one didn’t work. In addition, the afforestation projects meant to expand forests into areas that historically lacked them, were funded from the proceeds of the bonds, but poorly implemented, and the country is now facing calls for increased transparency and accountability in future green bond issuances.

While public scrutiny and rebukes can sometimes be enough to dissuade issuers from issuing a dubious green bond, there really isn’t much that can be done to punish issuers of unethical green bonds because no legal distinction exists between blue, green, or normal bonds.  Any and all kinds of promises could be made to the third party reviewing the veracity of a green bond only for issuers to turn around and fund environmentally toxic projects.  Without a means to hold green bond issuers to a higher standard, the green bond market may continue to leave room for greenwashing. Regulation needs to catch up. Otherwise, the green bond market runs the risk of being used to promote damaging projects and may eventually lose out on investments when investors doubt the projects' legitimacy.

Conclusion

Legitimate green bonds have been a resounding success for countries, companies, and investors looking to be more socially responsible. The bonds are an effective means for investors to achieve the change they want to see in the world.  The first quarter of this century has seen detrimental environmental changes that threaten to bring the whole ecosystem to ruin.  But at the same time, more folks have become more aware of the crisis than ever before, and the tools at our disposal have never been better.  The Coronavirus pandemic may have slowed down the issuing of new bonds, but 2021 still had well over $180 billion in new issuances.  The threat to our climate has never been stronger, but the potential to fund sustainable solutions grows everyday thanks to the ever-growing demand for sustainable investments.

Published on May 27, 2022.

References

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About the Author

Jesse joins the Humankind team from an expert network, where he first developed an interest in Business Operations. Jesse holds a B.A. in Global Affairs from Yale University. Jesse is an avid birdwatcher, with vultures being his favorite species.