Where do green billions go?

The attraction of green bonds lies in their simplicity, but more needs to be done to monitor where funds go so the investment does not leak back into the wider business


A record-breaking surge in green bonds is predicted for 2021 as the investment industry seeks to play a leading role in tackling the climate crisis.

Some predictions envisage $500 billion in green debt being issued this year, nearly double the amount in 2020.

Companies and governments need funding to support their energy transition, enabling them to help fight rising global temperatures and excess carbon emissions.

Green bonds can help and their relative simplicity compared to other so-called ethical debt has attracted investors. It’s often easier to measure the impact of a renewable energy project funded by a green bond than the benefits of a social initiative, for instance.

But are all green bonds used for green purposes or issued by green companies and how do investors know where green bond proceeds have been spent? 

Growing demand for green bonds

Investors have an insatiable appetite for green bonds, which means they offer an attractive, and sometimes cheaper, way for nations or firms to raise money than with other bonds.

This makes it tempting for all types of entities to issue green bonds, even those whose business models contribute greatly to global emissions.

Some investors claim greenwashing, where an issuer overstates its green credentials, remains an issue, partly because there are no laws governing them. A glut of issuance could, therefore, lead to a spectrum of standards.

The International Capital Market Association (ICMA) launched its Green Bond Principles in 2014, a voluntary set of standards to help issuers outline how the proceeds will be used and monitored, and how progress will be communicated. 

Even if a green bond abides by ICMA principles though, investors must ensure any bond they invest in meets their own definition of a green investment.

Assessing the whole investment picture

Bryn Jones, who runs the £2.1-billion Rathbone Ethical Bond Fund, thought to be the world’s largest ethical bond fund available to retail investors, looks for adherence to ICMA principles, but also engages specialist consultants to provide what the industry calls a second-party opinion, or SPO.

This assesses the sustainability credentials of the bond and can provide ongoing monitoring. Impact reports produced by issuers, which outline how money has been spent and the impact it has had, are also key. UK-based utility company SSE and Danish energy firm Ørsted are among those hailed for their impact reports.

Beyond this, Jones says ethical investors must consider the wider context of all green bonds issuers.

“We screen assets out based on certain criteria, meaning we avoid companies with links to the likes of tobacco, alcohol, gambling and animal welfare [abuse],” he says. “If a pharmaceutical company that used animal testing launched a green bond to improve the energy efficiency of its buildings, we would not invest.

“This is because while the use of the bond proceeds are going towards improving the environment, investing in the bond allows that business to generate excess profits from something that’s unethical.”

Focusing on outcomes

Spanish oil giant Repsol split opinion when it launched its €500-million green bond in May 2017, the oil and gas sector’s first. The use of proceeds was stated as supporting investment in projects that would cut its CO2 emissions by 1.2 million tonnes within three years of issuing the bond.

Vigeo Eiris, a rating and research agency that provides SPOs on green bonds, gave it the thumbs up, citing a “positive contribution to sustainable development, aligned with the Green Bond Principles”.

Repsol said the money would not be spent searching for new oil or gas reserves, but would help upgrade existing refineries. However, the pledged reduction in CO2 emissions was just a fraction of the 35.6 million tonnes it emitted in 2016. And it was to be spent upgrading fossil fuel refineries rather than investing in new forms of energy.

“Thus, thinking about actual outcomes, this apparent ‘green’ bond simply upgrades fossil-fuel burning assets, extending their lifespan, improving efficiency, increasing company profitability and in absolute terms increases total emissions over the life of these assets,” according to TwentyFour Asset Management in its September 2020 green bond report. “A potential win for shareholders, but not the environment.” 

Digging deeper into green bonds

The Repsol example shows research into a green bond is critical, especially as there are no legal requirements for issuers to follow. However, efforts to create a standardised framework for green bond reporting are underway.

The Task Force on Climate-Related Financial Disclosures (TCFD), chaired by billionaire Michael Bloomberg, has produced a set of standards to help public companies and organisations improve their climate-related financial reporting. 

The UK plans to make TCFD-aligned disclosures mandatory across the economy by 2025, which means investors should have greater clarity around green bond standards, which will also make comparisons easier.

Karim Arslan, programme director at the Green Finance Institute, says this development is very encouraging because it will “force companies to think about their exposure to climate change and how it impacts their value”.

He also expects the UK government’s plans to launch green government bonds to be a catalyst for the green bond market, as happened when Belgian, Irish and French administrations launched green bonds in their respective countries.

Ongoing development of green bonds

Even with more rigid guidelines, there are still rival standards, with the Climate Bond Initiative developing its own criteria and the European Union working on its Green Bond Standard.

Kenny Watson, investment manager in Liontrust’s sustainable fixed income team, says the mix of rules means “there are lingering issues with assessing just how ‘green’ bonds truly are”, so investors are “taking it on trust” that issuers keep their word.

“A company doesn’t have to put the money in an escrow account,” he says. “You are relying on the finance department to keep the money separate from the rest of its capital.”

Investors sceptical about green bonds may see merit in sustainability-linked bonds, which encourage organisation-wide shifts towards being more sustainable rather than funding a specific project and can link to global climate initiatives, like the UN’s Sustainable Development Goals.

Either way, as Rathbones’ Jones says: “It’s a really exciting year to be investing in ethical bonds because there’s so much out there.”