Will a lack of transparency hurt green bonds?

The meteoric growth of green bonds is a sign that the finance industry is finally waking up to the potential of sustainability. But speakers at a recent green finance forum said that the opacity of how the funds are used means that green bonds are often little more than greenwash. 

Green bonds are no more than pieces of paper sold by banks that do nothing to verify their sustainability credentials, speakers suggested at a recent sustainable finance event in Singapore. 

Fixing the green bonds credibility gap will take time and a rethink of the entire finance industry, sustainability, business and finance experts said at the Unlocking capital for sustainability forum at the Grand Copthorne Waterfront Hotel in Singapore earlier this month.

Assaad Razzouk, chief executive officer of renewable energy company Sindicatum, said: “I’ve looked at green bond issuers over the last two years, and the list of issuers is a joke.”

He said banks that finance coal projects and utility companies that own fossil fuel plants are issuing “fungible” green bonds—that is, funding once injected becomes untraceable—and the lack of transparency makes it difficult for investors to know that the funding is actually going towards a sustainable cause.

“Some 90 per cent of green bonds appear to have been issued as transactions to save yield, look good, or greenwash, with no actual impact on the ground,” Razzouk said. 

He said: “Green bonds are issued by banks to sell paper without [ensuring sustainable] fundamentals.” 

Green bonds are financial products designed to raise funds for projects that reap environmental benefits, such as renewable energy development and pollution prevention. They have been a bright spot in a global finance industry that has been slow to adopt environmental and social principles. 

In 2017, green bond issuance broke the $100 billion mark to reach a record $155.5 billion, according to the Climate Bonds Initiative. The non-profit estimates that for 2018, issuance could hit $250-300 billion.

China has been a main driver in the growth of green bonds, and was responsible for one-third of last year’s issuance, though the US is the world’s top green bond issuer. India is also likely to drive green bond growth in the year ahead, while other Asian countries such as Singapore and Malaysia dip their toes in the market.

Rahul Sheth, executive director of Standard Chartered’s capital solutions team, said that this was “not the first time this question [of transparency] has come up” about green bonds, in response to Razzouk’s comments.

He said that while green bonds are relatively new products and guided by voluntary standards, they have helped to diversify investments in the capital market where certain funds and investors are looking for environmentally conscious projects to back.

“You said the money is fungible and that’s absolutely correct. [But] you could have a coal manufacturing plant on the one hand and be setting up a renewable energy plant on the other, and still get your green bond issued on the back of the renewable energy plant,” Sheth explained before the 100-strong audience at the forum.

“All the green bond standards say is that proceeds from the bond should be directed to green projects, irrespective of whether your entire business is environmentally friendly or not.”

But Sheth said he expects standards to evolve over time, and for transparency and accountability to become a bigger factor as more green bonds are issued.

Putting the green in green bonds

To have green bonds truly live up to their “green” reputation and channel funds into projects that will make a difference, speakers offered a number of suggestions.

Responding to Sheth’s comments, Razzouk said that it would be too late to wait for the fifth bond to be rolled out before beginning to ask where the funds raised through green bonds have gone. “The issue is the short term incentive system of the stock and bond markets, and the compensation [system] of the entire global financial service industry.”

“If you keep paying them bonuses every 12 months, how is he going to even think about green bonds? Even if bankers cared, the system doesn’t help him care,” said the CEO of Sindicatum, which earlier this year released its first green bond.

He suggested that changing the timeframe of fiduciary duties, which are legally binding obligations for bankers or financial institutes to act in their client’s best interests. A longer timeframe would force the industry to think about future risks, so they will “no longer have the convenient excuse that they are focused on the three-month, six-month or one year [duties]”.

Another way would be to impose a global, flat-price carbon tax that’s costly enough to remove the incentive to move more funding into genuine environmentally beneficial projects, he said.

Standard Chartered’s Sheth called for changes to regulations for investors, so that they are required to allocate a percentage of their funds into sustainable investments.

“Secondly, we could look to state-sponsored or sovereign funds, or even a sub-fund of that, to specifically invest in green bonds within the country or the region. That would create a captive investor base for issuers in the region,” he said.

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