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Doubts over green bonds’ impact in Asia’s low-carbon transition

A new study has uncovered scant disclosure by green bond issuers of their environmental impact, and a lack of social safeguards to protect communities from unintended consequences of financed projects.

Green bonds have surged in popularity among investors in recent years and are seen as an important tool to finance environmentally friendly projects. But whether they have helped to accelerate the low-carbon transition in developing Asia remains in doubt.

This is because most green bonds issued in emerging Asian markets have offered scant information on the environmental impact of projects they fund, a new study by development organisation Oxfam Hong Kong and consultancy Carbon Care Asia has found.

The study, released earlier this month, analysed 249 green bonds issued between January 2018 and September 2019 in Asia, excluding the more developed markets of Japan, South Korea and Australia. The total issue amount was US$84 billion, with about two-thirds of the sum, or US$57 billion, issued in China. Southeast Asia accounted for US$4.9 billion of the issue amount.

Only a quarter of the green bond issuers offered details on how they identified the environmental impact of projects funded, according to the study, Making Green Bonds Work: Social and Environmental Benefits at Community Level. A common key performance indicator for renewable energy, energy efficiency and clean transportation projects is the amount of annual greenhouse gas emissions avoided.

Despite claiming to contribute to climate goals, only 3 per cent of issuers mentioned climate resilience measures in their green bond frameworks. Only 1 per cent indicated they adopted the best available technology in project design—an important disclosure because of the lost opportunity for maximum environmental benefits if such technology is not deployed.

Leading companies worldwide are using science-based targets to chart their carbon reduction, but only one bond issuer, Swire Properties, adopted the approach, the study noted.

There is an urgency to improve the standards and practices of green and climate bonds. 

John Sayer, director, Carbon Care Asia

“It is evident from our research that there exists a significant gap between current practice and the expectations of investors and community at large with regard to green bond integrity,” the report stated. “While much of the claims of environmental benefits may be valid, the communication of supportive evidence for such claims is patchy at best, or non-existent at worst.”

Ensuring no social harm

The bond issuers were also deficient in social safeguards. Only 6 per cent of them had a process to identify the social impact of funded projects, and 4 per cent had a process to manage social risks. None had identified any action to prevent negative impact on the United Nations’ Sustainable Development Goals (SDGs).

While green bonds do not embed explicit social goals in their design, they should contribute to social well-being or, at the minimum, not contravene the SDGs, the report said. Oxfam Hong Kong’s international programme director Chan Mayling urged issuers to embed more safeguards to ensure that communities, such as villages affected by hydropower dams or onshore wind farms, do not suffer unintended consequences of financed projects.

“There is an urgency to improve the standards and practices of green and climate bonds,” said John Sayer, director of Carbon Care Asia and senior advisor to the research project. “Each one-degree rise in average global temperature puts an additional one billion people outside the optimal climate zone for food production and outdoor work.”

The report highlighted the shortcomings and best practices of some bond issuers.

The 45 billion yuan (US$6 billion) green bonds issued by the China Three Gorges Corp carried environmental and social risks, for instance. Among the projects financed was the 10.2 gigawatt Wudongde dam in Sichuan/Yunnan, which has been associated with reservoir-induced landslides and seismic hazards, and whose construction led to the displacement of at least 14,200 people, the report stated.

Issuers that demonstrated best practices included China’s Fuzhou Water Investment and Development. For its 500 million yuan (US$73 million) bond issue, the company hired a reputable third-party green auditor to evaluate its projects, set key performance indicators including yearly water supply targets, and disclosed various environmental risks and their impact on the company’s operations.

Another was Indonesia’s PT Sarana Multi Infrastruktur (Persero), which issued a comprehensive annual report 15 months after its first green bond issuance sized at US$1.25 billion.

The study recommended that issuers use quantitative measures to assess and disclose the bonds’ environmental contributions.  They should use best available technologies, adopt a do-no-harm principle to the SDGs, conduct community engagement for projects, and adopt science-based targets for carbon reduction.

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