Organisations around the world issued a record $259bn of green bonds last year, according to the latest report from standard-setting body the Climate Bonds Initiative (CBI), bringing cumulative issuance in this product class to $754bn since its inception in 2007.
In other words, by itself, last year’s issuance made up more than a third of that historic total. The CBI notes that one of the key factors behind this surge was a steady “mainstreaming” of green finance: a trend that pushed annual issuance firstly over the $200bn mark, and then past $250bn, for the very first time.
The report also notes that issuers are making increasing use of a broader range of debt labels related to the United Nations’ Sustainable Development Goals (SDGs), for example, sustainability bonds, social bonds and ESG-linked credit. (See this month’s news roundup for more on those labels.)
In parallel, various sectors are engaged in a growing debate on how to enable zero-carbon transition, including with the use of ESG-linked instruments and the emergence of the ‘transition’ debt label.
All of which sounds incredibly healthy. But the CBI’s big-picture analysis only tells part of the story…
Indeed. To demonstrate how, let’s look at some new research from the Asia-Pacific.
In mid-August, Oxfam Hong Kong – in partnership with corporate sustainability advisers Carbon Care Asia – published Making Green Bonds Work: Social and Environmental Benefits at Community Level.
The report’s title would appear to suggest that in certain, important ways, green bonds currently don’t work – and that is very much the thrust of its findings.
In its opening pages, the report points out that sustainability-conscious investors and civil-society organisations (CSOs) frequently ask two questions:
In their examination of 249 green bonds issued in Asia since 2018, the research partners turned up some disappointing figures. While 83% of the issuers disclosed the sustainability context of their bonds…
“The integrity of the green bond monitoring process,” stated the report, “is also a concern for investors. Many issuers failed to publish impact reports on time.” And among those who did…
It doesn’t take much reading between the lines to sense their frustration.
“The future of green bonds can only be assured if investor confidence is enhanced through better standards and practices with regard to environmental outcomes, social impacts and process integrity,” the report stressed.
“Even among mainstream economists,” it pointed out, “there is growing scepticism about the quality of ESG measurement and disclosure in climate finance.”
At the same time, it noted, “there is emerging evidence that green bonds are retaining value better than mainstream corporate debt during the COVID-19 pandemic – which has spurred more investor interest.”
That combination of scepticism and enthusiasm, the report suggested, “presents an unprecedented opportunity for reform”.
Correct. And further Asia-Pacific stats indicate that stakeholders’ suspicions of greenwashing – or issuers using ESG bond labels as cover for projects that are not strictly environmental – are hardly being mitigated by current practices.
According to a recent news item at the Financial Times, South Korea is the region’s fastest-growing market for socially responsible debt. “Banks, industrial groups and the government have repeatedly touted the benefits to society from the Won64.7 trillion ($54.7bn) in ESG notes issued since May 2018,” the report notes.
However, less than 3% of that funding has been focused solely on environmental projects, raising concerns over “greenwashing” and weak regulatory oversight.
“Of 426 ESG notes issued over the past three years,” the article points out, “only 22 raised debt for ‘environmental’ purposes, while 387 were labelled ‘social’, meaning the funds likely went towards the vaguer objectives of supporting job growth, helping businesses and boosting housing.
The remaining 17, it adds, were classified as ‘sustainable’, meaning the proceeds can be used to fund either environmental or social projects.
“Going forward,” they say in their report, “a broad stakeholder engagement process with the full range of market players – from regulators, issuers and intermediaries to asset owners and standard-setters – is essential in creating a consensus for progress.”
They recommend that, as a priority, stakeholders should consider the following action points:
Matt Packer is a freelance business, finance and leadership journalist