Published on November 2, 2017 by Prashant Gupta
Climate change, as highlighted in the previous part, is one of the major challenges facing mankind whose mitigation requires huge investments. Concerns over this environmental issue led to the evolution of ESG investments, which spurred the growth of green bonds. However, as the market for green bonds began to grow so did the confusion about what exactly allows a bond to be labeled “green.” Ascertaining what counts as green becomes a major challenge, predominantly when conventionally heavily polluting industries seek funding. Apparently, any entity that wants to raise funds via green bonds can do so by just convincing investors through its stated intention, as there are no universally verifiable standards. For example, in China, green bonds are being used to fund “clean” coal projects. Similarly, fossil-fuel companies around the globe are funding their projects by labeling them green.
Green Movement or Greenwash?
Investors have now started asking whether green bonds have any positive impact on the climate or whether they are just a case of “greenwashing” – the risk that funds raised are used for activities that do not have a direct and positive environmental impact. Is this innovation really protecting the environment?
While there are no regulatory bodies to address the issue, a group of issuers, investors, supranational agencies, and environmental organizations has created a set of voluntary standards, named Green Bond Principles, for the benefit of investors. Moreover, rating companies have started to track the environmental effect of projects funded by green bonds, such as reduction in greenhouse gases or impact on air pollution. These initiatives will bring transparency and provide assurance, which will help investors rely on bond-sale promises, which are hard to verify by investors alone.
Further, agencies, such as The Climate Bonds Initiative, have been organized to establish standards on what is green. They have identified independent verifiers, who perform independent environmental due diligence and provide a second opinion by way of certifying whether a particular project is green or gray. Issuers are also actively working to address investor concerns by enhancing transparency. According to Bloomberg New Energy Finance, by the end of 2016, about 80% (up from about 70% during Q1 2015) of issuers had promised to report the use of bond proceeds and the environmental impact else they would be willing to undergo external review. Quantification and reporting of the positive environmental impact will provide more credibility to these bonds. So far this is a work in progress, and awareness of these standards or principles among investors will take time.
We agree that green bond is not a “magic wand” to tackle the climate change problem, but it is certainly moving market participants in the right direction. To help green bonds reach their full potential to abate climate change, active government or regulatory involvement and continued private engagement are essential. Nevertheless, as an investment tool, this is a great opportunity to realize our common goal of sustainable development that would help protect our planet in the long run.
What's your view?
Thank you for sharing your Comments
About the Author
Prashant is part of Private Equity & Consulting team and has been with the company for over 11 years. He has a total work experience of over 16 years and has rich exposure working on a variety of research and analysis assignments serving clients ranging from top asset managers, PE firms to bulge bracket investment banks.
He has extensive experience working on assignments covering in depth end to end credit analysis covering capital structure analysis, corporate structure analysis including guarantees and structural subordination case, covenant compliance analysis, financial modeling & valuation, asset recovery analysis, relative value analysis of HY bonds, amongst others.
Prashant holds an MBA in Finance and a Bachelor’s degree in Engineering (Electronics). He is also a CFA charterholder.
11-May-2018 04:28:47 am
I am a mechanical engineer from Ghana in West Africa; living here in Austria and I make research on environmental issues; including electric vehicles, the use of palm kernel oil as advanced non-toxic and anti-oxidant biofuel to replace all the toxic fossil fuels, which are severely destroying our entire planet. I work also on natural plastics to replace the toxic petroleum plastics, which usually end up in our oceans, rivers and lakes, hence the present name \"CEAN PLASTICS\".To combat climate change and global warming practically and earnestly, we must try to get rid of air pollution and this is exactly what my project will do. I will hereby ask your group for a credit of 15 Million Dollars to grow the crops of palm oil, natural rubber,coconut,cocoa, sheabutter and also cassava in my native Ghana on a very large-scale plantation, i.e. about 60 plantations, with each single plantation of a size of about 8-10 square kilometers wide, The crops will be grown only with natural fertilizers and pesticides; i.e. we shall totally avoid any use of toxic chemicals on our crops. We shall always put our entire farming process on the internet for interested buyers,companies and enterprises to see for themselves and we may even invite them cordially to come to Ghana to verify the authenticity of our green crops themselves. Due to the nature and the purity of our green crops; many nations and also major companies will rush to buy them like very hot cakes and so I can fully repay your group even 20 Million Dollars for the 15 Million within 5-6 years and later extend our plantations all over the tropics to create millions of green jobs to improve their standard of living and also put an end to this present global migration. When we have our plantations, spread all over the world, then we can also build palm oil and palm kernel oil processing plants, all over the world to produce greener energy to get rid of all the toxic fossil fuels, which spew a lot of toxic chemicals into our atmosphere daily. For you information; we shall always bury our carbon emissions in the ground to prevent air pollution, which is the main cause of greenhouse gases. Secondly; we shall build numerous natural plastics factories around the world o put an end to these toxic plastics, which are dumped into our oceans daily. We shall blend our NPT crops with natural basic mineral oxides like: alumna,silica,kaolin and alike to produce non-toxic natural plastics, which will be 100% recyclable and therefore won\'t again end up in our oceans. Please grant me this much needed credit to grow my plantations now to be able to tackle and solve our greenhouse gases and ocean plastics problems in true deeds and no more in empty words, I have a lot to offer to our planet and so please get me this credit now. Thank you very much.
COP27 – landmark collaboration for climate fin....
UNFCCC: overview and key functions The annual gatherings termed the United Nations Climat....Read More
ESG regulations in Honk Kong & Singapore....
Introduction Researchers recently confirmed a 25% increase in global warming in 2022 – ....Read More
Digital ESG communications from a compliance per....
An environmental, social and governance (ESG) framework helps shareholders recognise how a....Read More
Private debt gaining traction as an asset cla
Investors globally continue to shift away from traditional asset classes towards alternati....Read More
SPACs were hot in 2020 and are hotter now!
Special-purpose acquisition companies (SPACs) have become a notable trend in the IPO world....Read More
Early-stage companies – A case of fallen an
We are now almost 12 months into a global pandemic with no clear end in sight. When global....Read More
Like the way we think?
Next time we post something new, we'll send it to your inbox