The interest in green bonds has been growing with $694 billion in labeled and unlabeled green bonds outstanding in 2016. Since the European Investment Bank issued the first green bonds in 2007, much of the action has been coming from development banks and municipalities, but in recent years, corporations have been showing interest as well.
In the past year, Apple released a $1.5B green bond to help the company meet its renewable energy and efficiency goals along with switching towards more biodegradable materials. Starbucks’ $500M sustainability bond, issued shortly after Apple’s, is expected to go towards sustainable agriculture practices and ethical coffee sourcing.
At SustainAbility, we see green or sustainability labeled bonds as important tools in the transition to a more sustainable economy. Business can be an important engine for change by identifying and bringing social and environmental solutions and initiatives to life at scale. Green bonds increase corporate access to the capital necessary to fund such initiatives. They can also bring reputational benefits, demonstrating to corporate stakeholders a company’s dedication to supporting a sustainable future. These bonds also take advantage of the growing demand from institutional and other investors for products that can fit into a ‘green’ or ESG focused portfolio as demonstrated by the fact that several recent green bond issuances have been oversubscribed. Perhaps most importantly, green bonds give corporations a way to raise funds for projects with longer time horizons (over 10 years), which allows them to pursue the types of sustainability projects that often go unfunded due to the short-term demands of the stock market.
It’s clear that green bonds have a role to play in how corporations can support the transition to a sustainable economy, but several questions remain. With so many labeled and unlabeled green bonds, how can we be sure these funds are going to projects that truly deliver impact? What does ‘green’ or ‘sustainable’ mean to issuers and investors? How do we avoid mislabeling or even greenwashing? And how can we ensure that the projects these bonds fund are actually having the impact over time that they were intended to have?
We see several barriers that need to be addressed to support faster adoption of green bonds, and to ensure bond proceeds go towards the projects required to enable a sustainable economy.
- No single standard: There is still no single, widely accepted and enforceable set of standards and definitions for green or sustainable bonds. Several frameworks exist, including Climate Bonds Initiative which offers standards and certification, the Green Bond Principles created by the ICMA and more recently Moody’s Green Bonds Assessment and Scorecard. Corporates planning to issue a green bond need to be aware of these frameworks, but the fact that there are several demonstrates a lack of alignment across the market. While each framework covers similar elements such as use of proceeds, bond governance and disclosure, there is not one single approved framework that all bonds are required to adhere to, making it difficult to compare and evaluate bonds equally.
- Incomplete project specific standards and metrics: The Climate Bonds Initiative is doing excellent work with teams of experts developing criteria for specific projects in water, solar, wind, buildings, geothermal, and transport, with similar criteria for bioenergy and land use on the way. These criteria are not yet used for all bond projects though, and are limited to projects that contribute to a low-carbon economy. While climate change is arguably one of the most critical sustainability issues of our time, the focus on low-carbon economy misses the opportunity to assess green bond funded projects that contribute to sustainability in other ways. What about projects that deliver social impacts and those that build resilience to climate change? These are also important initiatives for corporates to consider.
- No required independent review: The growth of second party verification of green bonds is a required step for the Climate Bonds Initiative, but many bonds are still not verified. For an investor considering purchasing green bonds and for a corporation interested in issuing them, this is a critical step. Furthermore, even when a bond is verified, the methods and metrics used by second opinion providers may differ. Again, the Climate Bonds Initiative is leading here by offering a list of approved verifiers that are vetted, but there is no evaluation of how strong one second party opinion is over another, leaving issuers and investors with reviews that may be inconsistent from one verifier to another.
- Limited impact reporting and no legal enforceability: There is also still limited and inconsistent reporting on ongoing project impact after a bond has been issued. Both verification and reporting are still only voluntary and where a green bond does publish an impact report, many are not audited. The better bonds are verified, report on impact and are audited, but even when this does happen, there is currently no legal penalty if the promised ‘green’ impact isn’t achieved.
- Verification Cost: Currently, issuers bear the burden of the additional cost necessary to deliver what we could call a ‘good’ green bond, which includes verification and independent review, ongoing reporting and audited reports. Hopefully in the future this cost will be shared with the investor or result in a price premium for bonds that are verified and deliver on impacts.
Although standards and verification are not yet unified across the market, the work of Climate Bonds Initiative and others is a critical and necessary first step toward the goal of a transparent and impact-driven green bond market. It will take time, trial and error and more data, but many of the actors in this space from non-profits to the verifiers, issuers and investors, are working towards this goal. As a trusted advisor to many leading corporations, SustainAbility is dedicated to helping foster the awareness of and issuance of green bonds across the corporate sector. Several of the issues mentioned here are neither quickly or easily resolved, but we will continue to watch and support this space through our work.