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Pitfalls of green finance: why credentials of some sustainability-linked bonds don’t stand up to closer scrutiny
- Some bond issuers are seen as too lenient in setting performance targets and triggering penalties when they fail to hit their green targets
- Popularity of green bonds is growing, with issuance in the year’s first seven months standing at US$49.7 billion versus US$8.2 billion in 2020
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The desirability of sustainability-linked bonds (SLB), a nascent but fast-growing finance tool, is blighted by terms that limit the financial penalty for issuers missing their green targets despite rising interest in the instrument, according to asset managers.
There are concerns about “greenwashing” as issuers are seen as too lenient in setting performance targets and triggering a higher bond coupon rate when the goals are missed. And in some cases bond terms allow them to bypass the penalty altogether. Greenwashing refers to the creation of an impression of higher than actual sustainability benefits.
“The tailor-made nature of both sustainability performance targets and interest coupon adjustment potentially gives rise to concerns around greenwashing,” said Martin Dropkin, head of Asian fixed income at Fidelity International.
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Investors should conduct a “bottom-up” assessment of issuers to ascertain whether they are undertaking significant changes to enhance their operation’s sustainability, and examine the specific bond features, he added.
Sustainability bonds are a key funding source for projects that have environmental or social benefits. Much of their proceeds go to renewable energy and energy efficiency enhancement projects that help fight climate change by cutting the emission of greenhouse gases.
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