Climate crisis: Hong Kong, UK and Singapore dive in, but are green bonds just greenwashing?
- Three of the world’s biggest financial hubs are launching multibillion-dollar green bond programmes amid a push to address the climate crisis
- But sceptics say the bonds aren’t always as green as they sound, and with governments jumping on the bandwagon, who is left to keep them in check?
To do so, authorities in these cities are launching massive sovereign green bond programmes, in the hope that they will spur private sector issuance and investment.
And it is not just traditional financial powerhouses that are seeing opportunity – and investor interest – in green debt.
Italy’s sale this week of 8.5 billion euros (US$10 billion) of green debt that matures in 2045 – its first foray into the sector – saw orders of over 80 billion euros.
Industry observers told This Week in Asia they expected more such movement in the green bond sector in Asia and elsewhere in the near term.
The global market in green bonds reached a record US$269.5 billion last year and is projected to reach US$400 billion to US$450 billion this year, according to the Climate Bonds Initiative.
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While the optimism surrounding green bonds is seen as crucial to helping policymakers invest in a low-carbon economy, some analysts say the industry must take care to track how the funds are used.
Green bonds can be cheaper to raise than regular ones, given the grants provided by countries and donors, and are attractive to investors looking to fulfil their own corporate sustainability goals.
Kamran M. Khan, managing director and head of environmental, social and corporate governance (ESG) for Asia Pacific at Deutsche Bank, said green bonds were “a particularly powerful tool” for Asian governments.
If government policies and programmes were “set right” and moved “with an ESG aligned instrument”, they could achieve the dual purposes of raising funds for economic growth while “doing so in a manner that will not destroy the environment”.
“The implications are really interesting and can be very, very constructive,” said Khan.
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One of the projects Singapore has identified for green bond financing, for example, is Tuas Nexus, a facility that integrates waste and water treatment that is meant to be energy self-sufficient.
The integration of two facilities saves land the size of four football fields and its carbon savings would be “equivalent to taking 42,500 cars off Singapore’s roads”, according to the National Environment Agency.
Simon Schillebeeckx, an assistant professor of strategic management at Singapore Management University, said that while Asia was lagging Europe in this area, the region had the capacity to develop the market.
But was it keen? “The interest is very clear,” said Schillebeeckx, citing how his university was working with Imperial College London to link the practice of green finance with academic work.
GREENWASHING?
So is there a catch? Corporate governance expert Mak Yuen Teen for one is a touch sceptical about just how climate friendly green bonds really are.
“It is still mainly greenwashing in my view,” said Mak. “So it’s a fair question to ask: if governments themselves are jumping on the greenwashing bandwagon, who’s checking the use of the funds?”
Documentation for Indonesia’s 2018 bonds, for example, said none of the money raised would go to fossil-fuel based infrastructure or projects involving the burning of peat – an accumulation of partially decayed vegetation or organic matter that keeps carbon out of the atmosphere – but it did say some projects might still include “an element of deforestation”.
One reason for the cynicism is the notion that companies or governments can “have something very green that I’m spending money on but, elsewhere, I’m doing coal,” said Lucie Tepla, senior affiliate professor of finance at Insead.
Even within green projects, when the money raised through the bonds is ring fenced for sustainable means, it’s not always clear just how green a project is. Tepla pointed to Repsol as an example.
The Madrid-based oil and gas company had in 2017 issued green bonds to finance and refinance energy efficiency investments in their chemical and refinery facilities. “But in that sense, it also prolonged the life of fossil fuel equipment,” said Tepla.
Mak said it was hard to tell what was lip service when a company or government “builds show flats and then tears them down while claiming sustainability, or while laws still favour en bloc redevelopment versus conservation”.
Zhang Weina, a senior lecturer of finance at the National University of Singapore (NUS) Business School, said: “The genuine motives of the issuance of green bonds can be hard to verify.”
But Zhang said she would give developmental agencies and governments the benefit of the doubt on misuse of green bonds’ proceeds compared to corporations “as their motives are focused more on the green projects themselves”.
Another issue is enforcement – whether the money raised was really used for the sustainable projects set out in the structure of the green bonds, and if not how investors can seek redress.
Khan said bond issuers were bound to the commitments made in capital market transactions by law, and unsatisfied investors could take companies to court for not following through on their green commitments.
Schillebeeckx said “the difficulty of enforcement against the government if sustainability objectives are not met” was a “big negative” in his view.
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This limitation, though, can give certain governments an edge. While Khan declined to name any “straight winners” or say that any were “terrible or they have done something they shouldn’t have done”, he said Singapore was likely to make sure its bonds were “very structured and provide a lot more detail than perhaps a normal sovereign green bond would just because they are very clear and focused on making sure that Singapore has top of the line ESG standards across the board”.
The experts said for sovereign green bonds to work, they needed to be structured well, have clear standards and third parties needed to be able to certify and monitor the bonds issued.
Schillebeeckx said enforcement was hard because while only the financial market could hold issuers accountable, most investors lacked the financial incentive to undermine the credibility of a green bond.
“So you need self-policing, independent rankings provided by universities or non-governmental organisations, and a financial market with a moral compass,” he said. “It’s tricky but not impossible.”
Zhang said issuers should be committed to second-party and third-party certification and monitoring by international bodies such as Climates Bond Initiative. Governments should also provide data and regular updates on the green projects, Zhang said.
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Investors would want more data, said Khan. “They do want to know details of how the money is being used, but they also want that information to go into the public domain so there will be additional pressure coming to the issuer, whether they’re public or private, to stick to their commitments and not try to skirt their commitments,” he said.
Standards wise, the experts said there had to be clear definitions of what counted as a green bond. Their preference was to have an international standard rather than the “whole cottage industry” which Tepla said had sprung up. “You don’t know when you get a certification, whether it is a good certification,” she said.
“There are too many different standards out there, often pushed by ratings organisations with commercial objectives,” Mak at NUS said.
Schillebeeckx said when countries drew up standards these needed to be clear, however hard it was to create an exhaustive list of the types of projects that would fit a green bond. He pointed to Indonesia’s green bonds and how while they had to fit into one of 11 categories, “the last one is a catch-all category”. That last category was vaguely defined as: “other activities that are environmentally friendly or have environmental benefits”.
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Khan thought many countries were likely to develop their own ESG rules and standards “because each one has a different situation”. However, these would eventually converge with similarities on “a significant portion of those standards and rules”, Khan said.
The market, experts said, was still young and growing and should not yet be dismissed. Tepla called it “super important” since there were few other financial instruments based on sustainability.
Besides, said Zhang, any player who tried to fool investors was unlikely to be successful in the long run. “Reputational risk is an intangible asset that can be dramatically swung by the disguised motives or actions after the issuance of the green bonds.”
