Green bonds surge despite concerns over sustainability objectives

In line with global efforts towards a low-carbon future, banks have been instrumental in financing renewable energy initiatives. However, these financial instruments are facing criticism for potential shortcomings that could undermine sustainability objectives.

Bank of America data reveals a significant surge in investments towards renewable energy. In the first half of 2023 alone, environmental and social bond funds attracted $18 billion globally, nearing the total $22 billion raised in 2023. Europe accounted for nearly half of these sustainable bond investments, while in the United States, sustainable bond inflows rose to $1.7 billion for the year up to June 2023, a significant increase from $819 million recorded in May.

Morgan Stanley reported a substantial growth in green bond supply in 2023, with the first two quarters setting issuance records at $176 billion and $185 billion respectively. These bonds, issued by countries or companies for specific low-carbon development projects, have however raised concerns about greenwashing due to their broad and flexible definition.

This concern was highlighted when Masdar — the state-owned renewables company of the United Arab Emirates — issued a green bond worth $750 million in July, which was seen as controversial given UAE's status as a major oil producer.

Sustainability-linked bonds (SLBs), which tie a company's debt interest payments to their climate commitments, are gaining traction despite criticism that the increases in rates are too small to motivate companies to improve their environmental practices. Italian energy company Enel (BIT:ENEI) and Chile have been prominent issuers of SLBs, with Heathrow airport also issuing an SLB worth £650 million with targets including reducing Scope 3 emissions.

"Banks have a crucial role in demonstrating to their corporate clients the availability of affordable and plentiful funding for commercial climate projects," said Mona Dajani, partner at law firm Shearman & Sterling. She also emphasized the need for banks to collaborate with their industry peers to establish collective enforcement standards.

Banks themselves are also setting net-zero goals and are using green bonds to finance their own carbon reduction projects. In July, two of the three largest green bonds were issued by banks, with Japanese bank Mizuho issuing the largest worth $1.4 billion, followed by Norway’s DNB with a bond worth $1.1 billion.

However, Dajani points out that there is a lack of clarity on the exact impact of these sustainable-debt financing efforts due to inadequate standards and ill-defined criteria for what constitutes a green bond. Daniel Green, a finance professor at Harvard Business School, also raised concerns that green bonds are often used to finance investments that would have been made regardless of their availability.

Green investments now face an environment of rising interest rates in many countries which could potentially discourage new investments. However, Green suggests that some green projects may be protected due to subsidies and regulation making them attractive regardless of funding costs.

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