Downstream Power

Green bonds under revision: ESG and ‘greenwashing’ fears

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Green bonds are increasingly growing in the energy sector. However, there exists the fear that Environmental, Social, and Governance (ESG) indicators may work more as greenwashing credentials rather than as material actions for companies to reduce their carbon emissions.

Experts think it is necessary to translate credentials into visible and accountable actions.

Green bonds and the reality

According to research conducted by the Dutch asset manager NN Investment Partners, the green bond market is expected to represent a $2 trillion value by the end of 2023.

This development is of unprecedented growth since the market roughly reached a $660 billion value almost a decade ago.

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However, the asset manager also found that companies already issue almost 15% of those bonds. These issues account for companies involved in controversial practices that contravene environmental and green bonds’ credentials.

Regarding that, corporate bond managers think it is vital to make credentials genuinely accountable.

In the words of Tom Chinery from Aviva Investors, consulted by The Financial Times, managers don’t “buy a bond because it’s green, but because the company is.”

In that sense, asset managers are looking for companies to comply with decisive actions regarding ESG indicators globally. Green bonds portfolio managers identify more certainty in businesses whose bulk is in “clean” industries rather than in “dirty” or polluting ones.

According to Chris Bowie from TwentyFour Asset Management, also consulted by Financial Times, polluting companies may not have significant incentives to change their behavior if finance houses lend them or if they sell their green bonds.

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What investors should look for is for wider overlooks that include national ethical and sustainability metrics.

While these bonds could fund some projects, that doesn’t mean businesses or countries will stop investing in polluting industries.

Furthermore, to achieve green bond investments without addressing the overall picture could lead to “greenwashing” activities. According to the experts, it is essential to acknowledge this to invest in wise and committed sustainability transition efforts.

The risks of a non-legal framework

Experts agree that it is necessary to have a legal hard-coring framework in bond contracts, with available legal recourses. The current green bonds tools are more a spoken agreement than a legal-binding commitment.

To take the countries’ and businesses’ word that procedures are being used for environmentally-friendly purposes represents a high risk.

On the contrary, the sustainability-linked loans and bonds can help investors to press more on companies for green actions. According to the Inside Investment ESG analyst Joshua Kendall, also consulted by FT, with these bonds, if issuers don’t meet sustainability targets, investors can get a reward for that.

Source: Information from a Financial Times Billy Nauman and Tommy Stubbington News Article.

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