Dr Ryan Jones and Dr Tom Baker ask if ‘green bonds’ can save us from economic and climate collapse

Covid-19 has combined with climate change to create a dual crisis that demands extraordinary financial solutions.

Governments around the world, including ours in Aotearoa New Zealand, have rushed to finance emergency responses to the pandemic with record-setting money borrowing via issuing government ‘bonds’.

Rather than addressing the Covid crisis by hastening the climate crisis, does the bond bonanza offer an opportunity to support a green recovery?

The importance of a green recovery is signalled in the New Zealand Government’s commitment of $1.1 billion to create 11,000 environment jobs as part of the economic recovery from Covid-19. As time goes on, much larger sums of money will need to be raised if that economic recovery is to help bring about a transition to a lower-carbon future.

The moment seems readymade for the mainstream rise of green bonds.

Green bonds – part of the family of so-called ‘thematic bonds’ – are loan-like products that link finance to projects that claim to have social and/or environmental benefits. Advocates suggest they can drive investment in sustainable development, while critics claim they fail to offer a fair or effective solution.

Are green bonds our saviour or a waste of time?

Bonds for beginners

A bond is a fixed-term IOU that is repaid with annual interest. Corporations and government agencies issue bonds to borrow million and billion dollar sums from financial investors. Conventional bonds are issued for ‘general corporate purposes’ where borrowers have autonomy over how they spend the money borrowed.

Green bonds, by contrast, are issued with a pledge to (re)finance projects that have social and/or environmental benefits. Project eligibility is set by voluntary standards that also commit borrowers to report on their use of money they have borrowed. More than US$750 billion in green bonds have been issued globally since the market began in 2007, including several in Aotearoa New Zealand. In Aotearoa, the Financial Market Authority has responded to the growth of green bonds with proposed guidance on their legal definition and requirements.

Green recovery or greenwashing?

Some claim this innovation already offers win-win-win outcomes for companies, investors, and the planet. In theory, green bonds are expected to drive larger and cheaper flows of finance to projects that support sustainable development. This should achieve additionality by reducing the cost of borrowing. Achieving additionality means green bonds finance new projects that are neither business-as-usual nor would have been funded by other means.

Current experience, however, suggests lofty claims of green bond impacts are too optimistic. Research has found little to no evidence of a consistent cost benefit to borrowers. Instead, serious concerns have been raised about the product’s integrity and impact.

Green bonds have courted controversy by financing environmentally dubious projects such as parking garages, hydropower dams, and petrochemical refineries. This has led to allegations of greenwashing as organisations gain reputational benefits from superficial claims of environmental impact.

Green bonds are also accused of repackaging conventional bonds without achieving additionality. Bond issuers typically have easy access to credit whether they use green labels or not. As such, green bonds generally fund projects that would have been financed with conventional debt.

Critics add that green bonds fail to constrain or trigger changes to business-as-usual investment plans. An energy company, for example, can issue green bonds for a minor portfolio of renewable assets while still increasing their investment in fossil fuels. These observations support the claim that green bonds offer little more than feel-good vibes for borrowers and investors.

These practical concerns with green bonds are now raising political concerns about fairness and value. If green bonds do not achieve additionality, there is a real risk they will simply favour financial incomes over social and environmental outcomes.

The monetary value of green bonds currently has no strict relationship to the material value of the projects they finance. Investors receive their interest payments, and banks claim fees for arranging new deals, even if green bonds finance projects with weak claims of impact or additionality.

In the case of government bonds, this unevenly distributes risk and reward to favour investors over the taxpayers that ultimately service the debt. This can amplify social inequality when there are racial and class divides between the groups patronising bond-funded public infrastructure and the investors drawing income from it. If green bond projects fail, or do not add anything to business-as-usual, communities also remain exposed to the social and environmental risks green bonds are meant to address.

Neither saviour nor sinful

The practical and political problems with green bonds should dispel claims they can save the planet or change the world. Equally, though, we should not be tempted by the false comfort of feeling justified suspicion of financial markets has been vindicated once again.

The better option might be to alter our expectations and not overly invest ourselves in a single financial product having a magic fix.

Advocates and critics alike have arguably set an unreasonably high bar for green bonds. Borrowers primarily use bonds to refinance their debt when better terms are on offer. Green bonds are conventional bonds with a twist, and this is reflected in their current performance.

They are not generally financing new, additional projects that will solve wicked problems like social inequality and climate change. They are not made for this purpose, but this does not mean they have no practical value either.

Emerging anecdotal evidence suggests green bonds instigate changes that support the longer-term reform of financial markets. Green bonds have catalysed discussions of what green means in financial markets and established infrastructures for evaluating products that claim to support sustainable development.

At an organisational level, they have closed the distance between treasuries and corporate sustainability teams. They have also demanded greater transparency from borrowers and compelled them to upskill so they can measure the impact of their investments.

These changes are not of a scale that will solve our dual crises. They do represent, however, small and necessary steps on the longer road to making a financial system capable of supporting sustainability.

Dr Ryan Jones and Dr Tom Baker are from the School of the Environment at the University of Auckland, and Tom is a Research Associate at the Public Policy Institute. Both are leading a research project on the rise of green finance in Australasia. The content of this article is developed in more length in a recent paper in the journal Geoforum.

*Originally published in newsroom. Republished with permission.

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