A whopping $163 billion worth of green bonds were issued in 2017, an increase of almost 70 percent over 2016 figures. And despite the fact that some critics have been quick to judge them as “greenwashing”, these bonds could very well provide renewable energy projects the competitive edge they need to replace fossil fuels.
Green bonds, a type of financial instrument issued to fund environmentally-friendly projects such as renewable energy installations or low-carbon construction, have been around for the better part of a decade, pioneered by the European Investment Bank (EIB) and the World Bank. But the market really took off in late 2013, when the first corporate bonds were issued, quickly followed by local and municipal government bonds. While 2017 saw the issuance of the first sovereign green bonds, from Poland, France, Fiji, and Nigeria, they remain generally popular with the private sector.
Generally speaking, green bonds accelerate the renewable revolution by reducing the capital cost for these projects, allowing renewable energy to become competitive without government subsidies, and bankrolling the development of the next generation of renewable technologies. For example, a Moroccan green bond issued in 2016 helped fund part of Noor PV 1, the world’s largest concentrated solar plant, while Italian utility Enel issued a green bond to offer a record low bid for an 850 MW wind project in the country. French energy giant EDF raised one of the first corporate green bonds to build wind and solar farms, while Fiji is using the proceeds of its sovereign green bond to achieve its target of 100 percent renewable energy by 2030. Related: China, U.S. Join Forces In EV Race
But the instrument’s relative novelty has led some to worry whether green bonds are worth issuing at all. Just look at China, the world’s largest green bond issuer for two years running, having rapidly surged to the top of the list after its first issuance in mid-2015. Out of the over $32 billion issued, up to 12 percent actually went on to fund coal and clean coal projects. Similarly, last year, Spanish oil company Repsol was criticized for issuing green bonds, prompting concerns that the lack of regulation of climate bonds can be exploited to effectively greenwash activity.
But are green bonds really greenwashing?
To be fair, green bonds are still a niche investment tool, accounting for only 0.6 percent of global bond sales in 2017. What’s more, the general fuzziness over what a green bond actually is has fired up environmental activists everywhere. More than 100 NGOs from 37 countries have called on the UN to “ensure that the green bond market is truly green”, while civil society groups lashed out at Engie for a €2.5 billion green bond issued to finance renewable energy projects. But this kneejerk reaction forgets that the financial instrument is not meant to finance companies themselves, but projects aimed at decreasing their environmental footprint.
Firstly, both energy companies and heavy industries play an irreplaceable role in modern society, and dismissing their efforts to reduce their carbon footprint is counterproductive to say the least. Rather than labelling such efforts as “greenwashing”, such companies should be given the means to finance cleaner projects.
Some governments seem to have gotten the message. Countries such as Australia are considering shifting part of the responsibility for meeting its emission reduction targets away from the energy sector and onto agriculture or manufacturing. By so doing, green bonds could play an even bigger role in making sure the targets of the COP21 are met, further incentivizing industry players to reduce emissions. Related: Tesla Looks To Get Ahead In Lithium Battle
Brazil’s market for green bonds is steadily growing, especially in the highly-polluting forestry and agriculture sectors, with green bonds including the $700 million note recently issued by Fibria, the world’s largest eucalyptus pulp producer. India’s green bonds market more than doubled in 2017 to $4.3 billion. In the metals and mining industry, Russian aluminum giant Rusal is also looking into issuing green bonds. While energy intensive, aluminum is considered to be environmentally friendly thanks to its recyclability and durability - so funding projects that make its production process more efficient is one of the core tenets of green bonds.
Secondly, a harmonised set of standards for green bonds is clearly necessary in order to bolster the market. The fact that China was able to finance coal projects through green bonds is explained by the fact that Beijing simply refuses to follow either of the two main voluntary frameworks that have been developed around green bonds, deciding instead to establish its own set of standards.
Reporting metrics, such as carbon emissions avoided per dollar invested, would provide investors with even more certainty regarding the environmental impact of their investment. As the market for climate bonds matures, best-practice standards will inevitably develop and be more consistently applied. China has already made progress in building a regulatory framework for its green bonds, and is in the process of setting up a ‘Green Bonds Standard Committee’.
Lastly, a universal definition of what constitutes a green bond still needs to be established. Like any emerging sector, soaring demand for climate bonds has outpaced the development of regulation and standards. For the moment, however, the essential thing is that this growth continues unabated. The Paris Agreement set out extremely aggressive goals, which will require massive financing to achieve. Countries must mobilize both public and private capital to hit their carbon reduction targets. Green bonds offer a financially viable way to promote more environmentally responsible projects, and help the private sector speed up efforts to decouple CO2 emissions from GDP growth.
Despite the backlash, the green bond market’s rapid expansion should be seen as good news in the fight against climate change and the transition towards a low-carbon future. Investors’ enthusiasm for ethically conscious finance will encourage numerous industries to become greener and will provide countries around the world with a key tool in fulfilling their responsibilities under the Paris Agreement.
By Richard Talley for Oilprice.com
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