SHOOTING FOR THE MOON IN A HOT AIR BALLOON?

The discussion paper aims to pave the way for the development of a framework for assessing and moving forward the “contribution of green bonds to scaling up the investments in green projects”. The paper focuses on the case of ‘Use-of-Proceeds Green Bonds’ (UoP GB) that represent 95% of the market in 2016. It discusses the link between increasing investment in UoP-GB on the one hand, and the growth of investments in green projects by issuers on the other hand, suggesting how this approach can be enhanced to achieve further impact.

The paper shows that we currently lack evidence to conclude that as currently designed UoP GB contribute - or can without further enhancement contribute - to scaling up the investments in green projects:  
• First, the financial risks specific to earmarked green projects remains on the balance sheet of the green bond issuers, meaning their capacity to invest in more green projects remains the same as with standard bond issuance.
• A key issue is whether increased green investment actually takes place above a business as usual baseline. In effect this is the key issue – do the UoP bonds lead to an overall shift in the balance sheet of the issuer over time?
• Second, the main potential financial incentive for issuers, the ‘green premium’ paid by investors to acquire green bonds, seems structurally limited by the lack of tangible financial benefit for these investors. Will this hold the market back?

This situation creates what I4CE¹ calls “a ‘coherence’ gap between scaling up of the green bond market and ensuring its tangible contribution”: green bonds are subject to inherent limitations that are likely to inhibit green projects from achieving scale.  In other words, the booming green bond market might be comparable to a hot air balloons festival: great to raise awareness and turn people’s heads towards the sky, but if the objective is to reach the moon, we will need more than hot air.



Green bonds promoters argue that the ‘soft benefits’ for both issuers (oversubscription, extension of the investor base, behavioural effects) and investors (awareness raising, green marketing, behavioural effects) are systematic and strong enough to eventually influence investment decisions and eventually contribute to scaling-up investment in green projects. However, as yet, we did not find any evidence pointing in this direction.

This conclusion has implications for the potential recognition of UoP-GB investments as ‘climate action’ in the context of the Marrakesh partnership, and the categorization of UoP-GB as ‘green finance’ instruments² in the context of EU policy debate. It questions the rational for introducing public support to the UoP-GB market and ownership without prior impact assessment and/or introducing changes in the green bond standards.

The paper calls for further research on the topic, and sketches for consideration a proposed framework for assessing the contribution of green bonds. It concludes with recommendations to enhance the GB labelling standards, including introducing the assessment of the issues alignment with climate goals as a core criteria.

To download the full paper, please click here.





¹ Beyond Transparency: unlocking the full potential of green bonds, I4CE (2016). From the same author, see also Green Bonds: What contribution to the Paris Agreement and how to maximize it? (2017) and Green Bonds:  Improving their contribution to the low-carbon and climate resilient transition (2018).
² The G20 defines Green Finance as the “financing of investments that provide environmental benefits in the broader context of environmentally sustainable development” (see G20 Green Finance Study Group 2016  G20 Green Finance Synthesis Report). For a discussion of the various definitions of ‘green finance’ see page 3 of “The Global Green Finance Index”, Y/Yen, Finance Watch (2018).