Embracing Environmental Sustainability: The Power of Green Bonds

Green Bonds have emerged as an innovative financing mechanism for projects that are in line with creating a net-zero economy and exhibit other environmental benefits. By specifically addressing issues related to pollution (GHG’s, VOC’s, particulate matter and other effluent[1]) and energy production, these financial tools provide crucial support for initiatives aimed at reducing and reversing anthropogenic environmental degradation. This overview highlights the benefits from green bonds and underscores their importance.

Understanding Green Bonds

As an essential step towards fostering environmental stewardship, green bonds primarily target projects that offer measurable environmental impacts (emissions reduction / avoidance) rather than merely complying with regulations. The measurability of the impact brought about by the projects funded through green bonds is a key component in eliminating what has become known as “greenwashing”, which is making a claim surrounding the environmental benefits of a project that are misleading or don’t exist[2]. Green bonds enable the investing organizations to pursue more substantial sustainability goals such as integrating renewable technology seamlessly into industrial workflows. An example of this is solar panels used to reduce the carbon footprint of a building which would otherwise pull power from an electricity grid that provides power through the burning of fossil fuels.

These specially structured financial solutions promote green innovation both indirectly and directly by backing various initiatives such as environmental education & projects targeted at pollution reduction or avoidance.

A key piece of literature to follow to ensure a bond can be classified as “green” is by following the Green Bond Principles 2021 published by the International Capital Markets Association[3].

Additionally, you can also have your green bonds rated by a Second-Party Opinion service such as Sustainalytics or S&P’s Shades of Green methodology to provide investors confidence that the funds raised are being used in the way that is advertised.

Who Uses Green Bonds?

Green Bonds primarily serve industries, governments, or public sector organizations with projects in areas including renewable technology development; energy efficiency upgrades; green transportation and infrastructure, among other sectors focused broadly on minimizing the carbon footprint and effluent emissions worldwide.

Critiques of Green Bonds

As a relatively new financial instrument, Green Bonds are imperfect and remain a work in progress. As mentioned, objectively measuring impact is critical to curtailing greenwashing. Further, many would argue that the criteria that qualify Green Bonds are facile and may fail to provide a full accounting of the environmental impact of the ‘Green” alternative. ?Projects that qualify as collateral for green bonds may not be as profitable as traditional projects, potentially contributing to mispriced risk / reward.? Limited issuances of Green Bonds may also inhibit investors from properly diversifying their portfolio. ?The regulatory environment around Green Bonds is continually evolving and is an ever present risk.? Finally, a change in government support or policy could impact valuations or the evolution of the market[4]. ??

Summary

These unique investment avenues help foster low carbon, environmentally conscious solutions, and practices worldwide. Such initiatives ultimately lead towards an environmental transformation - paving paths to reduce anthropogenic pollution.

By funding projects that focus on emissions reduction or avoidance a Green Bond investor can support the net zero pledge that more than 140 countries, 9,000+ companies, 1,000+ cities, 1,000+ education institutions and over 600 financial institutions have joined[5]. ?Green financing can be a key element in our fight against environmental degradation globally.

Completing your due diligence to identify and mitigate any undisclosed risks or misrepresentations is key to ensuring you’re making an informed decision.? Despite the drawbacks cited, Green Bonds have seen an encouraging start as a mechanism that harnesses investor incentives to achieve wider environmental objectives.

Dan Martin Fabiene Evans, CPA, CA John Gibson Darrell Bartlett CFA, CPA, CA, CIA Paulette Brangman Samuel Christoff Paul Klemke

[1] Effluent is waste material (such as smoke, liquid industrial refuse, or sewage) discharged into the environment especially when serving as a pollutant. https://www.merriam-webster.com/dictionary/effluent

[2] Gilllis, A.S. What is greenwashing?. Tech Target. https://www.techtarget.com/whatis/definition/greenwashing#:~:text=Greenwashing%20happens%20when%20a%20company,positive%20effect%20on%20the%20environment.

[3] The Green Bond Principles. International Capital Markets Association. https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/green-bond-principles-gbp/

[4] Conde, Arturo & Villanova, Patrick. June 23. 2024. Pros and Cons of Investing in Green Bonds. https://smartasset.com/investing/are-green-bonds-a-good-investment

[5] United Nations. Climate Action: Net Zero. https://www.un.org/en/climatechange/net-zero-coalition