About Green Bonds and Greenwashing

Hong Kong leads the way for Green Bond Issuances. But greenwashing fears rise.

Green bonds have become increasingly popular over the last few years as a way of raising funds for environmentally friendly projects.

As a major global financial centre, Hong Kong has been leading the way in issuing and funding these bonds.

But fears continue to abound whether the funds for projects are being used responsibly or is the green label being used solely for marketing purposes to hoodwink investors.

What are green bonds?

Green bonds work like traditional bonds with one key difference: the money raised from investors is used exclusively to finance projects that will have a positive environmental impact. These bonds help fund renewable energy projects such as wind, solar and hydro, recycling efforts, clean transportation, green buildings, and sustainable forestry.

Given the climate crises we face and our dependence on fossil fuels for energy, it is the need of the hour that we fund projects that don’t leave an outsized imprint on the environment. Initiatives such as the Paris Agreement and the UN Sustainable Development Goals are holding countries accountable for their greenhouse gas emissions, which has deepened political resolve for green financing.

Are green bonds more expensive than traditional bonds?

The price of a green bond is similar to that of a traditional bond. The bonus feature of a green bond is the positive impact the proposed project will have on the environment.

Can retail investors purchase green bonds?

Usually, green bonds are sold to large organizations such as institutional investors, pension funds, asset managers etc. Going against the norm, in 2022, the Hong Kong SAR government issued bonds worth HKD 20 billion (USD 2.55 billion) for retail investors. Globally, this is the biggest retail green bond issuance.

The three-year bond carries twice-yearly interest payments tied to inflation, with a guaranteed minimum annual interest rate of 2.5%. The funds raised will go towards resource-recycling projects and the construction of environmentally friendly buildings.

The floor rate of 2.5% is higher than the fixed deposit rate of ~1%. With the principal guaranteed by the HKSAR government, the bond offers stable and attractive returns.

Seeing the investor demand, the government plans on issuing HKD 10 billion of retail green bonds in the next financial year.

Alternatively, as individuals we can invest in exchange-traded funds and mutual funds to gain exposure to green bonds, such as Calvert Green Bond Fund or iShares USD Green Bond ETF.

By investing in green bonds, investors can finance eco-friendly projects while earning competitive returns. Earlier, funding for green projects was the domain of governments and institutions with buying power.

Institutional Investors Perception of Green Bonds

BlackRock CEO Larry Fink, believes the transition to net zero emissions presents a "historic investment opportunity." In his letter to CEO’s he stated, “Few things will impact capital allocation decisions – and thereby the long-term value of your company – more than how effectively you navigate the global energy transition in the years ahead.

It’s been two years since I wrote that climate risk is investment risk.”

In investing in this space, BlackRock’s appetite outpaces other investors. At the end of 2021, BlackRock reported that it has USD 10 trillion of assets under management, including USD 16 billion in green bonds. Even though BlackRock’s investment in green bonds constitutes a small part of its overall portfolio, it signals to the market participants its intention to pursue sustainable investments.

Ultimately, green bonds must compete in returns with traditional bonds to be considered for purchase by investors. Eventually for issuers, going green comes at a cost, the cost of setting up filters so that carbon dioxide is not released into the air or treating the pollutants and not releasing them as is into the water. It’s a cost and benefit analysis.

With a nudge from activists and evidence in the form of wildfires, climate change and flooding the bond market is changing. It’s situations like this when markets are undergoing a tectonic shift that one can see investment opportunities emerge.

How big is the global green bond market?

The global green bond market has crossed USD 1 trillion, in cumulative issuance in December 2020. This is a big milestone, though it’s still just a niche in the overall global bond market, which is estimated to be USD 130 trillion. With a continued focus on climate friendly policies and ESG investing the market for green bonds will continue to grow.

How is Hong Kong leading the way for green bonds?

In 2021, Climate Bonds Initiative identified USD 10.4 billion worth of green bonds and loans originating from Hong Kong. This represents the highest volume on record, with four times YoY growth. The depth of the market results in easy access to capital for the issuers, stimulating more private funding for sustainable projects in the region.

Some notable deals include, MTR Corporation raising USD 192 million to finance improvements that will aid in decarbonization of Hong Kong’s transport sector. China Development Bank (Hong Kong Branch) issuing a 3-year, USD 500 million bond with proceeds earmarked for renewable energy and low-carbon transport.

Is “greenwashing” something to be concerned about?

The rapid expansion of the green bond market has posed a problem of “greenwashing”- wherein companies make exaggerated or false environmental claims to help them raise funds from investors.

For example, in 2022 the Airport Authority Hong Kong raised USD 1 billion via a green bond tranche to help fund the development of a third runway. Environmental campaigners complain the project poses a danger to Chinese white dolphins that are already threatened with extinction. In addition, the project will result in increasing carbon emissions due to an increase in air traffic.

The concerns around “#greenwashing” emerge due to the lack of a global standard for the issuance of these bonds. Green bonds are issued under a variety of guidelines developed by trade bodies such as the International Capital Markets Association, Climate Bonds Initiative, big banks, or the country’s own framework. This results in a patchwork of voluntary standards which permits misuse of the “green” label.

Furthermore, a lack of transparency, traceability and accountability on how the Green Bond funds are being spent, as well as the continual monitoring and verification of the positive environmental impact as promised throughout the lifetime of the Green Bond remains a challenge and a risk to investors, regulators and issuers. The data, technology and processes required to establish and maintain integrity, validity and trust on Green Bonds are still being developed and over time, should address concerns regarding greenwashing.

In the meantime, as investors, we have to be vigilant where funds will be invested and demand for accountability from our government and corporates.

Conclusion

As an emerging asset class that’s quickly gaining popularity, green bonds represent a great option for investors that want to make an impact while still generating returns. However, concerns around greenwashing remain and all bonds should be evaluated carefully before investing in them.