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  • By Karishma Sheriff and ReMAtics

The green bond market; a path to achieving global sustainability goals


The year 2020 was the warmest year on Earth. Global surface temperature rose by 1.02°C during the year, the highest recorded in history. Apart from the continuous rise in global temperature, the world is also experiencing a rise in ocean temperatures, shrinking ice sheets, rise in sea levels, and extreme weather patterns. As climate change becomes more pronounced, Green Bonds are gaining traction as a positive means of bridging climate risk mitigation and sustainable development. With the green bond market reaching ~USD 1tn in 2020, we take a look at the role it plays in pushing companies to adopt more sustainable investments.


Climate change concerns drive demand for green investments

Human activity relating to economic growth and population growth are the two main drivers contributing towards global warming. The way we do business, our consumption patterns, our decisions on how we choose to invest, our growth and development aspirations, have all contributed towards global warming and climate change.

Atmospheric CO2 concentration levels have been steadily increasing

Source: Oxford Martin School – Our World in Data | PPM – Parts per Million

Close co-relation between global GDP growth and CO2 emissions

Source: Oxford Martin School – Our World in Data

However, the countries that are mostly affected by climate change are not necessarily those who emit the most amount of CO2. As per the Global Climate Risk Index 2021 report, of the top 10 countries most impacted by climate risk in 2019, only two are leading CO2 emitters, indicating that a majority of affected countries are those who do not significantly contribute towards carbon emissions. Depending on the geographic location, many of these countries are subject to droughts, intense tropical cyclones, flash floods etc, resulting in severe humanitarian crisis. Of the leading CO2 emitters, the top five countries (China, US, India, Russia and Japan) are responsible for more than half of the global CO2 emissions.


Countries with least amount of emissions continue to face higher climate risk

Sources: Germanwatch Global Climate Risk Index 2021, UCSUSA.Org, IEA , Our Word in Data, World Bank

While it is inevitable that countries, organisations and individuals continue working towards meeting their economic growth aspirations, there is continuous emphasis now on how this growth can be managed in a more sustainable manner.


To address the growing negative impact that economic activities have on the environment and the wider society, the United Nations set 17 Sustainable Development Goals (SDGs) with 169 targets covering environmental and social factors. These were implemented in 2015, with a 15-year horizon to meet the set targets. During the same year, the Paris Climate Agreement was adopted by 196 parties with the goal of limiting the increase in average global temperatures to below 2.0°C and ideally limiting to 1.5°C, compared to pre-industrial levels. The agreement also states that relevant parties need to take initiatives to make financial resources consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.

Global temperatures on the rise

Source: NOAA National Centers for Environmental information

Given these changes, in March 2007, the European Union's Energy Action Plan set ambitious targets in the areas of renewable energy and energy efficiency, compelling the European Investment Bank (EIB) to participate in these goals. EIB chose to emphasise its commitment via a climate-related capital market product, with the aim to improve public awareness and reaching new investors. As a result, in June 2007, the EIB pioneered the green bond market by issuing the first ever Climate Awareness Bond (CAB) at EUR 600mn.

Not long after, the World Bank issued its first green bond in 2008, for SEK 2.3 bn (~USD 400mn) with a 6-year maturity. The issuance was prompted by a group of Swedish Pension Funds wishing to invest in projects that helped the climate, but did not know of a financial method or a financial instrument that they could invest in. The issuance also created the blueprint for the green bond market. It was the first to define criteria for eligible green bond projects, and the first where investors received assurance, through a second party opinion provider, that eligible projects would address climate change. The World Bank was also the first to commit to investor reporting on the use of green bond proceeds and expected project impacts.

A green bond is a fixed-income financial instrument, proceeds of which are used to specifically finance and/or re-finance climate and environmental projects. Green Investments are those that generate earnings fully (or significantly) from environmentally friendly business practices. The term “Green” could have different interpretations, as some investors may back business practices which focus on energy efficiency and renewable energy, while some would look at natural resource management.


Apart from green and climate bonds, the blue bond market emerged in 2018, with the Seychelles (supported by the World Bank) issuing its first USD 15mn blue bond. These bonds specifically raise money to finance and implement SDGs related to ocean and marine resources, as well as the transition towards a sustainable ocean economy. Another type of bond which raise money for climate projects is sustainability bonds. These bonds use proceeds to finance or re-finance a combination of green and social projects and therefore are broader in their coverage.


The global 'Bond' universe

Source: Asian Development Bank

The International Energy Agency (IEA) estimates an annual USD 53tn investment will be needed in the energy sector until 2050 in order to meet the Paris Agreement’s target of limiting global temperature increases to 2.0°C. This is double the value of current clean energy investments. The IEA also states that sustainable debt securities, including green bonds, may provide the clearest route to financing clean energy and other green projects.


The green bond market covers a wide range of investments

As of December 2020, the cumulative green bond issuance hit USD 1tn globally, growing significantly since its initiation over a decade ago.

The global Green Bond market reached USD 1tn in 2020

Source: Climate Bonds Initiative: Global State of the Market 2020

Since the first issuance of corporate green bonds, the market exploded from USD 10bn in 2013 to over USD 40bn in 2015. Global green bond issuance in 2019 was ~USD 267bn, a 51% YoY growth from 2018. Until 2012, only Multilateral Development Banks were allowed to issue these. However, since then, any government or business entity can also issue green bonds. The popularity of green bonds has also brought some of the largest investment banks into the market.

Companies which proactively include impact investing and sustainability measures such as Environmental, Social and Corporate governance (ESG) into their business practices, stand a better chance of being ahead of their peers. These companies can hedge better against future regulatory changes, as well as reduce legal and reputational risks related to environmental regulations.


Top global Green Bond underwriters (as of end 1H 2020)

Source: Climate Bonds Initiative

Currently, majority of green bond issuers are from developed countries with The US taking the lead with a cumulative issuance of ~USD 190bn to-date. However, green bond issuance by emerging economies has also seen a notable growth in the recent past, led by China who has so far issued bonds worth ~USD 117bn to-date.


US takes the lead on global green bond issuers

Source: Climate Bonds Initiative

Bond issuance by developing nations the strongest, led by US

Source: Climate Bonds Initiative

Green bonds are commonly used to finance projects related to:

  • Energy efficiency

  • Renewable energy

  • Pollution prevention and control

  • Natural resources and land management

  • Clean transportation

  • Wastewater and water management

  • Green building

A majority of the USD 1tn green bond proceeds thus far have been directed towards energy sector investments (~USD 355bn) followed by low carbon buildings (~USD 264bn) and transportation (~USD 191bn).


A majority of green investments are directed towards the energy sector

Source: Climate Bonds Initiative

However, allocations to green transportation and buildings are increasing over time

Source: Climate Bonds Initiative

In 2020, green bond proceeds raised for clean transportation grew by 26% YoY originating from sovereigns and government-backed entities. Almost half of government backed green bond transportation projects originated from France, valued at ~USD 14.8bn, with its aim to expand the existing metro and commuter rail network. China issued the second highest transportation related bonds during the year amounting to USD 3.8bn, which are to be directed towards 11 separate metro projects.


Impact investing and greenwashing; two sides of the same coin

Impact investing is an investment strategy that focuses on social and environmental gains, as well as financial gains. The green bond European Investor Survey conducted by Climate Bonds Initiative in 2019, shows that small scale investors hold a larger proportion of green bonds in their fixed income portfolio.

Green Bonds holdings in European Fixed Income portfolios

Source : Green Bond European Investor Survey 2019

It must be noted however, that green bond investments do not yield strong returns, although the rate of return has been improving steadily over the years.


Returns on global fixed income indices; Green Bond returns yet to catch up

Source: Bloomberg

However, these investments are not solely about the financial gains.


The Green Bond European Investor Survey further finds that:

Green bond issuance saw a slowdown in 2020 due to the COVID-19 pandemic. However, industry analysts expect the market to pick up from where it left off in 2019, as the pandemic itself has made organisations realise the importance of sustainability. Furthermore, since the US re-entered the Paris Climate Agreement, the country is seeing a rapid development in ESG frameworks that could lead towards standardised regulations, covering the green bonds market as well. Further, industry analysts estimate governments and corporates to issue green bonds worth of USD 500bn in 2021, half of the total issuance up to date since its inception.


However, one of the key concerns of this concept is the actual implementation of the proposed sustainable investments. When green bonds are issued, companies publish their green bond framework, highlighting the “Green” areas they aim to focus on using the bond proceeds. Companies would also specify the monetary value and/or percentage of investments they wish to direct at the stipulated “Green” areas, while also highlighting KPIs or target matrices they wish to achieve through their green bond investments. (eg: targeted CO2 emissions reduction, targeted increased percentage of renewable energy in the energy mix, targeted reduction of water usage etc.). Most investors and fund managers would look at these KPIs when choosing the bonds or funds to invest in. However, sufficient focus is not given to the actual environmental impact that green bond investments have brought about, which could usually be found in an issuer company’s sustainability report or a specific Green Bond report.

Due to investor demand and, at times, regulatory requirements, companies aim at making their business practices “Green”. However, not all business practices would be as “Green” as advertised. The practice of companies deliberately misleading investors and consumers with regards to green practices is known as “Greenwashing”. This occurs when companies spend more of their time and resources marketing themselves and their products as “Green”, rather than taking efforts to make their business practices sustainable or environmentally friendly. [KS1] One of the best examples of a greenwashing case is that of Volkswagen admitting to cheating on their emissions tests by installing a proprietary software that detected when the vehicle was going through an emissions test and accordingly altered its performance to reduce emission levels. Eventually, the engines were found to have been emitting 40 times more than the allowed limit of nitrogen oxide pollutants. [KS2] Eventually, US authorities extracted USD 25bn in fines, penalties, civil damages and restitution from the company for the 580,000 tainted vehicles it sold in the US. However, most times greenwashing is not practiced in a manner that looks like cheating or misleading, as companies do disclose their environmental impact. Yet, how these companies choose to disclose these metrics and measures and how we make true sense, needs further scrutiny.


Is it sufficient that companies set a target for Green House Gases (GHG) reduction, and meet this target? Is it good enough that companies increase investment in renewable energy? What is the actual environmental impact of these companies’ business activities?


To understand the impact of green bonds, we look at a few leading as well as diverse green bond issuers and their investment performance in terms of the environmental impact.


Case study 1 - Apple Inc

Apple Inc. issued its first green bond in 2016 valued at USD 1.5bn, followed by a second issuance of USD 1bn, with proceeds from both issuances fully allocated. The company is committed towards the Paris Agreement, with the goal of reducing its emissions by 75% by 2030 from its 2015 levels. In 2019, Apple Inc. issued its third green bond aiming at achieving carbon neutrality.


A majority of Apple Inc's third green bond is allocated towards renewable energy

Source: Annual Green Bond impact report, Apple environmental progress report 2020

Apple further looks to invest in a new renewable energy project as part of its USD 4.7bn spending from its green bond proceeds, aimed at generating 1.2 gigawatts of renewable energy globally. However, Apple’s corporate facilities using fossil fuels for over 99% of its energy needs and manufacturing facilities being responsible for over 75% of its GHG emissions remains a concern. Apple will need to focus more on its internal practices on negative environmental impact, as its green bond program does not seem to address this concern.

Case Study 2 - Porsche

Porsche has committed to the 2015 Paris agreement of cutting CO2 emissions and the company targets to have electric motors in half of their new fleet by 2025. Porsche identified a green project portfolio of over EUR 2.75bn, for which the company issued a EUR 1bn Green Schuldschein* in 2019, a first for a car manufacturer. The company aims at focusing on mitigating GHG emissions resulting from vehicles operations as well as on emissions of its supply chain.


A majority of bond proceeds were allocated towards energy efficient production facilities

Source : Porsche Newswroom

(*A Schuldschein is a privately placed, typically unsecured medium to long long-term1 debt obligation governed by German law. Schuldschein tend to be less expensive than bonds and do not need to be listed or registered at a stock)

As part of its carbon-neutral production facility strategy, Porsche opened its Stuttgart-Zuffenhausen factory in 2019. To enhance its clean energy mix, the factory installed two new cogeneration plants which utilise biogas and residual organic waste to produce heat and energy for the factory.

As a result of its green bond strategy, Porsche introduced its first fully electric vehicle, the Taycan in 2019. In 2020, Porsche delivered a total number of 272,162 vehicle units worldwide, of which 20,015 units were Taycans, representing 7.4% of its total vehicle deliveries during the year. This still leaves a significant portion of Porsche’s vehicles containing fuel combustion engines.


Porsche vehicle deliveries by model in 2020; still more weighted towards fuel combustion engines

Source: Porsche AG

In 2020, Porsche emitted direct and indirect GHG totaling ~27,000 tons of CO2e (e=equivalent), a reduction of about 50% from the previous year. Of this, ~45% originated from production sites and ~51% from development sites. In its efforts to reduce its GHG emissions, Porsche continues to improve the energy mix in its production process. As a result, Porsche has brought down its per vehicle production GHG emissions to 69kg/vehicle in 2020 from 239kg/vehicle in 2019.

Porsche’s energy mix of production sites in 2020; mix weighted towards biogas

Source: Annual and Sustainability Report 2020 Porsche AG

However, the main concern remains that the majority of Porsche’s vehicle sales still consist of traditional fuel combustion engine units, which emit significant amounts of CO2 in its operations. Further, Porsche’s leading model the Cayenne series, which represented 34% of Porsche’s total car sales in 2020, is at the higher end of the CO2 emission spectrum, with over 250g/km CO2 emissions in operation.


CO2 emissions by Porsche models

Sources: Porsche, Autoexpress

Porsche plans on issuing over EUR 6bn in green bonds by 2022, in its efforts to push for more electric vehicle investments. Porsche has done significantly well in introducing its electric vehicle model, as well as developing carbon mitigating production processes with its previous EUR 1bn green bond. However, overall as a company, the green bond strategy might fall short for Porsche, as demand for traditional fuel combustion, high CO2 emitting vehicle models remains high.


Case study 3 - Ontario Power Generation (OPG)

OPG is one of the largest power generators in Northern America, with a focus on diverse and clean energy. The company has issued green bonds in attempts to invest its proceeds in renewable energy and in energy efficient management. OPG is focused on investing its green bond proceeds in building, managing, and maintaining renewable energy sources such as solar, wind and hydro plants, as well as on investments that help in reducing energy consumption and efficient energy storage facilities.

OPG's bond proceeds focused on renewable energy

Source: OPG 2020 Green Bond Impact Report

OPG acquired 100% ownership of Eagle Creek in 2018, which consists of hydroelectricity facilities and solar facilities. Emission avoidance by Eagle Creek is 675,000 tonnes CO2e annually. OPG commenced the replacement of two outdated power generations in its Sir Adam Beck facility, which is expected to avoid 21,807 tonnes CO2e emissions annually.


Additionally, OPG currently operates seven thermal stations, two nuclear stations, five hydroelectric stations and a solar station. In 2019, thermal and nuclear stations emitted 506,060 tons of CO2e with over 98% emissions originating from thermal stations, despite these stations producing less than 1% of electricity in 2019.


Thermal stations still continue to hamper emission goals

Source: OPG Performance Data reports

As a result, it would be far more beneficial for OPG to continue to invest in renewable energy to reduce its negative environmental impact, as the company’s green bond proceed allocations in acquiring renewable energy facilities and replacing outdated generators are keeping OPG on track in reducing GHG emissions.


Lack of globally unified standards leads to a number of challenges

Despite the positive impact green bonds bring about in achieving sustainability goals across governments and companies, there are a number of challenges and risks to the continued use and growth of the green bond market. These include inadequate green contractual protection for investors, the quality of reporting metrics and transparency, issuer confusion and fatigue, greenwashing (discussed above), and a perceived lack of pricing incentives for issuers. Due to the ambiguity of what constitutes as “Green” and in the absence of strong, unified frameworks and regulations, companies have had a freehand on deciding how they wish to invest their green bond proceeds, as well as how they choose to monitor and report the impact of such investments. While some bond investments result in achieving set goals by their respective green bond framework and targets, the total negative impact on the environment by the issuers of the bonds cannot be ignored. For example, Apple Inc. has strong environmental targets they wish to achieve through their green bond program. However, the environmental impact by Apple’s business processes and products are much more severe than what their green investments can currently negate. The lack of a unified framework and standards have also led to ‘rampant greenwashing’, as noted by the International Accounting Standards Board in 2019. In addition, the use of proceeds, review of the use of proceeds, and annual reporting are most often not included as direct covenants in the terms and conditions of Green Bonds. As a result, failure to use bond proceeds for stated green projects (or deliberate use for non-green purposes) and inadequate annual reporting (or simple non-compliance) are not events of default or events that call for put options, that would enable the noteholders to accelerate or redeem their bonds in the event of breach.

A study carried out by Baker McKenzie in late 2019 notes that given the urgency of addressing the Paris Agreement’s limits on global warming, it is imperative for governments, supranationals (The EU, United Nations and the World Trade Organization are all considered supranational groups), and sovereign wealth funds to take the lead on incorporating enforceable green covenants that will hold companies accountable in the long-run.

Much to be done; however, green bonds show a clear path to promoting sustainability

Environment impact related investments are becoming increasingly important, and companies are taking significantly rapid steps towards integrating sustainable investment strategies into their businesses. The demand for sustainable investments and products also gives rise to a new niche area for investment analysts, portfolio managers, and businesses across all sectors to integrate new leadership and business strategies, focused on mitigating negative environmental impact and working towards a greener economy.


However, the effectiveness of these strategies and the success of sustainable investments depends significantly on strong investor and consumer demand, as well as on stringent regulatory policies by governments and related agencies.


Karishma Sheriff is a seasoned economic analyst with over seven years of experience in capital markets and macroeconomic research. She holds a Masters in Economics from the International Islamic University, Malaysia. The article was written in collaboration with ReMAtics, a freelance platform specialising in financial research, writing and analytics.


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