In the context of the Covid crisis, some see green bonds has a “green” way out. At first glance, these bonds – debt equities emitted by firms or public entities – aiming at financing so called “green” projects seem to embody the sought-after sustainable financial product.

However, with lacking supervision, green bonds cover a wide range of realities, including the financing of non-green projects and the emission of bonds by polluting companies. Furthermore, the study of their financial characteristics reveals that they are not different from standard bonds and only make greenwashing easier. Despite these many flaws, green bonds are developing, and the new transition bonds repeat the same mistakes.

To make green bonds real tools for the ecological transition, it is necessary to ensure that their emitters are committed to a 1.5°C trajectory and not active in the most polluting sectors.

As for transition bonds, they should be based on the emitter’s commitments. Only companies that have adopted detailed absolute decarbonization objectives on all their activities in order to be aligned with a 1.5°C trajectory should benefit from them.

1000 shades of green in “green” bonds

The first green bond was emitted by the European Investment Bank (EIB) in July 2007. Until 2013, and the “Green Bond Principles”, there was no real intent to clarify or organize green bond emission. However, these relatively loose and voluntary principles, remain largely insufficient to reduce greenwashing and avoid the use of self-named green bonds to finance polluting activities. Even today, there is no legal definition for green bonds.

First attempt set first criterion about the environmental contribution of financed projects and recommend certification. As NGOs and financial actors have often underlined, and with no unique definition, these principles remain insufficient to ensure the “green” quality of the bonds.

Green bonds financed controversial project, such as Engie’s dam (formerly GDF Suez), or massively polluting ones, like coal in China. According to the Climate Bond Initiative, that aims at ensuring that projects financed through green bonds are aligned with a 2°C trajectory, from January to the end of May 2020: 66.5 billion of emitted bonds were aligned with the Paris Agreement and 90.1 were not.

Since 2018, the European Union is working on “Green Bond Standard” to reinforce the transparency, quality and credibility of green bonds. Despite the fact that the EU Commission is considering a legislative side for this work, these principles, that suggest the alignment of investments financed through green bonds on the new green taxonomy, remain fully voluntary.

A standard financial product… With green communication as a bonus

  • The objective of green bonds it to contribute to develop green projects. The underlying idea is that these projects are more difficult to finance and that specific mechanisms are useful to incite companies to develop more green projects.  

Concretely, a green bond should be emitted at a higher price than a similar standard bond. Investors would pay for a “green promise”, there would be a “green bonus” for the emitter, which implies that investors integrate non-monetary benefits in their decision making. 

However, Ivar Ekeland and Julien Lefournier’s study of green bonds reveals that green bonds and standard bonds are emitted in similar conditions, there is no “green bonus”, and they are negotiated at similar prices on the secondary market.

  • Green bonds should push emitters and/or investors to increase their activity in green and reduce it in brown. But, there is no evidence of such an effect.  

The only specificity of green bonds is that they finance so called “green” projects. Any company can emit green bonds, even fossil fuel companies like Repsol and Engie emit green bonds. The emission of green bonds doesn’t entail the stop of non-green projects financed through standard obligations. In addition, green bond buyers are classic investors that also invest in non-green options, there is no such thing as group of “green investors”.

Therefore, without any “green bonus” for emitters, green bonds seem to be powerful tools for greenwashing.

Emitters can use these bonds to hide their polluting activities while investors can use it to justify the presence of companies in their portfolio. Financial players say nothing different. Emitters do not talk about financial advantages and nobody mention a price difference on these financial products. The Climate Bond Initiative indicates that the benefit from green bond emission are to “highlight green assets/business”, a “positive marketing story”, to “diversify the investor base” and the possibility to “join up internal teams in order to do the investor roadshow”.

Green bond’s credibility will not be ensured without a strict certification process based on the quality of the project and of the emitters’ commitments. Only green projects with demonstrated ecological benefits should be financed. Furthermore, these bonds should be reserved to emitters engaged on a 1.5°C trajectory and not involved in the most polluting sector and activities (coal, fossil fuels, air sector…). Corporations that do not fulfill these requirements should prefer transition bonds.

Transition Bonds, one more tool for greenwashing?

Last December, a new financial tool has appeared: transition bonds. According to one of its main promoters Axa, is to finance companies that are “brown today” and “cannot emit green bonds for a lack of green projects” but have “an ambition to transition to green in the future”.

These obligations are even more problematic than green bonds. Emitters have no need to prove their commitment to a green transition and the added value of financed projects is especially difficult to assess in a context of fast technological evolution. Thus, the first emission of transition bonds, by Axa and Crédit Agricole, announced at the end of 2019 at the insurers’ office rue Matignon with Total’s CEO, included gas projects in Asia. Nothing proves that these projects will reduce GHG emissions and it is impossible to justify the use of transition bonds while renewable energy projects are more competitive that fossil fuel projects in Asia.

If transition bonds are not conditioned to the emitters’ commitments to decarbonize all of its activities, they will finance more projects that contradict climate objectives, such as new fossil fuel projects.

Green bonds or transition bonds?

While green bonds aim at financing green projects, transition bonds should not be based on the projects but should rather require global climate commitments from the emitter.

While green bonds should be restricted to emitters not involved in the most polluting sectors, like fossil fuels, transition bonds could be emitted by corporations active in these sectors if they demonstrate their commitment to rapidly exit them.

Both green and transition bonds should be reserved to companies that have adopted short, medium and long term objectives of absolute GHG reduction aligned with a 1.5°C trajectory. For fossil fuel companies, it would mean adopting a plan to close their fossil fuel plants and installations to phase out the sector by 2030 in the EU/OECD and 2040 everywhere for coal and 10 years later for oil and gas.