As the cumulative issuance of labelled green bonds passes the $1trn mark, a debate on the relevance of the ‘earmarking’ a bond’s use-of-proceeds is finally taking place.
On the one hand, a growing chorus of voices suggests that earmarking use-of-proceeds is a nice marketing trick, but what actually matters is the environmental trajectory of all investments made on the ground, and the trajectory of issuers’ balance sheets. After all, green bond investors are exposed to these balance sheets rather than the earmarked projects
On the other hand, the wider green bond industry continues to advocate for the idea that ‘use of proceeds’ is the only thing that matters, and that earmarking equals “financing” the green projects at a project-finance level.
A green bond issuer can be on a 4°C trajectory and transition towards 5°C, as long has it can find green projects to earmark.
Influenced by lobbying of the latter group, the European Commission and its Technical Expert Group on Sustainable Finance (TEG) have picked their side in this debate. The Commission has endorsed the idea that ‘earmarking’ is scientifically relevant to delivering environmental outcomes, despite the lack of evidence. The TEG has developed a standard that refuses to set any requirements on the green bond issuer itself, beyond describing the strategy. A green bond issuer can be on a 4°C trajectory and transition towards 5°C, as long as it can find green projects to earmark.
Of course, advocates of the current green bond concept suggest that sophisticated institutional investors can still discriminate between issuers who are ‘real’ and those who are ‘greenwashing’. Repsol – which made the controversial move of becoming the first oil company to issue a green bond, ostensibly to improve the efficiency of its refineries – is often used as a case in point.
But what about retail investors? What do consumers and citizens think about the standards that are developed for them, on their behalf?
We asked 1,000 people in Germany and France what they think is needed to allow a company to issue a ‘green bond’. 90% rejected the idea of simply ‘earmarking’ projects: consumers don’t agree with what this Commission is establishing as a one-size-fits all standard – by a wide margin.
This is not a philosophical problem. When confronted with the all too frequent claim made by green bond funds that investing in them allows you to “evaluate your real impact”, 55% of consumers feel misled after finding out how green bonds work in practice.
Altogether, consumers own 40% of financial assets in Europe and give a mandate to 100% of law makers. Of course, most of the people we surveyed don’t have the technical knowledge to come up with the standards on their own, but they know enough to judge what passes the smell test. The survey results are clear: the EU’s approach to green bonds doesn’t pass that test.
Jakob Thomä is Managing Director of Paris-based think-tank 2° Investing Initiative.