06 September 2019

Bloomberg: Here’s how ‘green finance’ aims to save the planet

Green finance could be at a tipping point. After an explosive growth, it’s running into a perhaps surprising roadblock: a shortage of projects that are green enough. So-called greenwashing is still a risk, and critics complain about a lack of global standards and inconsistency among ESG scoring methods.

That’s set off a scramble to create a wider range of debt-market instruments and incentives. Central bank officials and a growing list of investors are pushing to make the $100 trillion bond market -- one of the world’s largest pools of money -- a driving force in the increasingly urgent efforts to limit climate change.

The simplest and most established form is green bonds, which support environmentally friendly projects. The amount of green bonds sold in the first half of 2019 was up 44% from the same period in 2018; new borrowers included the government of Chile and Verizon Communications Inc. But the $500 billion or so issued so far represents just a tiny slice of the overall bond market.

Green bonds are quite restrictive: Their proceeds have to be used exclusively for green purposes. That’s left many companies uncertain whether they would qualify. It’s easy for a solar energy company to certify that the money it borrows won’t be used to drill for oil. It’s harder for an oil company to do that without provoking some skepticism.

So far, evidence suggests that there’s little difference in the performance of green and traditional bonds. There is, however, an increasing body of research suggesting that investment strategies that focus on ESG goals do better, probably because they screen out poorly run firms. So far, the rise of green loans hasn’t led to higher funding costs for companies in the extractive industries, but the idea that investor sentiment or government policies might drive up their funding costs has become an active if longer-term worry.

The EU’s June 2019 proposals for a green-bond standard and verification system is seen as potentially creating a benchmark that could ease the sale of green securities worldwide. (Bloomberg LP, the parent company of Bloomberg News, provides ESG data, analytics and indexes via the Bloomberg Terminal and data license services.)

Full article on Bloomberg

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