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Breakingviews - Green bonds could slide into irrelevance

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LONDON (Reuters Breakingviews) - Green bonds are booming. Everyone from JPMorgan to Germany is issuing securities earmarked for environmentally friendly projects. Yet the benefits of the $800 billion market in channelling new money to green causes are less obvious.    

Green bonds just mean a company issues securities and earmark proceeds for projects like wind farms. That gives the investor certainty how the money is spent. This year as much as $350 billion of the bonds could be created, the Climate Bonds Initiative reckons. Yet the securities may not always be used for very green ends. Oil and gas group Repsol’s 2017 bond, for example, was used to make refineries more efficient.  

The market is getting more vigilant. Dirtier bonds are excluded from indexes, and third-party firms scrutinise how funds are used. The European Commission’s Taxonomy, which says what’s green and what isn’t, will tighten the screw.   

However, even the darkest green bonds only serve a narrow purpose: They tell investors a lot about the projects they fund, but not much about the company that issues them. An issuer can allocate funds for renewable projects, but that doesn’t make its overall business any greener. A recent Bank for International Settlements report showed that green bonds issuance does not lead to falling or even comparatively lower carbon emissions by the firms selling them.   

Green bonds could become more useful if they stimulated new green investment by giving companies a new, cheaper source of funding. Yet that is unlikely, because the credit risk of green bonds is exactly the same as an issuer’s other bonds. If yields on green bonds fall too much out of whack with similar dirty bonds, investors will arbitrage the difference. While there is sometimes a green premium, or “greenium”, it is usually tiny.    

One solution would be to require issuers to also abide by emission reduction targets. Italian utility Enel has gone a step further; abandoning green bonds in favour of debt with coupons linked to its sustainability goals. Even so-called sustainability-linked bonds like these may just be a stopgap. As more capital pours into funds that focus on environmental, social and governance factors, bond markets will differentiate better between green and dirty companies. Green bonds would then become irrelevant.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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