Has the green-bond bubble burst? And if it has, should we care? Growing interest in sustainable finance in recent years has led to ballooning issuance of green bonds. From next to nothing five years ago, it swelled to about $160bn in 2017, according to Moody’s. This time last year, the rating agency was forecasting 60% growth in 2018.
It didn’t work out that way. By the end of the third quarter, issuance was actually slightly down on 2017. Though things picked up a bit in December, the final numbers will be way below initial expectations.
This is clearly bad news for the folks who make money out of green bonds. But for the environment? Not so much. Although green bonds are perhaps the most high-profile innovation in the greening of finance, they are among the least effective in terms of their environmental impact.
Green bonds are issued to finance environmentally friendly investment, so how could they not be a good thing? The big question is whether the issuing of green bonds leads to investment that would not have happened otherwise. Even their most enthusiastic cheerleaders struggle to find examples of projects financed by green bonds that would not have been funded by other forms of borrowing or by taxation.
This would be less of a problem if green bonds were cheaper for the borrower than plain vanilla bonds. If they were, there would be marginal projects that were viable if funded by green bonds that would not make financial sense if financed by ordinary bonds. In practice, however, there have been virtually no cases where green bonds were cheaper.
This leaves the green bond as a “lose-lose” product according to Hiro Mizuno, chief investment officer of Japan’s Government Pension Investment Fund, the world’s biggest pension fund. “We need to redesign it to make it a mainstream investment product,” he told a green-finance conference in Paris in November.
Enthusiasts argue that growing demand for green bonds could eventually enable borrowers to issue them at lower yields than conventional bonds. More sober types admit this is likely to require some sort of subsidy.
The real game-changer would be if banks were given lower capital requirements on green bonds and other types of sustainable finance. The idea is gaining momentum. Valdis Dombrovskis, the European Commission vice-president, said in January that Brussels was looking favourably at the idea of a “green supporting factor.”
But Mark Carney, the governor of the Bank of England, has quite rightly given the proposal short shrift. The notion that risk weightings should be determined by factors other than risk is nuts. And green investments are not inherently lower risk. Just think of the scores of solar power companies that went bust between 2011 and 2015.
A remarkable feature of the green-bond world is how many of the people involved privately admit that they are little more than an enormous exercise in virtue signalling. The head of sustainable investment at one of Europe’s biggest asset managers told me that, in themselves, green bonds are “pretty pointless.” But investors and banks are keen to burnish their environmental credentials and green bonds do the trick.
Green bonds are also good business for the City, which is seen as one of the global leaders in sustainable finance. That is why the government is very supportive and is backing the formation of a Green Finance Institute in conjunction with the City of London. Yet some government officials are gloriously cynical about it.
“Do I think green bonds make much difference to the environment? No I don’t. But there is a real demand for them, and that is good for the City,” said a senior government official.
For some sceptical environmentalists the worry is that the focus on green bonds could divert attention away from more effective strategies. Campaigning investors are having success in changing corporate policies, such as Shell’s recent agreement to set carbon emission targets. This lobbying is likely to have a much bigger impact than buying a few billion dollars of green bonds. But it is more difficult and more expensive.
If investors and banks really wanted to make a big difference they should be channelling more money into low-carbon technology research, which seems the best bet for tackling the threat of climate change.
Some green-bond critics suggest the pause in issuance growth in 2018 may reflect questions about their effectiveness. But most market observers insist the bubble has not burst and predict that this year will see another surge in issues.
If so, we must just hope that it doesn’t distract investors, banks and companies from taking more effective actions. As one JPMorgan insider said to me, all the billions of dollars it has helped raise in green bonds have probably had less impact on the environment than its ban on plastic cups in its Canary Wharf office.
Source Financial News