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How can we tell how green a green bond really is?

What’s happening? The Bank for International Settlements (BIS) has partnered with the Hong Kong Monetary Authority (HKMA) and the technology industry to launch a blockchain-based technology to improve the transparency of green bonds and to help issuers meet their sustainability goals. “Project Genesis” will investigate the tokenisation of green bonds, and BIS said its vision is for individuals to be able to track the real-time impacts, such as the reduction in CO2 emissions, linked to their investment. (BIS)

Why does this matter? Green bonds, like many other sustainable finance vehicles, have become a victim of greenwashing. For example, in some instances issuers may not use the proceeds raised for the projects promised, and when they do these projects might have negligible or negative environmental benefits. The use of blockchain – an immutable ledger that cannot be tampered with – could therefore improve transparency around the use of proceeds and ensure green bonds are actually having a positive environmental impact.

Back to basics – Green bonds are a type of bond – or fixed-income loan from an investor to a borrower – where the proceeds are, supposedly, solely used to fund environmental projects. Other groups of ESG, or sustainability, bonds include social bonds, where the proceeds are used on social projects, sustainability bonds, transition bonds, sustainability-linked bonds and environmental or social impact bonds. The BIS blockchain innovation is focused on green bonds only.

On the rise – In Europe, ESG bond issuance as well as ESG loans have increased by 227% to $223bn in Q2 2021 from Q2 2020, and in June 2021 green bonds specifically accounted for 8.8% of total European bond issuance.

As their popularity has grown, so has their misuse. In June it was discovered that Chinese state-owned firms were exploiting a loophole to use the proceeds from green bonds to grow coal operations – certainly not a green activity. Also, in 2014 green bonds were issued by GDF Suez in order to finance the construction of Jirau Dam in Brazil. The project resulted in the flooding of a rainforest.

How can blockchain help? If a green bond is tokenised, it means it can be moved, stored or recorded on a blockchain system, thus making it easier to track the proceeds of the bond. HKMA said this should facilitate reporting on the environmental impact of green bonds’ proceeds and, in turn, improve transparency for green bond investors.

BIS said its vision is for individuals to be able to download an app and invest in government green bonds focused on wind or solar projects. Over time, investors will not only be able to track financials but also how much clean energy is being generated in real time, along with the resulting reduction in CO2 emissions.

Incorporating blockchain to track green bonds will reduce the opportunities for issuers to misuse them – particularly in emerging markets where its likely to be harder to track the impacts of projects. By providing investors with more clarity on how their investment will benefit the planet, the bonds are likely to become even more popular, thus making it easier for green projects to raise money in the future.

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Mubaasil Hassan

Sustainable Finance Curator

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