In a booming global bond market, there are few segments that are growing quite like the money-minting machine for green bonds. So eager are investors to buy up these notes that they’re willing to pay a premium—and accept lower interest payments—for the privilege.
The risk is that in this mad rush they’re letting a feel-good label obscure the reality of their investments. At the forefront of concerns among a small but growing contingent of bond buyers is greenwashing: the possibility that governments and companies are exaggerating or misrepresenting their environmental credentials or sustainability bona fides to tap feverish demand, lower borrowing costs and boost their reputation.
Any signs of deception could undercut efforts to marry making money with making progress in the fight against climate change and inequality at a critical time—and derail one of Wall Street bankers’ fastest-growing cash cows. So even as sales of green bonds and the related universe of debt tied to broad concepts of improving the world notch record after record, a nascent investor rebellion is finding its voice.
Fund manager Aberdeen Standard blacklisted Indonesia’s green debt from its ESG funds due to deforestation risks. NN Investment Partners dumped its holdings of Poland’s green bond, citing the country’s unclear climate policy. In the corporate market, Actiam passed on a bond to finance eco-conscious renovations at Amsterdam’s airport because plane travel is inherently polluting. And Toyota Motor Corp.’s sale to fund safety research was rejected by Impax Asset Management, which figured that was something carmakers do anyway.
“What greenness you’re getting from those assets can really vary,” said Ashley Hamilton Claxton, head of responsible investment at Royal London Asset Management, which oversees about 148 billion pounds ($204 billion) of assets. “We want to put more money into green assets in the long term, but do it in a smart way.”
It’s a quandary that’s drawing a fresh look from regulators too as the market tops $2 trillion. A new generation of environmentally conscious and socially aware consumers has already embraced clothes made with organic cotton, coffee harvested with fair-trade principles and carbon offsets that promise to wipe away the guilt over jetting off to the beach, even as critics see many of the efforts as ineffective. Investors with the same goals must now parse a whole rainbow of eco-friendly debt, from bonds that fund windfarms to those helping polluters transition to cleaner tech—even if most simply see these bonds as “green.”
The European Union is working on a set of standards that will require more rigor and accountability from issuers, while the U.S. Securities and Exchange Commission has created a task force focused on rooting out misconduct in so-called ESG investing that considers environmental, social and governance issues.
There’s certainly a lot to scrutinize. Offerings of green, social and sustainability debt make up more than one in five sales in Europe this year, up from just 7% at this point in 2020. Latin American borrowers have been even more aggressive—they’re already 80% of the way toward 2020’s record $10.8 billion of ESG debt deals.