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Are green bonds funding the transition?

A new study shows weak link between companies’ climate targets and green debt financing
Green bonds are regarded by many as of the most important innovations in sustainable finance. Despite the outbreak of COVID-19 and the ensuing global economic crisis, total issuance of green bonds this year has already surpassed last year’s record of USD 250 billion. However, questions have been raised about the sustainability credentials of green bond issuers, and whether companies that are highly exposed to climate transition risks are using green bonds to greenwash their reputation to remain attractive to investors that are becoming increasingly concerned with climate change.
Study shows that issuing green bonds does not necessarily go hand in hand with setting ambitious climate targets
A new study by the Stockholm Environment Institute (SEI) and the Stockholm Sustainable Finance Centre (SSFC), investigates the question of whether green bond issuers are using green debt to manage their transition risk. Researchers asked the question what kind of climate targets have been adopted by green bond issuers, to what extent are green bond frameworks connected with issuers climate targets, and to what extent does green bond reporting enable transparent and comparative assessment of issuers’ progress on climate targets.

The study found that out of the twenty issuers, only eleven had set climate targets beyond 2025 and six had not set any absolute emission reduction targets. The lack of long-term mitigation targets and in some cases absolute targets suggests that green bond issuance on its own is not indicative of issuers having an ambitious strategy to lowering emissions and managing transition risks.
Lack of transparent and comparable reporting increasing greenwashing risk and calls into question additionality claims
Green bond post-issuance reporting plays a crucial role in reducing information asymmetry, lowering transaction costs, and building confidence and legitimacy of the green bond market. The study finds six key shortcomings in issuers financial and impact reporting: lack of reporting on the share of refinancing versus new financing; lack of project-level reporting on the share of green bonds in total project investments; imprecise use of proceeds and impact reporting; lack of consideration of project co-ownership; lack of a common impact methodology and low levels of external verification.

These shortcomings in reporting make it difficult for investors and market observers to correctly attribute the reported avoided emissions to green bonds. These limitations also carry a high risk of double counting of avoided emissions. Specifically, lack of information about methodology, third-party verification and project co-ownership could mean that avoided emissions from a shared project are claimed by multiple owners.
The proposed EU GBS addresses many concerns – but falls short at linking reporting to climate targets 
The proposal for a EU Green Bond Standard compels issuers to report on the environmental impact of their green bonds in a harmonized manner using metrics and thresholds developed under the technical screening criteria in the EU Taxonomy if available. Results from the study suggest that in addition to a common set of impact indicators, mandatory third-party verification of impact reporting is key to building a more transparent and credible green bond market in Europe. However, in its proposed form, the EU GBS falls short of asking issuers to report on the contribution of their green bonds to their own emission reduction goals or against the EU’s climate targets and newly enacted sustainable finance benchmarks.
Linking green bonds to issuers’ climate transition strategies and targets
The study concludes that issuers of green bonds should be asked to develop business transition plans, set credible emission reduction targets, describe in their Green Bond Frameworks how green bonds will help them in achieving these plans and targets, and report on progress by using transparent and harmonized impact methodologies and metrics.

Asking issuers to declare and report how green bonds support their transition to climate neutrality recognizes that green bond projects have different shades of green and that there is a need for assessment at the firm-level to complement project- or activity-based labels.

The study’s conclusions align with the recently published Climate Transition Finance Handbook by the ICMA which recommends issuer of green bonds and sustainability-linked bonds to disclose information related to their transition strategy and governance, science-based targets, and implementation progress.

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Expertise: Local level and urban sustainability, sustainability and environmental management (systems, indicators, and tools), Climate change mitigation and adaptation, marine issues
Heidi Tuhkanen
Senior Expert, Stockholm Environment Institute (SEI)
Gregor Vulturius is a Head of Operations and Engagement. He has a background in spatial planning, climate change adaptation and mitigation and disaster risk management.
Gregor Vulturius
SSFC Head of Operations and Engagement