The gray areas of green bonds
Issues surrounding green bonds are sometimes not straightforward
8 Nov 2018 | Michael Edesess
Like “blockchain” and “smart contracts” for all things transactional, “green bonds” and “green finance” have been touted as the solution for all things environmental. Of course, they don’t perform miracles. Many environmentalists may have started to buy a little too much into the “miracle of the market” ideal. They are a way for a company or governmental entity to explicitly promise that a project requiring funding will be green or have a green-ish tinge.
Would the green-ish tinge be incorporated anyway even if it wasn’t explicitly promised? The answer is presumably yes, in theory, if incorporating it would more than pay for itself (as, for example, with many energy efficiency measures). If a proposed project would not be incorporated anyway, because it would be detrimental to profits, then a corporate issuer could only justify it as a form of greenwashing (or rather, ‘public relations’ or ‘virtue-signalling’).
Greenwashing is not necessarily bad if it goes beyond mere public relations to embody a sincere aspiration to find ways to achieve green profitability, eventually leading to finding more ways, but it can easily miss that mark in practice.
A for-profit corporation (and even a non-profit) must at least break even on the investment of its borrowed funds or it will eventually not be able to repay its creditors and have to go out of business. If it previously used its borrowed funds to fund some projects that happened to be green and some that happened to be brown, but now it separates out its green projects to be funded by green bonds, then its brown projects may simply get funded by other, “brown” bonds, possibly with no net green benefit. Government issuers of green bonds are another matter. Governments can publicly fund green projects, like pollution clean-ups, that could not be justified solely on the revenue they produce.
China has been a big issuer of green bonds, pushed particularly by Ma Jun, former chief economist of China’s economic research arm. In this case the motivation isn’t greenwashing but an actual need for more funds to clean up China’s environment. But since most environmental clean-up projects don’t earn enough to pay off the bonds, China’s government will subsidize them as needed. In this case green bonds are a kind of public-private partnership, or like the funding of infrastructure through the issue of Treasury bonds that are repaid from general government revenues. This may, in fact, be their only real use outside of “greenwashing” – or to put it more hopefully, “an aspiration to find ways to achieve green profitability”.
However, China has the problem that its standards for green bonds are different from those of the developed countries from which they would like to procure investors. So some wealth managers and institutional investors outside China are steering clear of China’s green bonds because they don’t meet their standards. For example, electric vehicles do meet their standards but China’s “clean coal” projects (installing scrubbers at coal plants to reduce air-polluting emissions while also upgrading the plants to use less coal per unit of electric output) do not. European and American environmentalists are now most concerned about climate change not local pollution, and for all of them the use of coal, even to make its use more efficient, is out of bounds. (Nuclear power is also generally not considered eligible for green bond funding even when the primary goal is reduction of greenhouse gas emissions.)
This is paradoxical because it can be demonstrated that electric cars offer no greater medium-term benefits than China’s “clean coal” – and probably less. The benefits of electric cars are the same as the benefits of clean coal: reduction of local air pollution in cities and some net reduction in the use of fossil fuels. If the electricity is generated by coal-fired power plants, the plants must be as efficient as possible. So the idea that electric cars advance the clean energy transition while more efficient coal plants do not is more an artefact of knee-jerk thinking than of detailed analysis.
Nevertheless, China will have to provide better assurances that the proceeds of its green bonds will truly help solve environmental problems. It will need to assure that monitoring, reporting, and verification of the uses and emission-reducing results of the proceeds are reliable, and it will need to assure that proceeds are used only for environmentally beneficial ends.


Economist and mathematician Michael Edesess is adjunct associate professor and visiting faculty at the Hong Kong University of Science and Technology, chief investment strategist of Compendium Finance, adviser to mobile financial planning software company Plynty, and a research associate of the Edhec- Risk Institute.
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