Greenwashing and green bonds

When you talk about ‘green’ investment then the topic of ‘greenwashing’ is never far away. And, with the growing popularity of green bonds, the topic is certainly worth another look.

Green bonds have been around for seven years, and were pioneered by organisations such as the World Bank, European Investment Bank and African Development Bank to raise money to invest in green projects. Wind farms are among the main beneficiaries.

We are now seeing a new type of green bond emerging: corporate green bonds. French energy company, GDF Suez launched a €2.5bn bond in May to invest in renewable energy projects, and it was three times oversubscribed. There was also a £250m green bond that was launched by Unilever in March; and a €1.4bn green bond by EDF in November 2013.

And, this week, German development bank KfW got in on the action with its own green bond, with the aim of raising €1.5bn to invest in renewable energy and climate change mitigation projects. The AAA-rated bond was oversubscribed, with orders of €2.65bn. It says that this shows how mainstream investors want to put their money into clean energy.

This all sounds great but we have to sound a word of caution.

Now, we’re all in favour of investors putting their money into wind farms and other green projects. Developers need money if they’re going to keep developing, and green bonds are one way that they can gain this funding. But the flaw with some of these green bonds is whether they really offer investors as much greenness as they promise.

In the case of corporate bonds, for example, some investors would be put off investing in a green bond from a business like EDF or GDF Suez because they invest in other types of energy too. There is no recourse for investors if money from the ‘green bond’ goes into supporting other non-green projects, and so investors will have to scrutinise very carefully.

And, in the case of KfW, the question some investors will ask is whether it will end up investing in green energy projects, or other types of infrastructure with links to green infrastructure — such as energy transmission networks. KfW hasn’t made clear exactly which assets it will invest in and, until it does, it is tough to scrutinise its green credentials.

Investors need to be wise to these risks. In general, there is little recourse if their money ends up supporting a non-green project, and the risk is to the investor’s own reputation. The court of public opinion sees little distinction between companies that invest directly into something unethical and those who do it indirectly and unwittingly through a fund.

There is also the question of why investors would put money into these kinds of bonds when there are investment managers out there like Resonance or Greencoat. These are more focused on green projects and have a strong track record of focused investments, along with the potential of far better returns.

Some investors will accept slightly lower returns to invest in something ethical. Without research, this carries the risk that the project they’ve invested in isn’t as ethical as they would have liked — and the lower returns are still the same.

And some will claim it is mercenary to focus on the money when investing in green projects should be about doing the right thing. Well, we disagree. If we’re going to get more investors putting their money into green projects like wind farms then we need to make sure they see good returns and their investment being used for green projects.

If people feel let down by ‘green bonds’ then they’ll put their cash elsewhere.

When you talk about ‘green’ investment then the topic of ‘greenwashing’ is never far away. And, with the growing popularity of green bonds, the topic is certainly worth another look.

Green bonds have been around for seven years, and were pioneered by organisations such as the World Bank, European Investment Bank and African Development Bank to raise money to invest in green projects. Wind farms are among the main beneficiaries.

We are now seeing a new type of green bond emerging: corporate green bonds. French energy company, GDF Suez launched a €2.5bn bond in May to invest in renewable energy projects, and it was three times oversubscribed. There was also a £250m green bond that was launched by Unilever in March; and a €1.4bn green bond by EDF in November 2013.

And, this week, German development bank KfW got in on the action with its own green bond, with the aim of raising €1.5bn to invest in renewable energy and climate change mitigation projects. The AAA-rated bond was oversubscribed, with orders of €2.65bn. It says that this shows how mainstream investors want to put their money into clean energy.

This all sounds great but we have to sound a word of caution.

Now, we’re all in favour of investors putting their money into wind farms and other green projects. Developers need money if they’re going to keep developing, and green bonds are one way that they can gain this funding. But the flaw with some of these green bonds is whether they really offer investors as much greenness as they promise.

In the case of corporate bonds, for example, some investors would be put off investing in a green bond from a business like EDF or GDF Suez because they invest in other types of energy too. There is no recourse for investors if money from the ‘green bond’ goes into supporting other non-green projects, and so investors will have to scrutinise very carefully.

And, in the case of KfW, the question some investors will ask is whether it will end up investing in green energy projects, or other types of infrastructure with links to green infrastructure — such as energy transmission networks. KfW hasn’t made clear exactly which assets it will invest in and, until it does, it is tough to scrutinise its green credentials.

Investors need to be wise to these risks. In general, there is little recourse if their money ends up supporting a non-green project, and the risk is to the investor’s own reputation. The court of public opinion sees little distinction between companies that invest directly into something unethical and those who do it indirectly and unwittingly through a fund.

There is also the question of why investors would put money into these kinds of bonds when there are investment managers out there like Resonance or Greencoat. These are more focused on green projects and have a strong track record of focused investments, along with the potential of far better returns.

Some investors will accept slightly lower returns to invest in something ethical. Without research, this carries the risk that the project they’ve invested in isn’t as ethical as they would have liked — and the lower returns are still the same.

And some will claim it is mercenary to focus on the money when investing in green projects should be about doing the right thing. Well, we disagree. If we’re going to get more investors putting their money into green projects like wind farms then we need to make sure they see good returns and their investment being used for green projects.

If people feel let down by ‘green bonds’ then they’ll put their cash elsewhere.

When you talk about ‘green’ investment then the topic of ‘greenwashing’ is never far away. And, with the growing popularity of green bonds, the topic is certainly worth another look.

Green bonds have been around for seven years, and were pioneered by organisations such as the World Bank, European Investment Bank and African Development Bank to raise money to invest in green projects. Wind farms are among the main beneficiaries.

We are now seeing a new type of green bond emerging: corporate green bonds. French energy company, GDF Suez launched a €2.5bn bond in May to invest in renewable energy projects, and it was three times oversubscribed. There was also a £250m green bond that was launched by Unilever in March; and a €1.4bn green bond by EDF in November 2013.

And, this week, German development bank KfW got in on the action with its own green bond, with the aim of raising €1.5bn to invest in renewable energy and climate change mitigation projects. The AAA-rated bond was oversubscribed, with orders of €2.65bn. It says that this shows how mainstream investors want to put their money into clean energy.

This all sounds great but we have to sound a word of caution.

Now, we’re all in favour of investors putting their money into wind farms and other green projects. Developers need money if they’re going to keep developing, and green bonds are one way that they can gain this funding. But the flaw with some of these green bonds is whether they really offer investors as much greenness as they promise.

In the case of corporate bonds, for example, some investors would be put off investing in a green bond from a business like EDF or GDF Suez because they invest in other types of energy too. There is no recourse for investors if money from the ‘green bond’ goes into supporting other non-green projects, and so investors will have to scrutinise very carefully.

And, in the case of KfW, the question some investors will ask is whether it will end up investing in green energy projects, or other types of infrastructure with links to green infrastructure — such as energy transmission networks. KfW hasn’t made clear exactly which assets it will invest in and, until it does, it is tough to scrutinise its green credentials.

Investors need to be wise to these risks. In general, there is little recourse if their money ends up supporting a non-green project, and the risk is to the investor’s own reputation. The court of public opinion sees little distinction between companies that invest directly into something unethical and those who do it indirectly and unwittingly through a fund.

There is also the question of why investors would put money into these kinds of bonds when there are investment managers out there like Resonance or Greencoat. These are more focused on green projects and have a strong track record of focused investments, along with the potential of far better returns.

Some investors will accept slightly lower returns to invest in something ethical. Without research, this carries the risk that the project they’ve invested in isn’t as ethical as they would have liked — and the lower returns are still the same.

And some will claim it is mercenary to focus on the money when investing in green projects should be about doing the right thing. Well, we disagree. If we’re going to get more investors putting their money into green projects like wind farms then we need to make sure they see good returns and their investment being used for green projects.

If people feel let down by ‘green bonds’ then they’ll put their cash elsewhere.