We've seen a dramatic rise in the issuance of green bonds in recent years, with the market now close to a whopping $1 trillion in value globally. However, recent research shows that while much the activity associated with individual bonds is positive, not every issuer is doing what's best for the environment when it comes to the rest of their business. (For a refresher on green bonds and what makes CoPower's different, check out our explainer.)



A number of high-profile companies have issued corporate green bonds this year. Volkswagen, for instance, announced their first issuance which will raise funds for the costly shift to produce electric vehicles.[1] Costly indeed, the company is planning on releasing 75 new full electric car models by 2029. For such an ambitious and noble undertaking, it makes sense the company would want to access the growing green bond market where investor demand for sustainable investments means issuances are quickly snapped up and companies can raise debt at lower rates using a "green" label.

When a company like VW issues a green bond, they point to a green framework which details how they’ll manage, invest and report on the funds raised. You can find a company's green framework on their website, (link to VW’s here which looks quite strong). There are a number of voluntary guidelines a company may follow including the Green Bond Principles (GBPs) which were designed by the International Capital Markets Association (ICMA). The GBPs include four main principles summarized generally as:

  1. Use of proceeds are to finance or re-finance green projects;
  2. Issuers should clearly communicate the environmental sustainability of the projects to their investors;
  3. Issuers must be transparent about the green bond funds, and funds must be managed in a separate account or separate portfolio;
  4. Reporting on allocation of proceeds is required.

Despite these clear guidelines, Bloomberg reported in August that there has been little environmental evidence to back up the claims companies are making when issuing green bonds[3]. The article sources a recent report by the Bank for International Settlements, and quotes:

“Overall, there is no strong evidence that green bond issuance is associated with any reduction in carbon intensities over time at the firm level….Because green labels apply to standalone projects rather than to the firm’s overall activities, projects promising carbon reductions could be offset by carbon increases of the same firm elsewhere.” – Senior Economist Torsten Ehlers, BIS

In other words, while green bond issuances may be going directly to investment in environmental projects, the overall carbon intensity of some issuing firms have actually been increasing. And as highlighted in the chart below, on average, the increase comes just two years after issuing a green bond!

Why does this matter for individual investors?

Even though retail investors like you or I typically don’t have direct access to these large corporate or government green bond issuances which are normally snapped up by large funds and institutional investors, this is still good information to have and consider. Where most of us can gain access to the green bond market is through a green bond fund, which is a grouping of multiple green bonds from a variety of issuers.

For those interested in investing in green bond funds, my recommendation is always to look under the hood. It's easier than you might think.

Let’s use iShares Global Green Bond ETF as an example and take a closer look:

  1. Take a look at the underlying holdings.

Most funds will make their holdings available, you can find this example’s list of securities by clicking download on the iShares website. At the time of writing this piece, the iShares Global Green Bond ETF contained 448 green bond issues from a mix of governments and corporates. Note that an ETF is trying to track the index so it’s going to hold all of the green bond issues and is not necessarily a carefully curated composition. You’re going to get some good apples like the Province of Ontario’s green bonds (Green Bond framework found here), however you’re also going to get Poland’s green bond issue, that was notably shunned by at least one major investor because of the country’s reliance on coal and mixed record of climate action[4], as well as exposure to international energy companies like Enel in Italy, who still have 50% of their energy generation coming from traditional fossil fuel sources.[5]

2. Just 'cause it’s green doesn’t mean it’s clean!

Next, take a look at the sustainability metrics of the fund -- our example iShares Green Bond ETF is shown below.

An MSCI ESG Rating of A for this fund is an average score for such a product. Scores of AAA or AA indicate a leader in ESG metrics. MSCI ESG Quality score is also 6.7 out of 10. Remember that these scores represent the ESG scores of the underlying firms, not of the Green Bond issue itself.

For investors that are serious about carbon emissions, note the MSCI Weighted Average Carbon Intensity metric which measures GHG per $1 million in sales across the fund’s holdings. In our example of the Green Bond ETF, the fund has a metric of 470.95. Meaning the group of issuers emit 470.95 tons of Carbon for every $1 million in revenue they take in. This is relatively high when you compare it to a fund that is focused on low carbon, for example the iShare MSCI ACWI Low Carbon Target ETF, which has a much better carbon intensity metric of 63.68.

From a sustainability perspective, a potentially better option for the green-minded is the iShares Clean Energy ETF, which invests in companies that are producing energy from renewable resources. This ETF has a carbon intensity of 257.42, or close to half of the iShares Green Bond ETF. This is the heart of the matter for retail investors who can only access the green bond market through an aggregation of green bond issues.

At the end of the day, all investors need to ask themselves what most aligns with their own values. There are more than enough funds out there to match.

[1] https://www.bnnbloomberg.ca/vw-follows-daimler-in-making-green-bond-debut-for-electric-cars-1.1494705

[2] https://www.washingtonpost.com/business/green-bonds-should-have-green-strings-attached/2020/09/17/e8139bce-f8b4-11ea-85f7-5941188a98cd_story.html

[3] https://www.bnnbloomberg.ca/bis-sees-no-proof-green-bonds-improved-firms-carbon-footprints-1.1493593

[4] https://www.bloomberg.com/news/articles/2019-10-14/as-green-bonds-boom-so-do-greenwashing-worries-quicktake

[5] https://annualreport2019.enel.com/en/report-operations/performance-metrics/performance-group/performances-group#potenza