BEING GREEN STILL NOT EASY — The market for sustainable debt slowed last year along with the rest of the economy. Its chances for recovery face an additional obstacle — showing that it actually delivers. It’s a tenuous time for borrowing money at more favorable terms in order to do sustainable activities with it. After a record-breaking 2021 in which sustainable debt issuance topped $1 trillion, the global market declined for the first time last year amid generally adverse macroeconomic conditions. The first quarter of 2023 saw somewhat of a bounce back, but overall lending still lags behind the start of last year by 21 percent. At the same time, the market is going through growing pains similar to other green finance sectors. For sustainability-linked bonds, are the performance benchmarks ambitious enough to make a meaningful difference? And is the booming third-party review industry giving true assessments or just rubber stamping transactions because issuers are paying them? Transparency is also an issue: Often, outsiders can't tell whether the green or sustainable bond really helped finance clean energy procurement, for example, or whether a bond issuer achieved its board diversity goals. A third of corporate green bond issuers had a poorer environmental performance after initially selling bonds, according to a study last year from the Hong Kong Monetary Authority. “Not all green bonds are equal in what they claim,” said Nathan Fabian, chief responsible investment officer at the U.N.’s Principles for Responsible Investment. “Some of the intentions are quite modest when it comes to environmental benefit.” Europe is trying to install guardrails through a new voluntary Green Bond Standard, though S&P Global says "many issuers will find it too difficult or risky” to adopt. That leaves the International Capital Market Association’s voluntary market principles — which are currently followed by about 97 percent of issuances, according to S&P. The financial system needs to shift trillions of dollars into sustainable and energy-transition investments if the world is to meet targets for cutting greenhouse gas emissions, and the $133 trillion global bond market could be key to that effort — especially in the U.S., the largest source of global sustainable debt issued in 2022 from a single country. The concerns are somewhat similar to those plaguing the carbon offset market. Both are relatively young markets looking to build credibility and integrity as a useful tool for companies to fight climate change but have been beset by allegations — and the fears of allegations — of greenwashing. But sustainable bonds are in a better position, according to Fabian. For one, offsets are typically on land that might require consent from private landowners and are susceptible to damage from natural disasters, while bonds are in assets like factories and buildings, providing sustainable debt with much more certainty. Offsets' emissions impact, which can occur over decades, is also harder to track compared with bonds' quicker funding of green economic activities like starting a wind farm or turning off a coal plant. The market is slowly starting to respond to increased investor demands for accountability, according to Federico Pezzolato, the head of ISS Corporation Solutions’ green bond sales and second party opinion services. He says ISS has conducted 14 post-issuance reviews in the first half of 2023, compared with five at this point last year. All 14 yielded positive results, but that might not be especially meaningful, given that the voluntary reviews may only be sought by companies that are performing well and meeting their targets.
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