Sovereigns seek to address transparency hurdles
Green government bonds are often subject to the same spending rules as non-green bonds, which forbid the creation of separate accounts to earmark proceeds for any specific purpose. Elected representatives must also ratify any spending decisions. As a result, governments cannot offer green investors much certainty about how green bond revenues will be spent.
Governments have tried to address this problem in different ways. Poland has changed the law to set up a separate account for green bond inflows. Belgium has made a small legislative adjustment to earmark certain spending against green bond receipts so it cannot be financed again by the same means. Germany’s green bond issues are designed to finance pre-existing expenditure.
Still a ‘trust me’ exercise
However, without more robust certification, the ‘green’ label still carries no guarantee of the use of proceeds and is more of a ‘trust me’ exercise. Investors need to judge for themselves whether an issuer will actually use the funds for green investments and what impact that will have. The lesson from corporates is that green investors do just that. For example, several leading green investors declined to take part in Korea Electric Power Corp’s 2020 green bond issue following concerns about the company’s overseas investments in fossil fuels.
Some investors have turned to sustainability-linked bonds with explicit green targets attached to their coupon payments to ensure greater accountability on how their money is used. Governments may struggle to replicate this model, but we expect more green sovereigns to be issued with specific project and development targets over time.
One example is the UK’s green gilt, the first £10bn of which was 10 times oversubscribed at its September launch. While there are no legally binding constraints on use of proceeds, the UK government has clearly defined the areas of investment it intends to fund, which include renewable energy, clean transport, and climate change adaptation. No more than half of proceeds can go to existing projects, and only those begun the year before. The issue also requires the explicit reporting of social benefits of green projects, such as numbers of workers helped to transition to low-carbon jobs and homes protected against climate change. There is also a world-first retail product, Green Savings Bonds.
These new kinds of vehicles can help finance the energy transition at scale, given the size of global bond markets. But it may take time for the green bond market to mature, for standards to improve and for the greenium disappear. In this context, the maxim “buyer beware” remains as true as ever.
