Reflecting on green bond risk

We here at Unpacking Climate Risk love an academic spat – particularly if it touches on sustainable finance and climate risk.

Researchers at New York University provided the tinder for just such a ding-dong this week by publishing a new paper pooh-poohing the efficacy of green bonds.  From the abstract: 

“Green finance emphasizes “additionality,” meaning funded projects should offer distinct environmental benefits beyond standard practice. Analysis of U.S. corporate and municipal green bonds, however, indicates that the vast majority of green bond proceeds is used for refinancing ordinary debt, continuing ongoing projects, or initiating projects without green aspects that are novel for the issuer.” 

Their analysis goes on to suggest that just 2% of corporate and municipal green bonds are used to kickstart projects “with clearly green features.”

The paper ignited another fiery round of debate on whether sustainable finance is anything more than fancy marketing.  Notably, Ulf Erlandsson of The Anthropocene Fixed Income (AFII) let loose in a blog blasting the NYU researchers for misunderstanding the role of bonds in corporate finance.  It’s well worth the read – his exasperation rings out with every syllable. (Disclaimer: I do a little editing and communications work for the AFII).

I have little to add to the “additionality” debate, but the back-and-forth did make me ponder about the risk profile of green bonds, and whether they’re being misunderstood.