Week in Impact: The green bond bubble

Nowhere is the demand for sustainable finance more evident than in the green bond market, but are there more effective ways to channel finance towards positive environmental - and social - outcomes?


Nowhere is the appetite for sustainable finance more evident than in the green bond market.

Green bonds—bonds used to fund environmental projects—are on track for “another record year," with issuance surpassing the $200bn mark as of last week. Even Asia-Pacific, where demand has traditionally lagged, is catching up, having raised a record $18.89bn from 44 issuances this year. And with central banks entering the fray, the rapid growth of the $1trn market shows no sign of slowing down.

But are green bonds really the panacea we want them to be?

As demand has grown, so have the challenges. According to the FT, the market "is so fragmented that liquidity is thin, and data are so patchy that there is no standardised framework for measuring performance.” While the market should soon “grow up,” that can’t happen without “more agreement about standards and audit practices.” Good news: the London Stock Exchange laid down tougher rules for reporting only this month. Bad news: that’s not even the biggest problem facing green bonds.

In the Times this week, David Wighton pointed out that the “poster child of green finance" might be “good news for the City, but for the environment? Not so much.” His argument carries weight, with officials and professionals interviewed variously concluding green bonds “have little or no impact on the environment," are “pretty pointless” and are "complex, expensive and not very effective.” Oof. But worst of all: “the hype risks damaging the broader green finance effort.”

While the oft-discussed risk of greenwashing is real, "it can be reduced by tougher policing and efforts to agree international standards.” The trickier—and more frequently overlooked—question is whether corporations and governments would have financed green projects regardless of the green bond market. In other words, have they actually served an environmental purpose?

Exaggerating the benefits of green bonds has two major risks: one, it “allows companies and investors to tick the green box rather than move to more effective strategies,” such as campaigning to improve corporate policies; and two, it indicates that green bonds are a bubble that will burst if doubts about their effectiveness mount, which would only fuel cynicism around green finance.

Either way, the stakes are high. Concludes Wighton: “The City must rise to the challenge of channelling finance to help to combat climate change. If not, it could lose what political and public support it has rebuilt since the financial crisis. And it would deserve to.”


If there’s broad unanimity that the City should be channelling finance to better ends, the means by which it does so is up for debate.

Writing for Institutional Investor, Harvard Business School’s Michael Porter, George Serafeim, and Mark Kramer argue that ESG screens have failed to deliver alpha, with corporate leaders and investors viewing their sustainability efforts primarily as a PR and marketing tool. This, they contend, is a financial oversight: investors have “missed the boat by overlooking the significant drivers of economic value arising from the power of social impact that improves shareholder returns.”

A better model exists in the form of shared-value investing. Recognising the power of capitalism as a driver of positive impact, the most powerful way to integrate social or environmental innovation and economic value is through a company’s strategy: "creating social impact through an innovative and profitable business model reshapes the nature of competition and makes impact a part of capitalism itself.” And until investors begin to consider shared value as core to investment analysis, "they risk distorting corporate valuations, missing the true industry innovators and encouraging corporate managers to focus on checking ESG boxes that are not material to corporate performance or social progress.”

Reflecting on the "growing acceptance among business leaders of the need to broaden the pursuit of shareholder value to one that is based on inclusivity, sustainability and purpose,” the FT agrees that “some attempts to confront the problem have been only skin deep.” Change really needs to start “at the foundations of the business world” and with new corporate structures. The success of responsible capitalism ultimately hinges on two things: better standards (how do you measure a concept like purpose?) and the integration of ESG into executive remuneration. (We agree.)

Given the swelling demand for sustainability among a new generation, business leaders and investors would be mad not to start thinking about these issues. But perhaps it’s a mistake to think about it in terms of client demand or even 'doing the right thing’ per se. As Porter, Serafeim, and Kramer point out, healthy capitalism is contingent on a healthy society: disconnecting financial returns from real-world outcomes is a threat “not only to the legitimacy of capital markets, but also to the future of capitalism itself."

The problem is that “many in the investment community have moved away from fundamental investing and its powerful social purpose, seeing algorithm-driven strategies and trading on market movements as ends in themselves. In the process, the connection between capital investment and improvement of society is lost.”

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