The Law and the SDGs  |  Anna Cossi

Green Bonds: Financing the SDGs?

Green Finance refers to raising capital and financial investments for companies, services and products that have a positive environmental impact. But how suitable are green bonds as an instrument for providing the funding needed to achieve the UN Sustainable Development Goals (SDGs) before 2030? It is estimated that the world needs to raise US$5-6 trillion a year to achieve the SDGs. This capital cannot be provided through public finance alone. Every sector must contribute, particularly the private sector. There is growing awareness of the need for a shift in the financial industry and ‘Sustainable Green Finance’ is gaining attention from global financial and political actors, as well as the broader public. The inclusion of sustainability criteria in the financial sector is essential to address the funding gap for the SDGs.

What are Green Bonds and how do they work?

Green bonds are first and foremost bonds – fixed income instruments that represent loans made by an investor to a borrower. They are ‘green’ because the bonds have been allocated to finance climate and environmental projects. The structure, risk and returns of green bonds are identical to normal bonds, but they usually provide a tax incentive for investors, such as tax exemption and tax credits, in order to make them more attractive. An example is the Green Funds Scheme in the Netherlands, which encourages individual investors to buy bonds in the ‘Green Fund’, at a lower interest rate, in exchange for 2.5% tax credit.

In 2007, the European Investment Bank launched the first climate-themed bond with proceeds assigned to projects supporting climate action in the field of renewable energy and energy efficiency. These bonds were labelled as the Climate Awareness Bonds. After that, the World Bank was the first institution to issue a bond labelled as green bond in 2008, for the amount of SKr 3.35 billion (approximately US$440 million). The money raised was used to support World Bank lending projects that seek to mitigate climate change, or help affected people adapt to the impacts of climate change. The green bond, designed in partnership with the Skandinaviska Enskilda Banken (SEB), responded to a specific demand from Scandinavian pension funds seeking to support climate-focused projects through a simple fixed-income product. Following the lead of the World Bank, green bonds have been increasingly issued in the financial market and the demand for them has grown, particularly since the launch of the SDGs in 2015.

To qualify as green bonds they also need to be verified by a third party, which certifies that the bond will actually fund projects that are beneficial to the environment. Two institutions, the International Capital Market Association (ICMA) and the Climate Bond Initiative (CBI), have issued a series of guidelines describing the criteria for issuing a green bond, known as the Green Bond Principles (GBP) and the Climate Bonds Standards (CBS), respectively. These voluntary guidelines recommend transparency and promote integrity in the development of the green bonds market.

What are the limits of Green Bonds?

On paper green bonds are the perfect financial instrument to raise money, while involving the private sector in the global effort to achieve the SDGs. However, there is a lack of consensus internationally regarding what constitutes a green bond, which makes it difficult to evaluate the environmental benefits and sustainable impact claimed by issuers. Secondly, transparency and reporting are particularly weak in the green bond market, which still relies on voluntary reporting. Since the market has started to grow, there is a risk that bonds labelled as green are not actually green at all. The lack of transparency and ambiguity surrounding green bonds has an impact on investors’ trust, dissuading them from investing in green bonds altogether.

Investing in green bonds has recently been defined as ‘greenwashing‘, since companies and countries do not have to prove their corporate social responsibility or positive ‘green’ impacts before issuing a green bond. Once a bond is issued there are no penalties if companies or countries break their ‘green’ promises, nor are there robust ways of measuring and verifying whether these promises are kept.

How can lawyers contribute?

The issuance of green bonds is still at an early phase, so it is important to set the right due diligence standards for green bonds, as well as agree on a uniform definition. If green bonds are meant to help raise the capital required to tackle the environmental aspects of the SDGs, green bond issuers should focus on accountability, verification, and transparency.

Lawyers will play a central role in the evolvement of green finance. For example, they can help their clients, issuers of green bonds, to look at all the issues involving environment-related SDGs under the Environmental Social Governance umbrella, a set of standards for a company’s operations that socially conscious investors use to screen potential investments. In particular, they can carefully consider the environmental criteria, which refer to how a company performs as a steward of nature, when issuing green bonds, consequently promoting verification and transparency. This will protect the company from a reputational risk that will mine its credibility and, consequently, dissuading investors from invest in green bonds.

Green bonds and green finance represent the start of a new and challenging moment for lawyers, allowing them to concretely contribute to the global effort to achieve the SDGs. Lawyers can turn an idea into a tangible result that works on a regulatory, legal and commercial basis, three essential elements for green finance to be successful. They can provide counsel on risks that are emphasised by the issues addressed by the SDGs, and eventually find efficient ways to measure a company’s progress toward meeting these goals. Consequently contracts should be drawn up to clearly explain the terms of a certain investment, so that investors can assess what the company means by its ‘greenness’. This can help build trust and confidence for investors, reducing the negative consequences of the “greenwashing” phenomenon.

To conclude, lawyers can be the guarantors of green finance and the bridge between companies, institutions and investors. The work they do with green finance is exactly the same that they would do in ‘normal’ project finance, the only difference is that they must consider green infrastructure — natural assets such as forests, swamps, wind and rivers. Lawyers have the necessary skills to identify new links and understand them by transforming complex ideas and problems in an accessible reality, solving problems and promoting a truly sustainable change in this field.

Anna Cossi