Co-founder & CEO of Allinfra, Dave Sandor, discusses why a robust, credible green bond market is so essential and how advanced technologies could support this.
According to the OECD, an estimated US$6.9 trillion per year of climate-aligned infrastructure spending is required to meet the Paris Agreement’s goals of keeping global temperatures from exceeding 1.5°C – 2.0°C above pre-industrial levels.
We have seen government entities and corporations increasingly turning to green bonds to raise the capital required to invest in decarbonisation or renewable energy projects. This is why green bonds play a fundamental role in climate action – they have the potential to radically accelerate our journey towards net zero.
However, for green bonds to help achieve a truly positive impact on the environment, we need to build a better, more transparent green bond market.
The issuance of green bonds continued to grow over the last decade, and in the previous few years, we have seen a substantial acceleration. According to Climate Bonds Market Intelligence, the green bond market reached a record US$517.4bn at the end of 2021, representing the highest total since market inception.
While global ESG bond sales fell for the first time in 2022 amid higher borrowing costs, BNP Paribas SA – the biggest underwriter of green bonds in 2022 – expects sales of green debt to recover to 2021 levels this year. So, it’s a safe assumption that the trend for a growing green bond market will continue.
However, this rapid growth has also questioned the quality of certain bonds, signalling a potential problem of market confidence – some issuers are being accused of greenwashing. One concern is that some issuers may be taking advantage of strong investor demand to fund activities that do not indeed have a positive environmental impact, hence misdirecting market capital that was intended to make a positive difference.
There now exists a growing demand from both the public and private sectors for the transparency, granularity and verifiability of data that underlie green bonds, as these fixed-income instruments are only meaningful if there is evidence that positive climate action has been created.
Essentially, green bonds must stand up to scrutiny, or buyers won’t invest in them. But, equally, potential issuers may steer clear of the instrument for fear of greenwashing accusations.
“…green bonds must stand up to scrutiny, or buyers won’t invest in them.”
To build a robust, credible green bond market, there are areas for optimisation and improvement where technology could play a critical role.
One area of optimisation is in the data collection method for substantiation of environmental performance. Historically, the use of proceeds, underlying asset performance and environmental impact have been monitored through periodic manual processes, resulting in a lack of timely data, material time and cost incurred and the potential for human error.
These challenges can be addressed by implementing a blockchain-based system supported by smart devices and other digital processes. By collecting data at the asset level and recording or referencing it on-chain, stakeholders will have a verifiable, auditable data feed on a near real-time basis.
This implementation shows asset performance and environmental impact down to the individual investor level. Such a framework can support numerous finance-related activities concurrently, whether for reporting, accounting, or ratings – all at a fraction of the time and cost of manual processes.
However, this digital-driven data collection should be coupled with a digitised blockchain-based financial product, or “tokenised” bond to issue a truly optimised green bond.
These tokenised bonds can be permanently linked to an underlying data set, ensuring the tokenised bond, its use of proceeds and its environmental impact can be easily monitored and verified.
Issuing a tokenised green bond tied to a verifiable data feed shows that an organisation is genuinely committed to its sustainability goals. It will also manage the risk of eventual mandatory regulations and provide the transparency that mitigates any risk of greenwashing.
While not yet mainstream in the monitoring of green bond compliance, we expect that real-time and digital monitoring of the use of proceeds, underlying asset performance and environmental impact will become a new standard in the green finance space within the next 2 to 3 years. With technology-enhanced green bonds, there is an increasingly high degree of confidence that capital being deployed is going to assets or projects that are positive for the planet. This will increase confidence in the market, spurring further investment into green projects on the timeline needed to fight climate change.
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