Let's Make it Harder to Greenwash

The most significant opportunity at the COP26 summit in Glasgow is the growth of climate finance.  Environmental, social and governance investing has become mainstream, and the green bond market is growing exponentially every year. According to a recent Climate Bonds Initiative (CBI) report, “Latin America and the Caribbean State of the Market 2021,” cumulative green bond issuance has more than doubled since September 2019, reaching US$30.2 billion by June 2021. However, there are many concerns about greenwashing and misleading credentials in the green bond market. 

Greenwashing occurs when activities or projects are described as environmentally friendly when in fact, they are not. Defining what is environmentally friendly is tricky. Taxonomies play an important role in specifying what is green or what is not. For example, the CBI’s Taxonomy and Sector Criteria defines projects and activities with climate integrity, either through their contribution to climate mitigation or to adaptation and resilience to climate change.

The definitions to classify a project as green in the Sector Criteria have been developed through rigorous processes with external experts and are aligned with the best available scientific knowledge and with the Paris Agreement zero-carbon 2050 goals. They attempt to standardize green definitions for economic sectors around the world.

Existing Green Credentials

In addition to Criteria, CBI has created a Standard and Certification scheme for use-and-proceeds bonds, the only certification available in the market. To receive the certification mark, the issuer must appoint an Approved Verifier, who will provide assurance that the bond meets the CBI’s standards. To obtain an assurance, the verifier needs to do proper due diligence on the projects and assets that will be financed under the CBI Certified bond.

Approved Verifiers can also provide Second Party Opinions (SPOs), but those are not accepted to obtain CBI’s certification as they are just opinions and not assurance against a standard. SPOs have been very popular in the market. Some are robust, but others are not. Unfortunately, SPOs do not guarantee greenwashing avoidance. Many of them mention alignment to the Green Bond Principles, a high-level guideline to issue green bonds. However, organizations should pursue higher project-selection standards and disclosure. Recently, with the development of local taxonomies, such as those in Colombia and the European Union, there are different options for projects to qualify as green with higher flexibility, as those take into account the local context, and without compromising the green credentials nor engaging in greenwashing. 

Sustainability-Linked Bonds (SLBs) Credentials Under Development

SLBs have recently played a vital role in decarbonization. They allow issuers, especially in high-emitting sectors, to pursue financing for sustainability projects with pre-determined key performance indicators (KPI) “linked” to the instrument. In Latin America, a total of US$10 billion of SLBs had been issued through the first half of 2021. Two out of the Top 3 issuances occurred in Mexico. 

Some of these SLBs have raised concerns about the relevance, reliability, and ambition of the selected KPI’s for the organization’s environmental footprint and long-term strategy. Unfortunately, there is not a standardized benchmark for these instruments yet. However, Climate Bonds intends to add SLBs to its certification scheme to provide transparency to the market. Last month, during the Climate Bonds Conference, CBI proposed five hallmarks of a credible transition for companies. 

Investors Need To Make it Harder to Greenwash

Investors are repeatedly asking for better standardization and data consistency, better disclosure, and broader availability. The working paper Transition Finance for Transforming Companies  addresses these challenges and presents five hallmarks for a company’s decarbonization assessment credibility. It also recognizes that citizen participation, job creation, and measures to address the social and economic impacts from industries in decline are key elements to achieving a low-carbon economy.

We know that institutional investors play a key role in this process. They can pressure companies to climate-proof their assets, projects, and strategies. They can also urge governments to take the policy steps needed to avoid catastrophic climate change. And the most significant investment opportunities will be in emerging markets like Mexico. 

When there’s no more time to waste, here is our challenge: how can we make these opportunities a reality? Capital is not a problem, nor are green definitions. Shifting to green solutions and avoiding greenwashing is a multi-level task that would involve different actors – from public to private. Let’s do it; we still have time to fix the world.