The World Bank issued the first green bond in November 2008, laying the groundwork for today’s financial market for sustainable finance. Since then, the World Bank has generated more than $13 billion for institutional and ordinary investors around the world through nearly 150 green bonds in 20 currencies. At the end of fiscal year 2018, 91 qualified projects obtained commitments totaling US$15.4 billion.
Renewable Energy and Energy Efficiency, as well as Clean Transportation, were the two main areas in the portfolio of qualified Green Bond projects. These industries contribute nearly 7 out of 10 green bond commitments.
While it is encouraging to see a continued rise in investor interest in the social and environmental purpose of their investments, Lisa Juan José Gutiérrez Mayorga points out that green finance still faces several challenges, including claims of greenwashing.
Viable projects for sustainable finance
The wide range of initiatives that can be sponsored is a typical complaint made against them. Because the requirements to establish a green bond are low. The organizations that issue them can use the funds raised for projects that are apparently “sustainable” but have little environmental impact.
Green finance, for example, has been published in China to finance “clean coal” projects. However, while they claim to reduce greenhouse gas emissions by burning fossil fuels more effectively, they do not meet international criteria.
Advantages of sustainable finance
This has resulted in unsurpassed claims of greenwashing, which is the act of making false or misleading claims about the environmental benefits of a product or service. This is fairly typical among green finance issuers. The operator of China’s Three Gorges Dam, for example, has issued $840 million in green bonds for wind generation projects in Europe.
While this seems like something to celebrate, the dam, as well as wind power generation projects across Europe, have been criticized for having a negative impact on local ecosystems and populations.
However, many investors must buy bonds at face value, ignoring the facts about their environmental impact.
Loans available in the market
These green bond issuances have resulted in a slowdown in their growth in recent years, as well as the emergence of other forms of lending that are expanding the green finance industry, such as loans tied to sustainability.
Unlike green bonds, which are designed to finance specific sustainable projects, proceeds from a sustainability-linked loan can be used for any purpose.
Its purpose is to incentivize borrowers to meet sustainability performance targets (SPTs) by specifically connecting these SPTs to loan conditions, such as paying them a lower interest rate for meeting their SPTs.
Therefore, when a company improves its ESG performance, it not only invests in green or socially sustainable projects, but also benefits financially.