In the last several years, we’ve seen an exponential growth in the green bond market. Designed to fund projects that are positive for the environment, green bonds have gained popularity as companies view them as a way to be more sustainable and to also demonstrate that to the market.

There exists 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.

Issues with the traditional green bond market

While green bonds have the potential to become powerful financial tools in creating positive climate action, there are areas for optimisation and improvement in the traditional green bond model. Monitoring of use of proceeds, underlying asset performance and environmental impact is generally done through periodic manual processes, leaving the potential for:

  • A lack of timely data.
  • Material time and cost incurred to ensure the data collected and reported is reliable.
  • Human error.
  • Non-digitised data sets that are not easily referenced over time, nor fit neatly into future carbon accounting, or ratings and reporting regimes processes.

The technology solution for green bonds

These challenges can be addressed through the implementation of existing technologies. Supported with IoT devices, a blockchain-based system can provide:

  • A verifiable, auditable data feed to stakeholders on a real-time or periodic basis showing not just asset performance but also environmental impact down to the individual investor level.
  • A framework that can support numerous finance-related activities concurrently (eg. for reporting, accounting, ratings, etc.) at a fraction of the time and cost of traditional methods, thus enabling better financing terms overall.
  • A digitised product tied to an underlying data set that is easily provenanced, permanently linked to its source data, and able to be created, transferred and audited with few friction costs and intermediaries.

Project Genesis: An example of a blockchain-based system

A wonderful example of such a system is Project Genesis – an initiative led by the Bank for International Settlements (BIS) Innovation Hub and the Hong Kong Monetary Authority (HKMA).

This green bond tokenisation project explored the use of blockchain to drive transparency of green investments and accessibility to small investors. It built two prototype digital infrastructures that can enable green investments and help issuers and governments to meet environmental and sustainability goals.

Both prototypes used Allinfra’s green data feed technology for the gathering and reporting of verifiable data, enabling the tracking of the positive environmental impact of projects in real-time. The project concluded in November 2021 with a report put out by all participating parties: A Vision for Technology-driven Green Finance.

The Future of Green Bonds

While not yet mainstream in the monitoring of green bond compliance, there are a growing number of technology solutions that provide asset owners, lenders, ratings agencies, insurers and other stakeholders with verifiable, near real-time, asset-level information on underlying asset performance. As such systems benefit all stakeholders in the green finance space, we believe that this will soon become a new standard for the green bond market.

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