The climate crisis is driving the fast expansion of green finance, in particular the green bond market, where financial institutions, corporates, sovereigns and other government-related entities are raising capital to finance efforts to combat global warming.
We have seen this substantial acceleration in green bond issuance in recent years with good reason – they are a very powerful tool to funnel capital to projects that can make a positive impact on the environment on the timeline needed. They also effectively show that organisations are working towards their sustainability goals – a vital commitment to make in today’s market.
The rapid growth of green bonds has also brought into question the quality of certain bonds, with some issuers being accused of ‘greenwashing’ – false or exaggerated claims by organisations that their products or policies are more environmentally friendly than they actually are.
One concern is that some issuers may be taking advantage of strong investor demand to fund activities that do not truly have a positive environmental impact, hence misdirecting market capital that was intended to make a positive difference.
Currently, green bonds are generally issued under a variety of voluntary standards developed by trade bodies rather than mandatory standards from governments.
On one hand, the current voluntary system works very well and, in fact, tough regulations could discourage some organisations from issuing green bonds. On the other hand, the lack of regulation is what allows for greenwashing to occur, causing doubts around the effectiveness of green bonds among investors.
So given this situation, what can be done to overcome greenwashing in the green bond market? Here are two solutions that could revolutionise the market.
The first solution is improving the way we collect data to back up environmental claims. Historically, when it comes to green bonds, the monitoring of use of proceeds, underlying asset performance and environmental impact have generally been done through periodic manual processes. This has left the potential for a lack of timely data, material time and cost incurred to ensure the data collected is reliable, and of course, human error.
These challenges can be directly addressed through the implementation of existing technologies – specifically a blockchain-based system supported by smart devices, such as Allinfra Climate. 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 can show not just asset performance but also environmental impact down to the individual investor level. Such a framework can support numerous finance-related activities concurrently, whether it be for reporting, accounting, or ratings. And it can do so at a fraction of the time and cost of manual processes, thus theoretically enabling better financing terms overall.
However, to issue a truly optimised green bond, it isn’t enough to just have a verifiable data feed. The second solution for preventing greenwashing is to create fully digitised blockchain-based financial products, or “tokenized” bonds.
A tokenized bond refers to the creation and issuance of digital tokens that represent a bond. These tokenized bonds can then be permanently linked to an underlying data set, ensuring the tokenized bond, its use of proceeds and environmental impact can be easily monitored and verified at any time.
Issuing a tokenized green bond tied to a verifiable data feed not only shows that an organisation is truly committed to its sustainability goals, it will also manage the risk of eventual mandatory regulations, or if the voluntary system is here to stay, being labelled as a greenwasher.
While not yet mainstream in the monitoring of green bond compliance, there are a number of existing and emerging technology solutions that can 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, this could soon become a new standard for the green bond market.
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