A green bond is a loan issued on the market by a company or public organization to investors, intended to finance initiatives linked to the ecological transition (renewable energies, energy efficiency, responsible waste and water management, sustainable land use, clean transport and adaptation to climate change), mainly focused on infrastructure. This type of bond differs from traditional bonds in that it provides detailed monitoring of the investments financed and the ecological nature of the projects supported.

Well, that's the theory. The practice is, shall we say... nuanced.

Although the basis for green bonds has been defined, there are no precise standards for their environmental aspect. The green bond market suffers from a lack of transparency, vagueness around the definition of green, lack of guidance and problems of trust in monitoring and evaluation.

Unlike general-purpose sustainability bonds, green bonds require funding to be earmarked for eligible green projects. Nevertheless, it would appear that lawyers are succeeding in distorting the spirit of green bonds and turning them into a means of greenwashing practice.

Quinn Curtis' study, spotted by Joachim Klement of Liberum Capital, examined the type of green promises made in green bond prospectuses (what the product will be used for) and the type of disclaimers (if any) to limit legal liability should these promises not be kept.

Sources: Curtis et al (2023) & Joachim Klement (2023)

When green bonds first appeared on the scene, most, if not all, of the bonds issued pledged to finance green projects. Since 2018, the proportion of bonds issued with these eco-responsible commitments has gradually declined. By 2022, only 27% of green bonds issued included environmental promises, just over a quarter. Since certification and external audit are not mandatory to validate their "green" status, any entity can issue so-called green bonds without meeting the essential criteria.

What's more, around two-thirds of green bonds issued include clauses releasing the issuer from any liability in the event of non-compliance with green commitments. These clauses specify that a breach of the promise to use these funds in an environmentally sound manner will not result in default. Similarly, two-thirds of newly-issued green bonds require the issuer to invest the funds in green projects, while retaining "disclaims default" and "disclaims duty" clauses.

In reality, for the past two to three years, green bonds have been nothing more than greenwashing. They offer hollow commitments, and investors cannot demand that the issuer justify the use of the funds as they wish. Green bonds are simply a conventional product with a nice label. Putting an end to this abuse is simple, however: simply impose a third-party audit of green bonds according to the green bond principles, and change these principles to explicitly state that misuse of funds raised by green bonds will result in a default.

Efforts must be made to improve the "green" qualification of projects, as well as to strengthen reporting and on-site verification of the sums actually invested, so as not to let companies do as they please with lenders' money. In the meantime, be wary of this type of bond, and check out the issuers and their track record in terms of delivering on promises made versus projects actually financed.