As sustainability and green investing gain popularity, concerns about greenwashing have grown. Greenwashing is when brands conceal non-environmentally friendly products behind a green label to entice socially responsible consumers. This phenomenon can extend to the domain of green financing. For instance, the Brazilian meat giant JBS was accused of allegedly greenwashing its $3 billion issuance of green bonds. The company claimed the funds would go toward sustainability efforts, including the adoption of solar energy, a partnership with European health and nutrition firm DSM to reduce methane emissions, and capital expenditures to reduce greenhouse emissions intensity, over the decade. Protesters complain that the company is already failing to meet its emissions targets as it has by far the highest emissions of any company in agriculture, with methane emissions exceeding the combined total of France, Germany, Canada, and New Zealand from the supply chain.

The JBS case raises a question important to the financial sector more broadly. Is the money raised with green bonds really going into green and sustainable projects?

A recent study published in Technological Forecasting and Social Change provides answers. It explored the incentives driving the use of green bonds and examined their environmental implications.

Before diving into the study, it is useful to clarify what regular bonds and green bonds are. To carry out projects, which require large amounts of money, companies issue bonds to raise money. Banks act as middlemen, selling these bonds to institutional investors who invest money in bonds on behalf of their clients.

Green bonds, unlike regular bonds, require that the funds raised be dedicated exclusively to financing or refinancing green investments. These investments may encompass projects like Quebec’s clean transportation projects, Verizon’s renewable energy investments, or Arizona State University’s sustainable academic facilities. The issuance of green bonds thus implies an entity’s commitment to sustainable/green development.

Issuing green bonds is a way for companies to raise more money while declaring their commitments to a more sustainable future. They seek funds to support social responsibility and environmental initiatives. Similar to the green label on a clothing brand, a green bond label can attract socially responsible investors who not only seek to maximize their wealth but also a model offering sustainable growth and a commitment to society and the environment.

But are these bonds really supporting green projects? The study examines the credibility of green bonds by evaluating the environmental performance of the companies borrowing money for their green projects. To measure this, the study scored each company using 3 metrics:

1. Environmental innovation score: the company’s score for its ability to reduce environmental costs and burdens for its customers through new environmental technologies and processes or ecologically designed products. 
2. Emission score: the company’s score for its commitment and effectiveness in reducing environmental emissions and waste generation. 
3. Resource use score: the company’s score for its ability to reduce energy and water use and find more eco-efficient solutions.

The study discovered that green bond issuers, when compared to conventional bond issuers, had higher environmental pillar scores and lower CO2 emissions before the issuance. This implies that green bond issuers are not just using green bonds to acquire a green label but are more likely to already have well-established and longstanding environmental commitments.

The study also found that the environmental pillar score and CO2 emissions further improved after the issuance of green bonds. Based on this, green bonds have positive impacts on a company’s sustainability practices. 

The good news continues. When assessing the performance of green bond issuers over time, the research showed that these companies continued to improve their environmental pillar score, although results for resource use and CO2 emissions while positive were not significant.  The researchers suspect that this might be attributed to the fact that many green bonds, especially those of larger value, are intended to finance infrastructure projects. Consequently, the environmental impact of these initiatives would take longer to manifest significant effects than what current studies can examine.

Here are the takeaways:

1. Companies that issue green bonds are more likely to be environmentally conscious and with sustainable and climate-friendly projects. They tend to have a higher environmental score and lower CO2 emissions. 
2. Green bond issuance tends to lead to improved environmental performance. Specifically, in emissions score and environmental innovation score. 
3. Infrastructure projects financed by green bonds are long-term and may not have yielded measurable results yet.

As of end 2022, the green bond market had accumulated a total of US$2.2tn in debt issuance. Among the green projects financed by green bonds, energy, buildings, and transport were the three largest categories, adding up to 77% of investments.

While greenwashing can still occur, as was the concern with the Brazilian meat company JBS, the study’s findings show that green bonds are in most cases complying with their intentions.