Green bonds aren’t driving climate action in the US, study finds

Contractors install solar panels at the Phillips 66 Rodeo Renewable Energy Complex in Rodeo, California. Photo / David Paul Morris / Bloomberg

Almost all green bonds issued in the US fail to drive real action to tackle climate change, undermining the merits of a global market that’s grown to more than US$3 trillion, according to a study.

An analysis of the first green bonds sold by corporate and municipal issuers between 2013 to 2022 found about 2% of proceeds were used to fund projects that are genuinely unique or don’t replicate existing work, Pauline Lam and Jeffrey Wurgler said in a working paper published this month by the National Bureau of Economic Research.

Roughly 30% of proceeds from corporate green bonds and 45% in the case of municipal bonds were used to refinance ordinary debt, while in many other instances funds were directed to expanding existing projects or to new developments that were similar to previous work.

Investors also typically don’t differentiate between bonds based on their “additionality”, a term used to measure activities that generate a positive climate impact that wouldn’t have otherwise occurred, according to the NBER study.

“A cynical interpretation of the results is that the green bond market is largely a financing sideshow,” Lam and Wurgler, both of New York University’s Stern School of Business, said in the study. “The empirical conclusion is that the green bond label itself provides little assurance that the funds are being directed toward a project whose green traits are novel for the issuer.”

The green instruments are the largest component in a market for climate bonds now worth more than US$5t as governments and companies seek capital for projects at lower borrowing costs.

While Europe - which has stricter environmental, social and governance rules than the US - accounts for the largest share of green bond issuance, volumes increased in the past three years in the Americas and were about US$79.7 billion in the first eight months of 2024, up 11% from the same period a year ago, according to Bloomberg Intelligence.

As regulators aim to improve quality and amid a broader questioning of ESG objectives, green bonds are becoming subject to increasing scrutiny. Rising investor scepticism has contributed to an erosion in the so-called greenium.

Using proceeds for refinancing isn’t necessarily problematic, said Nneka Chike-Obi, senior director and head of Asia-Pacific ESG ratings and research at Sustainable Fitch.

“In some sectors, such as real estate, bonds are typically used for refinancing and this includes green bonds if the projects meet green eligibility criteria,” she said. Some ratings methodologies already assign better scores when a larger share of proceeds is allocated to new and additional activities.

Lam and Wurgler’s study was “misguided to denigrate the green bond market for supplying finance to existing green projects”, Ulf Erlandsson, chief executive officer of the Anthropocene Fixed Income Institute, a research organisation, said in a blog post.

Bonds are typically used to replace more expensive sources of capital for existing ventures, and “green bonds make refinancing green projects cheaper, therefore encouraging companies to initiate more of them”, he said.

With the issuance of sustainable debt continuing to increase, “we hope our findings will encourage greater scrutiny of green bond proceeds, and more precise notions of additionality, so that the market might achieve its real promise”, Lam and Wurgler wrote in their report.

- With assistance from Alastair Marsh.