We present the Forensic Carbon Accountant, investigating emissions disclosures, to support investors in aligning their portfolios to net zero. Green bonds (debt securities where proceeds are reserved for environmental projects) have successfully raised over $2.3tn for sustainable investment. Emissions reporting for green bonds should support investors in understanding the climate impact of this significant product class.
In this note, we consider how emissions are allocated to green bonds, and whether the current approach incentivises the correct behaviour, maximising capital raised for climate-friendly investment.
We conclude that the lack of a standardised emissions allocation framework for green bonds is a missed opportunity to quantify the benefits of those investments for investors, and so promote attractive funding spreads for issuers. Investors are under increasing pressure to reduce their financed emissions. As carbon footprint becomes a scarce resource to be allocated, we expect higher emission investments to require a higher hurdle rate of return.
A standardised approach, supported by issuer project emissions disclosure, would give investors confidence to report project-linked emissions for green bonds. Green bonds, with lower emissions than vanilla debt can drive a ‘greenium’ for issuers and investors. Green bond emissions reporting must be consistent with total emissions reported by investors. Lower emissions for green bonds must be balanced by higher emissions for vanilla debt. This should deter greenwashing and encourage truly additive green bond financing, where emissions are reduced for all.