The Hong Kong Monetary Authority (“HKMA”) released a research report last week showing evidence that about one-third of global corporate green bond issuers are reaping the benefits of issuing green bonds without cutting down their greenhouse gas (“GHG”) emissions. This type of ‘greenwashing’ behaviour impedes progress on combating climate change and could lead to financial instability if the market loses confidence in green bonds and other green asset classes. Not all is grim, however, as the HKMA has identified positive trends and ways to mitigate the damage. The HKMA report also confirmed that corporate green bonds, if taken seriously by issuers, could help tackle climate change.

Not as eco-friendly as you think

The purpose of issuing a green bond is to generate proceeds that are committed to funding assets or projects that bring positive environmental benefits, one of which is reducing GHG emissions and fostering a low-carbon economy.

Based on a set of sample data reviewed by the HKMA, around 40% of corporate issuers unfortunately showed a higher level of GHG emissions after they issued their initial green bond. While the rest of the issuers did show a reduction in levels of GHG emissions, the magnitude of that decrease was relatively small. This is strong evidence, in the HKMA’s view, that greenwashing is not uncommon amongst players in the green bond market.

The path to self-correction

Interestingly, the HKMA report explains that the market has its own way of penalising greenwashing behaviour. Investors become less willing to invest in green bonds that are revealed as greenwashing, which in turn stifles demand and pushes up costs of issuance, dis-incentivising those greenwashing firms from issuing green bonds again. Empirical evidence shows that greenwashing firms have a lower probability of repeated issuance of green bonds.

Mitigation through mandatory disclosure requirements and taxonomies

The HKMA report further observed that green bond taxonomies (i.e. identification of assets and projects needed to deliver a low-carbon economy which pass the GHG emissions screening criteria set by the COP21 Paris Agreement) and enhanced environmental disclosure requirements are effective in mitigating greenwashing risks. The likelihood of greenwashing bonds being issued by firms with comprehensive disclosure requirements on environmental performance is about 21% lower than those without such requirements.

Data set

The HKMA’s conclusions are based on its analysis of data on 1,888 corporate green bonds with total issuance size of around US$591.14 billion issued by 643 listed companies between 2013 and 2021. Information on the data selection and methodology applied can be found in the HKMA’s report.