- The Parnership for Carbon Accounting Financials says “follow the money” to understand and account for climate impact in the real economy.
- Analysing the impact of a green bond per unit of investment is difficult – inconsistent reporting and lack of standardisation make comparisons tricky.
- ING is the only bank in the data set to report its avoided emissions on a per unit basis as per best practice recommendations.
As the financial industry looks to mobilise capital to solve the climate crisis, debt issuance linked to sustainability outcomes hit a high of $1.6trn in 2021, according to the IMF. But is this capital, most of which is earmarked for green projects, actually meeting the stated goals it set out to achieve? Can a direct link be made between higher green bond issuance and better outcomes for people and the planet?
There is no easy way to answer to these question. At a global level, greenhouse gas (GHG) emissions continue to rise, not fall, meaning the planet is moving further away from the goals of the Paris Agreement, despite the efforts of the financial industry to invest in a better future.
The majority of ESG-linked capital flows are currently allied to a “do no harm” approach. This has a net neutral rather than a net positive impact on people and the planet. Some green bonds may even finance projects that result in increased GHG emissions at certain points in their life cycle – for example, certain infrastructure projects and impact investing – but have net positive outcomes as their purpose. Still, this type of financing remains a very small part of the financial universe.
But investors increasingly want to know, measure and report on the impact of their broader ESG-aligned financing. And as competition for fund flows increases, reporting a better green bang for your buck may also help ESG-labelled funds attract the discerning investor.
So how easy is it to assess the impact of green bonds? To answer this, Capital Monitor analysed the green bond impact reports of ten of the largest issuers of green bonds from the banking sector over the past five years, according to Refinitiv data. The banks chosen are all signatories of the Net Zero Banking Alliance and committed to aligning their lending and investment portfolios with net-zero emissions by 2050 and to setting near-term science-based targets. The analysis focuses on a single indicator: kilogrammes of CO2 emissions avoided per $1 of investment.
“Follow the money” is a key tenet for GHG accounting of financial assets, says the Partnership for Carbon Accounting Financials (PCAF), an open collaboration of financial institutions working to develop a global carbon accounting standard, which is rapidly emerging as the gold standard in reporting.
PCAF says the “money should be followed as far as possible to understand and account for the climate impact in the real economy (i.e. emissions caused by the financial institution’s loans and investments)”.
Working out the impact of a bank’s green bond should be as simple as dividing the total volume of CO2 emissions avoided by the total amount of green bonds issued or allocated. But reporting discrepancies make this very difficult to achieve.
Green bond issuers are heavily encouraged to report on both the use of green proceeds as well as the expected environmental impacts by the International Capital Market Association (ICMA), at least on an annual basis, but are not mandated to do so. Avoided emissions – emissions that would otherwise have resulted without a project – is a common key performance indicator (KPI) for renewable energy and energy efficiency projects. But as of yet, there is no standard way to calculate this, and consistent reporting of GHG emissions reported remains a challenge, ICMA says.
The lack of uniform reporting makes it difficult to make clear comparisons between the banks. Variations in the reporting period, methodologies and interpretation of impact mean that our findings should only be seen as a guide.
All of the banks analysed by Capital Monitor published, at the very least, the CO2 emissions avoided, but the reporting methodologies were very different. Some, like Bank of America, report tonnes of carbon dioxide equivalent (tCO2e) emissions avoided by a specific project financed by a specific green bond. Others, like Societe Generale, report the emissions avoided by the projects financed by themselves, but do not adjust this figure to reflect the portion of the deal financed by the bank.
The French bank says it used the prorated approach – which would be the avoided emissions linked to bank’s portion of financing – for a green bond issued in 2016 but not for the updated 2020 report. It provides the methodology to calculate the prorated financed emissions avoided, but does not state the figure itself, instead reporting that the “impact of its green portfolio” is “€7,548m identified across four asset categories, totalling for 19,574 million tCO2e avoided".
Societe Generale could not give the CO2 emissions avoided for its share of the projects, with spokeswoman Fanny Rouby saying “we can’t provide a precise answer as the figure is not available under our new approach by portfolio”.
The bank also says it would not calculate the prorated figure any longer “because of its little relevance in a context where the reporting is made through a portfolio approach, which is a global approach and under which we do not communicate on the loans that are refinanced through a specific bond issuance, as per market practice”.
The bank did concede it would change the formulation of its reporting “to avoid any confusion”.
Best practice advice from the PCAF is to report tCO2e avoided adjusted by the share of the bank’s portion of financing, rather than the whole project. This is the approach followed by ING, for example.
There were also discrepancies in what the figures were reported against. Bank of America, for example, reported the CO2 emissions avoided by a single bond and breaks the emissions avoided down into each project the bond financed. ING, on the other hand, reports the carbon emissions avoided by investments made under a larger portfolio of green loans made by the bank. The Dutch group has issued €3.8bn of green bonds as of December 2020 but its green asset portfolio stands at €8.512bn.
Neither approach is wrong. Bank green bonds are issued against a portfolio of green loans made by the bank, many of which have already been extended. Eligible projects must meet criteria outlined in a bank’s green bond framework, and best practice is to align this with the ICMA Green Bond Principles (GBP). As long as the portfolio of green loans is equal or greater than the size of the bond issued, the green bond is ICMA-compliant and the investor can take comfort in the like-for-like dollar investment.
Capital Monitor finds that for $51.8bn of green loans made by the ten banks to a variety of projects across renewable energy, green buildings and water projects, 44.5m tonnes of CO2 emissions were avoided per year.
But the efficiency of these investments depend on the institution, as shown in the chart above.
Capital Monitor’s analysis finds that for every $1 invested by Bank of America, for example, 0.97kgCO2e was avoided, while every $1 invested by BNP Paribas resulted in 0.46kgCO2e avoided. This makes Bank of America’s dollars almost twice as efficient as BNP Paribas's, according to their stated figures.
Assessing the impact of these green bonds should be straightforward. Ultimately, they are issued on the premise that the proceeds of the bond will be used to refinance loans or make new loans that have a positive impact.
But the inconsistency in reporting makes it very difficult to assess the impact of a specific bond, let alone make comparison across different banks.
ING is the only bank in the data set to report its avoided emissions on a per unit basis. The bank reports investments under its €4.151bn renewable energy portfolio led to avoided emissions of 5.6 megatonnes of CO2e or an average of 1.3kgCO2e per euro invested. However, this figure was calculated by US consulting firm Guidehouse using a weighted average unknown to Capital Monitor.
ING itself calculated its avoided emissions per €m invested by dividing the total GHG emissions avoided of 5,642,819tCO2e by its total green loan portfolio of €8.512bn to give a total of 662.9tCO2e per €1m invested or 0.6629kgCO2e per €1, says Sachin Shah, who works in the bank's sustainable markets debt capital markets origination team.
Other banks report a figure for tCO2e per millions of dollars or euros.