Brussels has launched its first Covid-19 green bond. It follows hot on the heels of the Spanish Government’s first green bond issuance, designed to support transportation projects. It shows the ambition of European policymakers to lead the world in sustainable debt, raising capital for environmentally-friendly reforms. But do green bonds stack up for investors?

On the one hand, green bonds solve a problem. It has been difficult for fixed income investors to invest sustainably. While bond managers can do the same analysis on companies, they don’t have an automatic seat at the table in the same way as equity investors. As a debt holder they have little leverage over a company to take action.

Green bonds, therefore, where capital is reserved for specific ‘green’ projects – the adoption of renewables, for example, or recycling projects, seem like a good solution. Bond investors can be comfortable that their capital is doing good and it is a useful way to raise money to progress towards net zero.

However, the question is what happens to the rest of the bond complex. By isolating the ‘green’ part, does it mean that the remaining bonds become more ‘brown’? If this is the case, there’s a danger that investors aren’t solving the problem but simply moving it from one place to another.

There has also been a concern with some green bonds that the use of proceeds is worryingly unspecific. This is a particular problem in the corporate sector, where proceeds may be earmarked for relatively vague projects such as ‘adoption of renewables’. There isn’t always the transparency needed when the capital raised from green bonds is spent.

Nevertheless, bond fund managers should weed out the most difficult green bonds. Some report rejecting as many as a quarter of the green bonds that come to market. The EU is providing additional scrutiny on how the proceeds of green bonds are spent, which should reassure those investing in this part of the market. The Climate Bonds Initiative and International Capital Markets Association are also working to ensure transparency in the market.

As with the wider ESG market, the green bond market is likely to mature over time, with the worst offenders weeded out and quality rising to the top. However, it cannot provide a complete solution to the problem of how to integrate ESG into fixed income.

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This article was sourced from Adviser-Hub.co.uk.