Analysis of the Quality of the Green Bonds for Climate Action

This research aims to quantify and evaluate the quality of green bonds in terms of transparency and additionality at the issuance level. The study reveals the differences between different countries and industry groupings in their green bond quality assessment and aims to provide a snapshot of the status of the market. For the purpose of this study, 241 green bonds were analyzed. The sample represents 31% of the 774 green bonds disclosed by the International Capital Markets Association (ICMA) as aligned with ICMA Green Bond Principles which covers 2016 – 2022 period as updated on 25 November 2022. For each green bond issuance, the same metrics were collected through an extensive review of the publicly available green bond frameworks and their impact reporting practices. Using the data extracted and coded by the author, each issuance is scored in terms of transparency and additionality. In this study, the disclosure practices concerning the use of proceeds of an issuance feed the transparency score. On the other hand, additionality is assessed based on the presence of refinancing and if any, the share of refinancing in the total use of proceeds. Hence, an issuance may receive a high transparency score with a low additionality score in the final scoring table. Each selected metric, such as disclosure of the excluded activities from financing, affects only transparency or additionality assessment. At the same time there are some interdependencies between iii metrics. For instance, the share of refinancing in total financing is a determinant of additionality. However, to be able to assess this, there should be a disclosure of the refinancing share which feeds the transparency score. There is a growing literature focusing on the greenwashing risk in the financial markets. This research fills a significant gap in the literature in two aspects. First, it creates a green bond database focusing on detailed disclosures. To the best knowledge of the author, there is no similar database publicly available. Secondly, the analysis provides an evidence-based analysis of the quality of issuances. The results of this study indicate that there is significant room for improvement in the transparency practices of the green bonds even if they are aligned with the ICMA Green Bond Principles. Further policy development is needed to enhance the reporting practices of the issuers to limit the risk of greenwashing. Green bonds are not designed as tools to finance greenfield projects only. Any green bond can be fully or partially dedicated to refinancing. The results show that the majority of the issuances are dedicated fully or partially to refinancing. This resulted in lower additionality scores. The additionality scoring helps to distinguish financial capital dedicated to address climate change from green bond issuances structured as “nice to have” labels. In the absence of clear intentions and transparent communication of impact, no kind of label can help us in the middle of a global climate catastrophe. This iv research aims to provide evidence of the urgent improvements required in climate finance market by specifically focusing on its shining star green bonds.