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Info Service on Biodiversity and Traditional Knowledge (May25/04) Green Bonds, Empty Promises Green bonds are debt instruments in which proceeds are earmarked directly or indirectly for projects with a positive environmental impact. There has been a lot of recent interest in green bonds as a potential instrument for resource mobilization for biodiversity, including their mention in Target 19(d) of the Kunming-Montreal Global Biodiversity Framework. This paper examines an often-overlooked feature of green bonds their legal structure. The authors constructed a large and representative dataset of green bonds (at least those marketed in English language as such). They examined the legal structure of over 1000 green bonds to understand what promises issuers make, and what mechanisms they establish for monitoring and enforcing environmental standards. In looking at the issue of sustainable finance through a judicial lense, the authors of the report come to a startling conclusion: while the market for green bonds may consist of instruments that appear eco-friendly, they rarely present credible and binding commitments. Whats more, investment managers have little incentive to probe beneath this veneer. They conclude that the green bond market has a concerning lack of enforceable promises. This seems to be the result of a financing environment where issuers have leverage due to a of strong demand for green bonds, and so have little incentive to offer transparency. The lack of enforceability is a latent risk for developing countries looking to obtain (expensive) funds that would otherwise not be forthcoming. While these shortcomings are known to market participants, the report stresses that demand for these instruments has been growing. The authors suggest increasing numbers of borrowers are taking advantage of this convenient lack of accountability. Even when an issuer promises to use the proceeds for sustainable projects, these are defined so broadly and vaguely that it would be almost impossible for an investor to prove non-compliance. Incidentally, the findings of this report are closely aligned to a 2022 Bolton et al. paper which shows that sovereign green bond issuers rarely (if ever) make credible and legally binding commitments to use the raised funds for green projects. With
best wishes, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4350209 Green Bonds, Empty Promises Quinn Curtis, University of Virginia School of Law, Mark C. Weidemaier, University of North Carolina School of Law & Mitu Gulati, University of Virginia School of Law Abstract We examine the legal terms in the market for green bonds, debt instruments in which proceeds are earmarked, directly or indirectly, for projects with a positive environmental impact. Utilizing a sample of nearly 1000 bonds over the entire history of the market and supplementing this data with interviews with over 50 market participants and policymakers, we find a concerning lack of enforceability of green promises. Moreover, these promises have been getting weaker over time. Green bonds often make vague commitments, exclude failures to live up to those commitments from default events, and disclaim an obligation to perform in other parts of the document. These shortcomings are known to market participants. Yet, demand for these instruments has been growing. We ask why green bond promises are so weak, while the same investors demand strong promises from the same issuers in other settings.
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