As discussed in my prior blog, “Green Finance” is both a challenge to be met and an opportunity to be seized. In this blog we’ll dive deeper into the Environmental, Social and Governance (ESG) revolution – with a focus on “green bonds” – and consider the essential role that technology can play to further elevate and illuminate this market-moving segment.
Going Green with Green Bonds
Green bonds are financial instruments that are specifically intended to encourage sustainability and support climate-related and environmental projects. For example, green bonds finance projects for energy efficiency, pollution prevention, sustainable agriculture, responsible fishery and forestry, the protection of aquatic and terrestrial ecosystems and sustainable water management.
Many Shades of Green
The green bonds are already mainstream and will continue as a mainstay of green finance. However, their standards are still evolving – as such, we see there are “many shades of green” and accusations of “greenwashing” are common. Technology, data and the advancements of Digital Ledger Technology (DLT) all will play a role as this market evolves. ESG stakeholders want confidence that green finance data is consistent, reliable and traceable. DLT meets these criteria, so will it revolutionize green finance?
The Need for Clear Standards, Regulation and Disclosure
Over the last decade, green bonds have grown continuously in both importance and in volume. Green bonds accounted for over 11% of total bond issuance in 2021, an increase of 4% over the previous year.[1] This year, S&P Global Ratings forecasts green bonds issuance to exceed $1.5 trillion, as public and private sectors pursue climate commitments. However, the same report also notes the following:
“As diversification and innovation in sustainable bond structures grows, ensuring greater integrity and credibility across the market will be key. Efforts to further establish and encourage the uptake of clear standards, regulations, and disclosure requirements will be critical.”[2]
The momentum of green bonds issuance shows their growing appeal, but the pace of change introduces challenges. Governments, regulators and investors grapple with an array of issues, many of which relate to data, standards and definitions.
Following are important considerations regarding the green bond market:
Transformational Technology: A Model DLT Application
Distributed Ledger Technology (DLT) – such as blockchain – can revolutionize green bonds issuance and management. It promises a new era of transparency, integrity and efficiency and serves as an example of how technology can shorten the distance between finance and the real world.
DLT can transform the green bonds market in several significant ways:
Going Beyond Green Bonds
Although green bonds provide a model application of DLT, the core technology can be applied to all bond types. Adoption of DLT in the green bonds market serves as a wakeup call to other areas of financial services as well. DLT has moved from theory to practice and it’s time to get involved.
[1] https://www.environmental-finance.com/content/the-green-bond-hub/sustainable-bonds-to-exceed-the-trillion-dollar-barrier-in-2022-for-second-consecutive-year.html
[2] https://www.spglobal.com/ratings/en/research/articles/220207-global-sustainable-bond-issuance-to-surpass-1-5-trillion-in-2022-12262243
