While 17 per cent of current investments by large public corporations are green, fewer than five per cent of corporate green investments in 2017 were financed by certified green bonds, which have the potential to play a bigger role, according to a report by Corporate Knights and the Climate Bonds Initiative.
The report, which covered more than 7,000 of the world’s largest companies, representing all publicly traded corporations with US$1 billion and more in revenues, found current green investments aren’t where they need to be to put the economy on track to meet the United Nations’ sustainable development goals.
In order to do so, total corporate capex and research and development spending must rise from $3.6 trillion to $3.8 trillion annually, with the green component rising from $611 billion to about $1.07 trillion, the report said. As well, more than 87 per cent of the additional green investments are required in transition-exposed sectors, including energy, utilities, automotive, steel and cement.
“Current green investments are quite large, but there is still a big gap between them, and what is required for the sustainable development goals and the use of a variety of financing mechanisms, including green bonds, and critically green bonds, could help to close that gap,” says Toby Heaps, chief executive officer at Corporate Knights.
When looking at the financial sector, the researchers found about $390 billion of green loans on banks’ balance sheets. “In theory, all of that $390 billion, almost all of it, could be securitized and then issued off as green bonds, which should reduce the cost of capital and then free up more funds for banks to target for green loans and to help to power the green economy,” says Heaps.
By raising money on the green bond market instead of the general bond market, companies can access a deeper pool of investors, he says. Studies are showing some marginally reduced cost of capital in terms of the amount of interest they have to pay on the bond, he adds, noting this can also lead to greater awareness. “There’s a lot of investors that are hungry for green product and the supply is not sufficient to meet their demand.”
Using green bonds to replace general bonds isn’t just superficial, he adds. “It seems like it could just be a pointless exercise in just relabeling, but it’s actually incredibly important because it introduces much higher levels of literacy around this stuff.”
The report also noted additional ways to build a link between green-motivated capital and corporate initiatives requiring funding could include agreeing on taxonomies and definitions for green activities to facilitate clean transition bonds, meaning bonds to finance de-carbonization in high-carbon sectors.
As well, there could be a shift from strict “in-or-out” specifications of how green bond proceeds can be used, said the report, highlighting there could be more flexibility for companies to pass a credible test on sustainable development goal alignment and see their debt issuance qualified as green.