Green bonds that finance environmentally-friendly projects remain popular with investors. However, the investors increasingly care not just about the projects, but also how the issuers plan to achieve net-zero greenhouse-gas emissions by 2050.

Recently three fund managers sold the green bonds of a bank in protest at its funding of an Australian coal mining project. And 30 investors managing USD9 trillion of funds have now signed up to the Net Zero Asset Managers Initiative that aims for net-zero emissions across all managed funds by 2050 with interim targets for 2030. Oil & Gas bonds may be particularly vulnerable given their emissions.

The Bank of England is also being urged by a UK parliamentary committee to ensure its corporate-bond purchasing programme is aligned with the Paris Agreement's goal of limiting global warming to 2°C – better still, well below 1.5°C.

Bonds whose proceeds fund specific projects that reduce carbon emissions but which do not invest in fully green technology have been dubbed 'transition bonds'. There have been only limited issues, however.

Many transition projects could, in principle, be funded by green bonds, but some investors may be reluctant to buy such 'pale green' bonds.

However, investors may be given comfort by guidance in the new Climate Transition Finance Handbook published by the ICMA rule-setting body. Instead of defining transition bonds it requires a bond to finance the issuer's climate-transition strategy, which should be aligned with the Paris Agreement's goal.

The issuer's transition trajectory should also be relevant to its business model, have measurable and science-based targets, be publicly disclosed, include interim milestones, and be independently verified. And the issuer should provide transparency of the underlying investment programme, including capital and operational expenditure.

This framework can be overlaid onto existing green bonds – which fund specific projects – and sustainability-linked bonds, which do not fund specific projects but penalise issuers if they fail to meet pre-agreed environmental targets.

The aim of adding issuer-level disclosure is to give additional reassurance to investors, making it easier for 'hard to abate' sectors to finance decarbonisation without having to define yet another bond label. This is further evidence that sustainable-bond investors increasingly care about the issuers themselves.

Even if investors increasingly take the view that green bonds by themselves are not enough, green bonds still matter. We are forecasting issuance of USD310 billion to USD360 billion this year.

The European Commission this year published its strategy to promote a stronger international role for the euro, including developing EU financial markets into a global green-finance hub, promoting green bonds as tools to finance the energy investments needed to reach the EU's 2030 climate targets.

The EU wants 30 per cent of the bonds financing its recovery fund to be green bonds – potentially EUR225 billion, with issuance up to 2026.

France and Germany have already issued green bonds and plan to issue more, while Italy and Spain are expected to issue their first this year and the UK has sought an advisor on structuring a green gilt-edged stock. As for sustainability-linked bonds, we expect companies to increasingly find these an attractive source of funding.

First published 26 January 2021.

Would you like to find out more? Click here to read the full report (you must be a subscriber to HSBC Global Research).

Disclosure and disclaimer

More, collapsed
Mainland China gets greener
Solar and wind capacity has grown faster than expected as country aims for carbon neutrality
Join the conversation?

Join our Linkedin group to get an unparalleled view of macro and microeconomic events and trends from a bank that is a leader in both developed and emerging markets.