Leading investment banks have set trillion-dollar green finance targets, driving a surge in “sustainable” debt deals. However, many of these deals have faced criticism for funding high-emitting companies or projects unrelated to environmental goals. While banks are still working out how to calculate the greenhouse gas emissions linked to their financing activities, they may soon be required to disclose these emissions in California, the EU, and the UK. This would increase pressure on banks to sever ties with polluting industries.
In the meantime, banks have focused on increasing the volume of sustainable bond and loan issuance, but this has attracted regulatory scrutiny. The UK’s Financial Conduct Authority warned bank executives about the potential for “greenwashing” in deals that link borrowing costs to sustainability targets. Investors have acknowledged the rapid growth of bonds marketed as sustainable, but caution that appropriate screening is necessary.
Green finance targets for 2030 include deals that help decarbonize oil, gas, coal, and shipping companies, as well as those that restructure emerging market debt in exchange for conservation funding. Bank of America recently structured the issuance of $500 million in bonds to fund a general-purpose loan to Gabon, marking the first debt-for-nature swap in Africa. However, critics argue that these “blue bonds” lack transparency and a robust sustainability framework.
Banks argue that meeting client demand for capital to transition to cleaner energy production can effectively reduce emissions. Goldman Sachs has already reached 55% of its target of $750 billion in sustainable deals between 2019 and 2030, just three years after setting the target. Additionally, loans to the oil, gas, and shipping industries that included sustainability goals amounted to $17.5 billion last year.
The expansion of sustainable finance into traditionally polluting industries has sparked debate. Critics argue that achieving certain targets while failing on other key aspects can lead to inconsistency. However, proponents believe it can improve governance standards and challenge the notion that all fossil fuel production is inherently “evil.”
While green bonds, which allocate proceeds for specific climate-linked projects, have fewer quality issues, there are still some cases of bonds financing coal or gas power plants without clear transition plans. Ensuring that sustainable financing targets genuinely support green projects is crucial to prevent the dilution of funding.
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