Assignment Cover Page
Course Code: BAFI3182 & BAFI3230
Subject Name: Financial Markets and Institutions
Location & Campus (SGS or HN) SGS campus
where you study:
Title of Assignment: Assignment 3: Individual research
project
Student Name(s): Nguyen Tuan Hung
Student Number(s): S3934835
Teacher’s Name: Minh Nguyen
Assignment Due Date: 20 Sep 2024
Date of Submission: 220 Sep 2024
Number of pages including this one: 9
Word Count: 2062
Part A: Individual research report
Are Green Bonds a green financial tool or a new form of
greenwashing?
1. Abstract
The expansion of the green bond market is driven by increasing awareness
of Corporate Social Responsibility (CSR). In the short term, green bonds are
expected to mobilize substantial funds for environmental projects. However,
their long-term effectiveness is questionable due to potential misuse of funds
for non-green purposes. This report aims to investigate the impact of green
bonds and examine the issue of greenwashing associated with this financial
instrument. Additionally, it includes a conceptual analysis of the carbon tax to
evaluate its effectiveness in preventing greenwashing practices within the
bond market.
2. Introduction
According to a study by Harvard Business School professors Malcolm Baker
and George Serafeim, in the absence of a global carbon pricing mechanism,
bond markets will play a crucial role in financing efforts for climate change
mitigation and adaptation (Walker D 2019). This explains why the green
bond market and green financial debt products more broadly have grown
rapidly in recent years. Additionally, there are concerns regarding whether
issuers genuinely invest in the environmental sector, raising questions about
the potential for green bonds to serve as a new form of greenwashing. Green
bonds are debt instruments designed to finance projects that yield positive
environmental or climate benefits, including both refinancing and non-
refinancing bonds. While green bonds generally have a tangible
environmental impact, the extent of this impact varies. Non-refinanced bonds
tend to have a greater positive effect by increasing the volume of
environmentally friendly activities. However, green bonds are frequently
utilized for refinancing purposes. The definition of “green washing” was
established in the 1980s by environmentalist Jay Westerveld and refers to the
practice of organizations making misleading statements about environmental
issues (L'Officiel 2021). According to Leung at.el (2022) the study shows the
"dark side" of green bonds where greenwashing is not uncommon as some
businesses were found to not reduce their greenhouse gas emissions
intensity after issuing green bonds for the first time in the bond market. The
economy may experience financial instability while the bond market may lose
investor confidence. Furthermore, financial, reputational and benefits.
Availability of money supply was identified as the main driver for bond
cleaning market. Greenwashing in the bond market is another issue the
research raises that a carbon price may help with. Carbon taxes have the
potential to displace untrustworthy green bond issuers by creating transition
and default risks. Furthermore, how quickly and severely the tax is applied
may have an impact on the premium for green bonds, which may have an
impact on issuers' financial motivations and discourage greenwashing.
3. Literature review
a) Green bond
Fundamentally, Green bonds are similar to regular bonds but have two
key distinguishing features: the funds raised are exclusively allocated to
projects with environmental benefits, which are often linked to social co-
benefits, and they ensure clear transparency and disclosure regarding the
management of these funds (ABO 2021). However, the proceeds from
green bonds are specifically used for a variety of climate and
environmental projects (ABO 2021). In actuality, because Green Bonds are
self-labeled, there are risks associated with this product in terms of
transparency on the issuer's green efforts (Lebelle et al 2020).
Consequently, there is growing concern on a global scale over
greenwashing in the green bond market.
However, the effectiveness of green bonds on the environment
remains unclear because if green bonds were truly effective then we
would eventually observe an improvement in environmental performance.
To dig deeper, it is necessary to evaluate the environmental performance
of issuers using an econometric approach to measure the carbon intensity
of green bonds (Fatica & Panzica 2021). Up to two years following bond
issue, non-refinanced green bonds demonstrate a reduction in the carbon
intensity of company assets. This is true for both direct and total
emissions (Scope 1). Non-refinanced bonds have a greater negative effect
on overall emissions than they do on Scope 1 emissions (Fatica and
Panzica 2021). In contrast, refinancing green bonds does not always result
in a rise in the number of environmentally friendly projects, it does not
create new funding for environmental and climate protection efforts.
Additionally, refinanced debts have a comparatively less impact on total
and direct emissions than non-refinanced bonds, according to data sets
and empirical models presented by Fatica and Panzica (2021).
Consequently, it is incorrect to appropriately credit the increasing amount
of environmental and climate protection initiatives with the usage of green
bonds in general. Green bonds continue to assist the environment overall
and greatly improve environmental standards (Walker D 2019).
b) Greenwashing in green bond
According to Adam H (2024), The practice of giving the wrong idea or
providing deceptive information about how environmentally friendly a
company's products and making an unsupported claim to trick customers
into thinking a company's products are greener or have a bigger positive
environmental impact than they do are known as "greenwashing. In terms
of bond issuance, greenwashing refers to the practice of labeling bonds as
green without adhering to commonly accepted reporting standards for
green bond proceeds (IFRL, 2019). Essentially, companies may falsely
designate projects as compliant with green bond criteria by providing
misleading information during the issuance process. This term is
particularly relevant to major carbon emitters who use green bonds to
raise capital for non-green projects, while falsely promoting transparency
and sustainability strategies. The fact that, green bonds are frequently
used to refinance assets that have already been developed, with funding
mostly coming from non-green sources (Walker D 2019).
Furthermore, “green washing” is the virus can have a negative impact
on the green bond market. Greenwashing activity can lead to serious
consequences by causing investors to lose confidence in green bonds of
businesses and the entire industry. Greenwashing is often observed in the
worldwide green bond markets, as evidenced by the fact that certain
corporations do not show a decrease in their greenhouse gas emission
intensity following their first green bond issue (Leung et al., 2023). In
addition, Leung et al. (2023) discovered that market players may
recognize and penalize greenwashing businesses by making it more
difficult or costly to reissue green bonds. Greenwashing can trigger a
cascade of negative impacts on various green assets.
From a business standpoint, greenwashing deters investors, reducing
their willingness to invest in green bonds from companies suspected of
such practices. Consequently, the diminished demand for these bonds can
lead to higher issuance costs for the companies involved, potentially
hindering their ability to issue new green bonds.
However, Issuers continue to accept trade-offs in order to issue green
bonds and reap significant rewards in spite of the substantial concerns.
Firstly, issuing green bonds can significantly enhance the issuer’s
reputation and credibility by showcasing their commitment to
sustainability. Additionally, Wang and Liu (2024) identified a notable
positive correlation between corporate green bond issuance and ESG
rating disagreements. This finding indicates that ESG rating discrepancies
among rating agencies tend to rise for firms that issue green bonds,
thereby supporting the hypothesis regarding the reputational impact of
green debt issuance. Next is the advantages of financial, depending on
the issuer and the region, green bonds may provide tax benefits including
tax credits and exemptions. This is done to draw funding for
environmental and/or climate-beneficial initiatives from investors (CFI
n.d). Thirdly, when funding is accessible, the increasing public policy
interest in green bonds has led to various initiatives designed to boost
investor participation, thereby raising the demand for green bonds (Fatica
and Panzica, 2021). Consequently, companies can secure financing more
swiftly and efficiently.
c) Carbon tax
One kind of fine that companies face for their excessive greenhouse
gas emissions is the carbon tax (Kagan J 2024). Typically, a tax is imposed
on each tone of greenhouse gas emissions and this tax is intended to
incentivize these companies to cut back on the amount of greenhouse
gases and carbon dioxide an odorless, colorless, inflammable gas that
they release into the environment (Kagan J 2024). In addition to green
bonds, carbon pricing measures like carbon taxes and emissions trading
systems (ETS) may also be utilized to reduce the overall cost of mitigation
and increase environmental efficacy. Transition risk appears when a
carbon tax is implemented or raised by the government following the
issuing of bonds (Chikahisa 2022). This issue is especially important for
firms who are issuing green-washed bonds since high tax rates in
response to their high emissions might put their financial health in
jeopardy and perhaps force them into bankruptcy if they have to take out
loans to pay for coupon payments. Furthermore, tax payments hurt brown
enterprises' profitability and make it harder for them to fulfil coupon
obligations. Secondly, carbon tax can influence the green bond premium
and the prevalence of greenwashing in the market. According to IMF
research, the effectiveness of a carbon tax depends on the speed of its
implementation. Specifically, a swift but gradual introduction result in a
small greenium and low levels of greenwashing, whereas delayed and
substantial carbon pricing has an ambiguous impact on both greenium
and greenwashing.
Therefore, as carbon pricing or a carbon tax largely targets the financial
incentives of companies that engage in greenwashing, it is crucial to
prevent greenwashing in the bond market. A carbon tax can nevertheless
prove to be beneficial even in the face of certain transparency problems
and green preferences among some investment groups.
4. Linkage with SDGs
Green bonds are financial securities created especially to provide funding
for environmentally beneficial enterprises. The noticeable connection
between green bonds and sustainable development goals (SDGs) is linked to
SDG 13: Climate action. Specifically, green bonds have a funding for
renewable energy such as solar, wind and hydroelectric power which lead to
less reliance on fossil fuels, hence, decreasing carbon emissions (CBI n.d).
Furthermore, Green bonds are also used to support sustainable agriculture
and fund infrastructure that is resilient to natural catastrophes like floods.
Green bonds contribute to increased community resilience to climate change
via this investment (CBI n.d). Apart from the above action, corporations and
governments have demonstrated their dedication to sustainability through
the issuance of green bonds, therefore motivating other organizations to
follow suit. This has a cascading effect that encourages more extensive
climate action in several industries.
5. Conclusion
In conclusion, green bonds remain a valuable financial instrument due to
their environmental benefits, consistent with their original purpose. However,
the bond market faces a significant contemporary issue known as
greenwashing. Greenwashing, defined as the misuse and lack of transparency
in the allocation of funds raised through green bonds, leads to financial
instability and erodes investor confidence in these instruments. This issue is
particularly pressing at a time when the tangible environmental benefits of
green bonds are not as pronounced. Research indicates that green bonds are
often used for projects with minimal positive environmental impact, and
greenwashing is prevalent among issuers, especially corporate ones.
Fortunately, imposing a carbon tax on greenhouse gas emissions has been
shown to effectively reduce the financial incentives for greenwashing.
Nonetheless, the implementation and adjustment of such a tax must be
carefully managed to achieve clear and effective results.
6. REFERENCE
Walker D (2019) How green are green bonds?, CPA Australia, viewed
19 Sep 2024,
https://intheblack.cpaaustralia.com.au/business-and-finance/how-green-are-
green-bonds
Leung et al (2022) GREENWASHING IN THE CORPORATE GREEN BOND
MARKETS,
Hong Kong Monetary Anthority, viewed 20 Sep 2024, RM08-2022.pdf
L'Officie (n.d) MUST BE GREEN: What is “greenwashing”?,
lofficielvietnam.com, viewed 19 sep 2024,
https://www.lofficielvietnam.com/style/phai-xanh-green-washing-la-gi-lam-
sao-de-nhan-ra-hanh-vi-tiep-thi-sai-lech-nay
ABO (2021) Price Differences Between Labeled and Unlabeled Green
Bonds, viewed 19 Sep 2024,
abm_nov_2021_price_differences_labeled_unlabeled_green_bonds.pdf.
Lebelle et al (2020) Corporate Green Bond Issuances: AnInternational
Evidence, Journal of Risk and Financial Management, pp. 1-21, ISSN 1911-
8074, viewed 19 sep 2024, https://doi.org/10.3390/jrfm13020025
https://doi.org/10.3390/jrfm13020025.
Fatica & Panzica (2021)Green bonds as a tool against climate change, Wiley
online library, p.2688-270, viewed 20 Sep 2024,
https://doi.org/10.1002/bse.2771.
Adam H (2024) Greenwashing: Definition, How It Works, Examples, and
Statistic, Investopedia.com, viewed 20 Sep 2024,
https://www.investopedia.com/terms/g/greenwashing.asp.
IFRL (2019) Critical challenges facing the green bond market, Baker
McKenzie, viewed 20 Sep 2024,
https://www.bakermckenzie.com/-/media/files/insight/publications/2019/09/
iflr--green-bonds-%28002%29.pdf.
Wang X & Liu Q (2024) Information disclosure and ESG rating disagreement:
Evidence from green bond issuance in China, sciencedirect.com, viewed 20
Sep 2024, https://doi.org/10.1016/j.pacfin.2024.102350.
Kgan J (2024) What Is a Carbon Tax: Basics, Implementation, Offsets,
investopedia.com, viewed 20 Sep 2024
https://www.investopedia.com/terms/c/carbon-dioxide-tax.asp.
CFI (n.d) Green bond, corporatefinanceinstitute.com, viewed 20 Sep 2024,
https://corporatefinanceinstitute.com/resources/esg/green-bond/#:~:text=Ad
vantages%20of%20Green%20Bonds,-The%20popularity%20of&text=With
%20that%20said%2C%20green%20bonds,the%20environment%20and%2For
%20climate.
Chikahisa (2022) Green Bond Pricing and Greenwashing, Report number:
No.WP/22/246, IMF working Paper, viewed 20 Sep 2024,
https://www.imf.org/en/Publications/WP/Issues/2022/12/09/Green-Bond-
Pricing-and-Greenwashing-under-Asymmetric-Information-526832.
Part B: Reflection on industrial talk
In the industrial talk, the main problem is investment. Specifically, the
guest mentioned investing and where to start. The guest also gave a basic
definition of investing as well as how this activity is profitable. Next, during
the meeting, guests continued to share about potential investment
opportunities as well as mention where investment risks come from. In
addition, guests also shared knowledge about equity of the market, thereby
showing the potential development of personal income from investment.
Basic framework to think about investment is also given in the presentation
so that students can understand it more deeply.
Module 9 & 11 is the course topic that has the related to guest speaker
content because the main topic of these module is equity market and fund
management which is match to the content in the meeting.
From the discussion of the guest speaker, I have learned a key takeaway
that ưhen you want to step into investing, you should clearly understand the
basic concepts as well as collect data appropriately to be able to make the
right choice. Not only that, through the meeting, I also learned that when you
want to invest Start learning and accepting the risk of loss is the key to
investing successfully in the current market.
