Our thinking

Money talks

4 November, 2022

In last week’s Friday 5 we focused on HSBC’s rap on the knuckles for greenwashing in its advertising, and this week the bank was heavily criticised for setting an ambitious commitment to contribute up to $1 trillion in sustainable finance while using funds raised to support highly carbon intensive activities. The world’s top 60 private-sector banks have poured $4.6 trillion (and counting) into fossil fuels since the Paris Agreement to limit global warming to 1.5°C in 2015, despite many of them making similar commitments to those from HSBC. 

The Bureau of Investigative Journalism says that a relatively new financial instrument called ‘sustainability-linked bonds’ (SLBs) is at the heart of the problem, and that they are making it too easy for institutions (and let’s be clear that it is not just HSBC that is in the frame for this) to indulge in greenwashing and worse, and here’s why.  

SLBs are promoted as a way for companies to raise money to help fund the transition towards a lower carbon economy, often for a reduced interest payment. However, the bonds are subject to very little regulation, beyond (usually) a requirement that the issuing organisation aligns with certain climate or broad ESG targets, rather than placing restrictions on what the funds can be used for. The head of market intelligence at the Climate Bonds Initiative has claimed that the SLB market is broken and warns we cannot “kid ourselves it is moving the needle on climate”. 

Bloomberg News analysed 100 SLBs worth approximately $70 billion and found that the majority of supporting targets set were weak, irrelevant or had already achieved. This means that under the banner of sustainable finance, companies can enhance their green reputation without implementing meaningful climate goals and find themselves subject to only the modest financial penalties if they don’t achieve the goals set, while funding all sorts of activities that undermine the net zero transition. 

There is nothing intrinsically wrong with so called green finance bonds. With the right rules in place, they can effectively move the needle by allocating capital to those projects that support the green transition. But for now, a lack of transparency and framework is going to slow movement in the management of climate risk. Only strict frameworks and guidelines will evolve this market’s potential. 

By Bertie Bateman