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NextGen Magazine


Risky Green Bonds Come With Caveat: They Might Not Work

Chris Gaetano
Published Date:
Jun 10, 2021

The Wall Street Journal has reported that, in the rush to invest in green bonds used to finance environmental projects, people are missing the fine print on some of the riskiest ones, which warn that their funds may not actually go toward the intended purpose. Some high-yield (a/k/a junk) green bond issuers have instead used the funds to pay off debt, finance deals or pay for other corporate expenses, with any environmentally minded spending coming only from what's left. While this might be the kiss of death for other bond issuers, the Journal noted that these companies aren't exactly lying, as they outright state this in the investor documents, but this practice does reflect growing risk as more enter the market.

High-yield green bonds represent only a small portion of the overall market, but they're growing fast. While in 2019 they made up just 1.2 percent of the over $250 billion market, they grew to 2.5 percent in 2020 and, as of the first quarter 2021, expanded to 3.2 percent. Janus Henderson, an investment firm, said that in the first quarter alone, some $4 billion worth of these bonds were sold in the United States, double the whole level of 2020.

As of now, companies reneging on their green promises are all but unheard of, particularly given the public relations fallout that would accompany such a failure, but the fact that they even felt the need to have such clauses in their documents at all can be seen as a worrying development.