$245b green-debt boom is growing faster than its impact

BRUSSELS • The green debt market is growing at a faster pace than the real-world projects it was created to support, thanks to some financial engineering.

While no official estimate exists for the difference between green finance and actual green business, a growing number of auditors, researchers and climate activists have warned that the figures provided by bankers offer an exaggerated picture of their role in fighting climate change.

"Financial institutions can paint a picture of themselves which makes their contribution to the climate transition more meaningful than it actually is," said Mr Stanislaw Stefaniak, a sustainable finance researcher at Instrat, a think-tank based in Warsaw, Poland.

The concern centres on the reselling of green loans, whereby the finance industry's contribution to an underlying project gets counted as often as the original debt is refinanced.

After issuing green loans, bankers can bundle them into a green bond that can then be sold to another financial institution. Both can claim they are financing the climate transition.

The accounting conundrum means the amount of green financial assets on banks' and asset managers' balance sheets outstrips real-world green capital expenditures.

This year, financial institutions printed a record US$180 billion (S$245 billion) in green bonds, more than any other private sector.

"It is difficult to put a number on the level of double counting that will happen due to the private nature of the loan market," said Ms Maia Godemer, a sustainable finance analyst at BloombergNEF.

The "caveat", however, is the risk of ending up with a "brighter picture about the actual decarbonisation that is enabled by credit institutions", she said.

The repackaging and restructuring of debt is a well-established and fully legal form of financial engineering.

Though there are examples to show that such models can backfire if applied without restraint - the subprime mortgage meltdown being a case in point - rebundling of debt can also add liquidity and bring more stakeholders into a market to help it grow.

Since banks are under pressure from regulators, particularly in Europe, to make their lending greener, this kind of refinancing serves them well.

But the disconnect from actual green business may complicate efforts to track their contribution to the urgent decarbonisation needed to avoid a climate catastrophe.

"If the bank has a legitimate exposure that it is able to report but then sells or repackages the loan, there is a risk that the purchaser getting the credit could be viewed as benefiting from financial engineering as opposed to representing the sustainable money going into the real economy," said Mr Tim Conduit, a partner at international law firm Allen & Overy. "It is a question of how the different green exposures are reported."

Policymakers are starting to counter this potential for greenwashing in the debt market.

Proposed amendments to the European Union's green bond standard include a clause that would prevent "the creation of green bonds out of thin air" by continuous refinancing, said Mr Paul Tang, a lawmaker responsible for guiding the legislation through the European Parliament.

The EU's regulatory packages are global in scope, and affect non-EU firms if they target clients in the bloc.

The idea is to steer capital away from activities that hurt the planet and into projects that protect the environment and social justice.

BLOOMBERG