Bringing Transparency to Green Bonds: Data-Sharing Across the Supply Chain

Bringing Transparency to Green Bonds

It’s widely thought that the financial sector should be on the front lines in the fight against climate change, not only because of “climate-related financial risk” but also because they’re responsible for incorporating sustainability into their own portfolio.

There’s been a surge in green labeled-issuances, e.g. Green bonds, but there is insufficient transparency in regards to what the money is used for and, therefore, the bonds aren’t necessarily always green or don’t always provide additional green value.

Green bonds also lack standardization, which makes it difficult to determine if the bonds are effectively green or not. 

According to an FT article, bankers have defended issuers against the ‘greenwashing’ accusations, saying that “while green bonds may be an imperfect weapon in attacking climate change, they can still help to move companies in a cleaner direction”. 

“The boundaries of what can reasonably be called green have been tested a few times,” said Johanna Kob, Head of Responsible Investment at insurance group Zurich, adding that greenwashing, in her view, does not happen often. 

“The world is not black and white,” claimed Kjerstin Braathen, head of Norwegian financial services group NDB. “It is not going to be green or brown. It is really a broader part of the full business environment that has to transition into a new world.”

To solve this, the EU and the International Organization for Standardization are both preparing a Green Bond Standard based on existing principles; the International Capital Markets Association has also established voluntary guidelines. 

New costly regulatory fulfillment apart, would a new standardization really be enough to see some effective changes, and more importantly, would it be convenient for the issuers and investors? 

In this matter, China seems to be far ahead. The Shenzhen Green Finance Committee in China, in partnership with the Energy Blockchain Labs (using IBM Blockchain technology), International Institute of Green Finance, and the China Emissions Exchange are piloting the use of blockchain and IoT chips embedded in green assets to digitize the green certification and verification process. 

Data from green assets is collected through IoT, stored in real-time on the blockchain, and converted into financial information. 

The characteristics of the blockchain meet the financial markets’ requirements for asset information that is trusted and traceable. In parallel, IoT provides real-time access to large quantities of cheap performance data, which makes measuring and tracking the performance of green assets cost-effective and efficient. 

Combined, these two technologies can reduce the data-costs and increase investor’s confidence in measuring, labeling and verification of sustainable assets. They can also be used to programmatically update the investors on the proper functioning and actual sustainability of the assets they have previously financed. 

Moreover, according to The Economist, investors are also very concerned about “transition risks”. Carbon taxes, tradable emissions permits, and other policies to chivvy along the process of making economies greener by imposing costs on companies.

Having a set of IoT sensors connected to the green assets is key to precisely monitoring, for instance, the amount of CO2 emitted; as well as measuring and managing the transition risk and performing simulations for hypothetical scenarios (e.g. higher expected carbon taxes, etc.) 

According to the World Economic Forum, an analysis of more than 640 IoT deployments showed that 84% of existing IoT deployments can address the Sustainable Development Goals, even though the impacts on sustainability were not their main driver. 

With estimates that the average annual number of connected IoT devices worldwide will reach 125 billion by 2030, IoT could play a significant role in encouraging financing for sustainable development.

The Bottom Line

Institutional investors, as well as central banks, can influence which project or company will prosper in the future. 

Financial institutions, like banks and asset managers, on the other hand, have the responsibility of digesting green asset data and continuously transferring the flow of information to investors.  

So, what’s standing between us and the application of IoT throughout the supply chain? Don’t we want to ensure that financial resources are being utilized correctly to add green value?