While finance has long played a part in encouraging greener business practices, demand for investments addressing climate risks is growing exponentially. COP26 wrapped up in Glasgow earlier this month, where the Paris Agreement was reviewed and countries’ commitments updated. This recent UN climate summit will have an even more profound and urgent impact on corporate finance.
Global issuance of green bonds surged to US$362.06 billion in the first nine months of this year, with a record US$500 billion expected to be printed by the end of the year. Designed to fund projects that are positive for the environment, green bonds have gained popularity as companies view them as a way to be more sustainable and to also show that to the market.
The instruments have been viewed favourably by governments, with the European Union selling green bonds under its pandemic recovery fund plan in October and China’s green bond market headed for its busiest year ever amid a national push for net-zero emissions.
However, as global policy and regulatory focus on climate change continues to increase, there exists growing demand from both the public and private sectors for transparency, granularity and verifiability of the data that underlies and supports green finance.
After all, such products only have meaningful impact in achieving the 2015 Paris goals if the underlying data is measurable, verifiable and ultimately able to be relied upon by third parties.
While green bonds have the potential to become powerful financial tools in creating positive climate action, there are areas for optimisation and improvement in the traditional green bond model.
Monitoring of use of proceeds, underlying asset performance and environmental impact is generally done through periodic manual processes, leaving the potential for human error and reducing the timeliness of data. Non-digitised data sets are not easily referenced over time and do not fit neatly into future carbon accounting, or ratings and reporting regimes.
These may sound like daunting challenges to solve. However, the use of blockchain technology and the internet of things or smart devices provides a streamlined, easily implemented solution.
While not yet mainstream in the monitoring of green bond compliance, these technology solutions can provide asset owners, lenders, ratings agencies, insurers and other stakeholders with verifiable, real-time, asset-level information on underlying asset performance.
A blockchain-based system can provide a verifiable, auditable data feed to lenders and investors on a near real-time or periodic basis. This digitised framework can support numerous finance-related activities concurrently (for reporting, accounting, ratings, etc.) at a fraction of the cost and time, and can enable better financing terms.
This system benefits all stakeholders in the green finance space: asset owners, users of product, regulators and third parties relying on these products for specific environmental outcomes.
With the latest climate change conference producing some breakthrough pledges, countries continue to face the challenge of implementing the commitments set out in the Paris Agreement’s nationally determined contributions (NDCs) – the system developed by the UN to track global emission plans on a country-by-country basis to determine whether, collectively, we are on track to stop global temperatures from rising by more than 1.5 degrees Celsius by 2050.
Green bond markets will be a critical tool for raising capital to fund low-carbon and climate-resilient infrastructure that can support the meeting of these national targets. Green bonds help meet climate targets by closing the gap between funding needs and investor demand.
But of course, the health of the green bond market and its long-term viability will require products that stakeholders trust implicitly, where the positive environmental impact of each single product is known and verifiable. Technology is fast becoming a core tool in helping to achieve this outcome and to drive positive environmental impact on the tight deadlines we face globally.
Dave Sandor is co-founder and CEO of Allinfra and an advocate of using blockchain technology to revolutionise the climate marketInternet Explorer Channel Network