More than $1.43trn has been raised in green bond issuance since 2007, underscoring their significant contribution to the market for impact bonds, according to Insight Investment. Photo: Shutterstock

More than $1.43trn has been raised in green bond issuance since 2007, underscoring their significant contribution to the market for impact bonds, according to Insight Investment. Photo: Shutterstock

The aim of the EU Green Bond Standard to improve reporting practices may face limited adoption due to its strict criteria, and about 21% of impact bonds have failed to achieve genuine impact goals, stated Insight Investment.

Over the past decade, the issuance of impact bonds has grown significantly, despite facing challenges like impact washing and regulatory hurdles, while at the same time, over a fifth of impact bonds rated by Insight Investment since 2017 have failed to meet genuine impact criteria, highlighting the importance of due diligence, stated the global asset management company in a recent publication.

A report from the fund firm, which has roughly £647.8bn (€758.2bn) in assets under management and is part of BNY Mellon, stated that this expansion is especially notable given the entrance of sovereign and supranational entities into the green bond market in 2021, with the UK and European Commission making their inaugural issuances of £10bn and €12bn respectively, demonstrating a growing commitment to environmental objectives.

Impact washing

However, this growth has not been without its challenges. The phenomenon of ‘impact washing,’ where issuers label their bonds as impactful without a genuine intention of deploying the proceeds towards significant environmental or social outcomes, remains a concern. Insight Investment’s review, covering the period from the end of 2017 to September 2023, revealed that 21% of the 1,235 impact bonds rated failed to meet the criteria to be classified as genuine impact bonds. This highlights the critical need for thorough due diligence from investors, said the global outfit.

Achieving sustainable outcomes

Despite these obstacles, the potential for positive environmental and social impacts through fixed income investments is significant. Insight Investment suggested three primary methods for achieving sustainable outcomes: use-of-proceeds or impact bonds, investing in companies generating revenue from sustainable activities, and supporting companies with capital expenditure in sustainable endeavours.

The firm distinguishes between ‘impact issuers,’ whose operations are expected to lead to positive environmental, social and governance impacts, and ‘improving issuers,’ with investment plans aligning to some degree with the EU taxonomy regulation.

EU green bond standard

The introduction of the EU green bond standard marks a step forward, remarked Insight Investment, establishing a high benchmark for disclosure and reporting practices. However, the requirement for 85% of proceeds to align with the EU taxonomy presents a significant challenge, potentially limiting the standard’s adoption primarily to Europe and risking further divergence in global standards, warned the report. The voluntary nature of this framework, combined with the absence of more formal regulatory measures, underscores the importance of investor due diligence to avoid impact washing.

The full 18-page report is available .

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