TL;DR
- As climate risk can significantly impact your green bond resilience, assessing these risks is crucial for building resilient investments.
- Asset-level data and regular updates are among the essential steps you should take to prevent mispricing and ensure accurate risk assessments in green bond investments.
- Transparency and credibility are critical to your green bond investments, requiring clear reporting, robust project evaluation, and independent review to avoid greenwashing.
Listen to this Episode
Duration: 12 minutes
With the growing threat of climate change to the financial market today, it's more important than ever to ensure that your investments are not only financially robust but also environmentally responsible. Looking at the green bond label, would you consider your investments sustainable, or are they merely a marketing gimmick?
In this article, we explore how to structure credible green bonds for sustainable finance that address climate exposure, prevent greenwashing, and meet investor expectations with resilient frameworks and data-driven risk assessment.
Why Green Bonds Must Be Resilient
Have you ever invested in green bonds only to see them underperform or even negatively impact your portfolio?
This is the fear of every responsible investor.
The green bond market (approximately $700 billion globally in 2024) should be seen as a channel to help achieve financial and climate resilience.
With escalating climate disaster shocks to your assets, however, the performance of your portfolio can be limited, causing you to experience low returns.
When it comes to climate adaptation finance, a recent study shows that investor losses can be significantly underestimated by 70% when asset-level data is neglected, and by 82% when extreme climate risks are ignored.
This underscores that factors such as climate risk considerations can be determinant in defining green bond resilience.
To make your green bonds more resilient, consider, among other things:
- Addressing physical risks - Assess the potential impact of climate-related events on the assets backing your green bonds.
- Conducting climate scenario analysis - Conduct thorough and regular climate scenario analyses to understand your exposure to potential climate-related risks.
- Ensuring ESG credibility - Ensure that your green bonds are backed by credible ESG practices.
Spotting Greenwashing in Bond Frameworks
Greenwashing typically involves exaggerating or misrepresenting the eco-friendly or sustainable aspects of a service, product, or investment, often with the intent to deceive or mislead consumers, investors, or stakeholders.
The ICMA’s Green Bond Principles (GBP) provide a widely accepted framework for green bond issuance, helping to mitigate greenwashing risks by emphasising transparency, disclosure, and integrity through clear guidelines and best practices.
Drawing from ICMA's principles, here are key considerations to avoid greenwashing within your green bond investment portfolio:
- Clear use of proceeds - Ensure that the use of proceeds is clearly defined and aligned with the bond's environmental objectives.
- Project evaluation and selection - Implement a robust project evaluation and selection process to ensure that projects meet the bond's environmental criteria.
- Reporting and transparency - Regularly report on the environmental impact of the projects financed by the bond, and ensure transparency in your reporting.
- Independent review - Engage independent reviewers to assess the bond's environmental credentials and provide assurance to investors.
Data Depth as a Guardrail Against Mispricing
Escalating climate risk is influencing the green bond market, with the pricing of green bond assets increasingly affected.
As climate-related events become more frequent and severe, investors are seeking more accurate ways to price climate risk.
A lack of granular data can lead to mispricing, where the true value of green bonds is not properly reflected.
Lukky Ahmed, CEO and co-founder of Climate X, notes that "banks are looking for ways to internalise climate signals into credit risk frameworks. That’s not an easy retrofit."
He adds, "being honest about uncertainty is more powerful than pretending to be precise. That’s how you earn confidence."
This highlights the importance of clear and robust climate risk data in gaining greater control over green bond pricing and accurately tracking your portfolio’s performance.
Data granularity can help prevent mispricing in the following ways:
- Asset-level data - Provide detailed data on the assets backing your green bonds to enable more accurate risk assessments. Climate X's Spectra is just the product you need, as it can give you access to over 80 data points in your asset risk analysis in minutes to support your investment decisions.
- Regular updates - Regularly update your data and risk assessments to reflect changing climate conditions. The advantage of using Climate X's products is that you can leverage real-time, up-to-date data at all times, saving you the hassle of awaiting new information for hours.
- Transparency and disclosure - As an investment portfolio manager, you should ensure transparency and disclosure in your data and risk assessments to build trust with investors.
Banks are looking for ways to internalise climate signals into credit risk frameworks. That’s not an easy retrofit. Being honest about uncertainty is more powerful than pretending to be precise. That’s how you earn confidence."
Lukky Ahmed, CEO of Climate X
Structuring Sustainability-Linked Loans
Like green bonds for sustainable finance, sustainability-linked loans (which reached $278 billion globally in 2024) are increasingly popular as a way to incentivise borrowers to improve their environmental performance.
These loans offer a flexible framework for lenders to support borrowers in achieving their sustainability goals.
The loans are closely tied to green bonds, as both instruments aim to promote sustainable finance and reduce securitised lending climate exposure.
As an investor in green bonds, you should consider sustainability-linked loans because they can provide a complementary financing mechanism for projects and companies that align with your green bond investment strategy.
Sustainability-linked loans, including climate-resilient loan structures, can support your green bond investment strategy:
- Diversified funding sources - Sustainability-linked loans can provide an additional funding source for companies or projects that have already issued green bonds, allowing them to tap into different investor bases and reduce dependence on a single funding source.
- Flexibility in use of proceeds - Unlike green bonds for sustainable finance, which typically require a specific use of proceeds, climate-secured loans offer more flexibility in how funds are used, allowing borrowers to drive sustainability performance across their operations.
- Incentivising broader sustainability performance - Sustainability-linked loans can incentivise borrowers to improve their overall sustainability performance, beyond specific projects or assets, which can enhance the creditworthiness and ESG profile of the borrower.
- Risk management - By linking loan terms to sustainability performance, sustainability-linked loans can help address ESG risks and promote sustainable business practices, which in turn can reduce the risk profile of your green bond investments.
Watch the Webinar: How to Scale Sustainable Finance
Investor Expectations, Regulatory Pressure & ESG Credibility
Investors and financial market regulators are defining credible green bonds as those that are backed by robust ESG practices and transparent reporting. Key investor expectations include the need for clear and consistent reporting, robust project evaluation and selection processes, and independent review. Regulatory undertakings, such as the EU's Sustainable Finance Disclosure Regulation (SFDR), are shaping the market by providing a framework for sustainable finance.
Investors and regulators, particularly in the EU market, consider:
- Clear reporting - Investors expect clear and consistent reporting on the environmental impact of green bonds and other instruments, while regulators are responding with frameworks such as the SFDR and the Green Taxonomy.
- Robust project evaluation - Investors expect robust project evaluation and selection processes, while regulators are responding with guidelines and best practices.
- Independent review - Investors expect an independent review of green bonds, while regulators are responding with requirements for independent verification.
- Transparency and disclosure - Investors expect transparency and disclosure in green bond reporting, while regulators are responding with requirements for transparency and disclosure.
Tools That Support Transparency & Risk-Based Structuring
As an asset manager, you need tools that support transparency and risk-based structuring in green bonds to make informed decisions.
Several tools are available to help you achieve this, including climate risk models, ESG rating platforms, and green bond frameworks.
These tools can help you assess the climate-related risks and opportunities associated with your green bond investments.
Some essential tools for transparency and risk-based structuring include:
- ESG rating platforms - Leverage ESG rating platforms that provide detailed assessments of the ESG credentials of your green bond investments, helping you ensure ESG credibility.
- Data analytics platforms - Utilise data analytics platforms that can help you monitor and report on the environmental impact of your green bond investments, ensuring transparency and accountability. E.g., Climate X's Spectra and Adapt.
- Green bond frameworks - Adopt green bond frameworks that provide clear guidelines for the issuance and management of green bonds, reducing the risk of greenwashing in sustainable finance. E.g., Climate Bonds Initiative's (CBI) Interactive Data Platform.
- Sustainability-linked bond platforms - Explore platforms that can help you structure bonds linked to specific sustainability targets. E.g., Sustainable Sovereign Debt Hub (SSDH) platform.
Building resilience and credibility in green bond investment is crucial to achieving your long-term goals.
Understanding the importance of climate risk considerations, avoiding greenwashing, and leveraging data-driven insights can enable you to make adequate decisions that support both your financial objectives and your commitment to sustainability.
With the right tools and strategies, you can structure green bonds and sustainable finance products that not only meet investor expectations but also contribute to a more sustainable market. If you want to learn more about sustainable finance, watch our free webinar below.
Watch the Webinar: How to Scale Sustainable Finance
Our Latest Sustainable Finance Articles
A selection of some of our latest articles covering industry, policy and climate science - written by us.
