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The ESG Revolution: The Role of Technology (Andrew Beatty)

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As discussed in my
prior blog
, “Green Finance” is both a challenge to be met and an opportunity to be seized. In this blog we’ll dive deeper into the Environmental, Social and Governance (ESG) revolution – with a focus on “green bonds” – and consider the essential role that
technology can play to further elevate and illuminate this market-moving segment.

Going Green with Green Bonds

Green bonds are financial instruments that are specifically intended to encourage sustainability and support climate-related and environmental projects. For example, green bonds finance projects for energy efficiency, pollution prevention, sustainable agriculture,
responsible fishery and forestry, the protection of aquatic and terrestrial ecosystems and sustainable water management.

Many Shades of Green

The green bonds are already mainstream and will continue as a mainstay of green finance. However, their standards are still evolving – as such, we see there are “many shades of green” and accusations of “greenwashing” are common. Technology, data and the
advancements of Digital Ledger Technology (DLT) all will play a role as this market evolves. ESG stakeholders want confidence that green finance data is consistent, reliable and traceable. DLT meets these criteria, so will it revolutionize green finance?

The Need for Clear Standards, Regulation and Disclosure

Over the last decade, green bonds have grown continuously in both importance and in volume. Green bonds accounted for over 11% of total bond issuance in 2021, an increase of 4% over the previous year.[1]
This year, S&P Global Ratings forecasts green bonds issuance to exceed $1.5 trillion, as public and private sectors pursue climate commitments. However, the same report also notes the following:

“As diversification and innovation in sustainable bond structures grows, ensuring greater integrity and credibility across the market will be key. Efforts to further establish and encourage the uptake of clear standards, regulations, and disclosure requirements
will be critical.”
[2]

The momentum of green bonds issuance shows their growing appeal, but the pace of change introduces challenges. Governments, regulators and investors grapple with an array of issues, many of which relate to data, standards and definitions.

Following are important considerations regarding the green bond market:

  • What constitutes a green bond? Like any other bond, a green bond is a fixed-income financial instrument for raising capital from investors through the debt market. Typically, the bond issuer raises a fixed amount of capital from investors over a
    set period of time, repaying the capital when the bond matures and paying an agreed amount of interest along the way. The key difference is that green bonds are earmarked to raise money for climate and environmental projects.

    One can say that “a green bond is what a green bond does”, but it’s sometimes difficult to decipher the specific project parameters due to a lack of consistent standards. And, even for clearly defined projects, the underlying “green creds” may be hard to quantify.
    In practice many investors must wait for post-issuance reporting to see what their green bond funds were used for. This lack of consistency and timeliness also makes it harder for potential investors to compare investment opportunities.

  • Who’s interested? Green bonds have more stakeholders than traditional bonds, including investors, shareholders, employees, customers, and partners. Stakeholder interest may be more than monetary, and communications will be key. Companies issuing
    green bonds must have clear, quantifiable objectives, supported by a consistent communication strategy.
  • What’s the data strategy? Data is perhaps the biggest challenge of green bonds issuance, involving a multitude of data types from disparate sources. There can be questions around the quality, reliability and timeliness of data and what it really
    means. Good data governance is fundamental to ensure transparency and integrity. Data must confirm that the green bonds fund specific green projects and not the general activities of the company.
  • Is the technology fit for purpose? Many of the challenges around green bonds relate to data, which in turn is a technology matter. In the digital age, stakeholders expect real-time information delivered on a device of their choice. In practice, stakeholders
    may utilize different types and generations of technology, which can be difficult to choreograph. A new approach is needed.

Transformational Technology: A Model DLT Application

Distributed Ledger Technology (DLT) – such as blockchain – can revolutionize green bonds issuance and management. It promises a new era of transparency, integrity and efficiency and serves as an example of how technology can shorten the distance between
finance and the real world.

DLT can transform the green bonds market in several significant ways:

  • Structuring, issuance and distribution of green bonds. This is currently a complex multi-stage process for preparation, subscription and settlement. Using DLT can streamline and simplify the issuance process facilitating new levels of efficiency.
    DLT reduces the number of parties in the issuance process, permanently lowering cost. The use of smart contracts allows immediate distribution, while the certainty of DLT reduces (or eliminates) the potential for fraud. Settlement can be performed immediately
    by real-time (or near real-time) payment.  
  • Investor access and ecosystem development. While cost reduction is an obvious case for DLT adoption, with the right approach, many other benefits will follow. Complementary technologies, such as the Internet of Things (IoT) can empower investors
    with accurate, real-time information on the environmental impact of their investments. Over time, a trusted ecosystem will evolve, providing a vital link between green finance and the environment.  

Going Beyond Green Bonds

Although green bonds provide a model application of DLT, the core technology can be applied to all bond types. Adoption of DLT in the green bonds market serves as a wakeup call to other areas of financial services as well. DLT has moved from theory to practice
and it’s time to get involved.

[1] https://www.environmental-finance.com/content/the-green-bond-hub/sustainable-bonds-to-exceed-the-trillion-dollar-barrier-in-2022-for-second-consecutive-year.html

[2] https://www.spglobal.com/ratings/en/research/articles/220207-global-sustainable-bond-issuance-to-surpass-1-5-trillion-in-2022-12262243

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  • Source: https://www.finextra.com/blogposting/22312/the-esg-revolution-the-role-of-technology?utm_medium=rssfinextra&utm_source=finextrablogs

This Post was originally published on Fintextra

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