Green bonds -- debt taken on to finance projects with environmental benefits -- hit a record last month with $50 billion issued, as more and more companies and governments turn to the instruments.
Adidas, French electricity firm EDF and telecoms firm Orange, along with the nations of Germany, Egypt and Sweden all issued green bonds in September, helping the volume jump by five times from August.
The value of green bonds issued so far this year climbed to more than $176 billion, a 26-percent increase from the same period in 2019.
The total includes instruments that meet the principles set out by the International Capital Market Association, the professional association that unites the global bond market and information compiled by Bloomberg.
The ICMA defines green bonds as those which finance renewable energy, energy efficiency, biodiversity, pollution reduction and other similar projects.
But as ECB executive board member Isabel Schnabel recently pointed out, green bonds remain a small fraction of the overall debt market, accounting for just five percent last year.
- Germany arrives -
The September boom in green bonds is due in part to the fact that many operations were postponed earlier in the year due to the coronavirus pandemic. The volume of green bonds issued in the first half of 2020 dipped compared to the same period in 2019.
"This month, the volume of corporate green debt was more important than the volume of state green debt," said Jovita Razauskaite, an expert on green bonds at asset manager NN Investment Partners.
The arrival of a major sovereign emitter has energised the market, with Germany making its first issue. The placement of 6.5 billion euros in September is to be followed by another of 5.0 billion before the end of the year.
"We expect a more diversified issuer base," said Razauskaite.
"In particular, we expect more industrials to come to the market while the supranational space will be enlarged when the EU starts to finance almost a third of the recovery fund with green debt," she added.
- Risk of 'greenwashing' -
The sector still has to improve the evaluation of projects that receive the green label, however.
"Environmental ratings for green bonds or other financial instruments –- if available –- are often inconsistent, incomparable and, at times, unreliable," Schnabel noted.
The possibility that green bonds could end up simply being "greenwashing" -- providing more benefit to corporate image than the environment -- has been a persistent concern.
And the emergence of additional labels that muddy the waters, such as "transition bonds", makes matters worse.
These are aimed at helping industries with high greenhouse gas emissions shift to greener activities, but there are worries that vague rules could allow the financing of switching to natural gas, which is cleaner than coal but not a renewable resource.
There are also concerns that green bonds, even the best of them, are not leading to much tangible improvement.
"So far ... green bond projects have not necessarily translated into comparatively low or falling carbon emissions at the firm level," said a recent study by researchers at the Bank of International Settlements.
Other companies, such as luxury house Chanel, issue so-called sustainability-linked bonds meanwhile.
The proceeds from these bonds can be used to finance any type of project but the borrower makes pledges to meet certain sustainability targets and pays a penalty if they fail.
The flexibility open to issuers makes these bonds harder to label and compare.
"There are evaluation criteria, but the investor must make his own selection," Razauskaite noted.
Sustainability-linked bonds will be accepted as collateral by the ECB beginning in January, meaning banks can pledge them to borrow funds from the central bank, which should boost demand for the instruments.