Carbon footprinting for green bonds: a way forward

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12 October 2023 Responsible investment, Fixed income

Investors, in many cases, are forced to estimate the carbon footprint of green bonds but available approaches produce very different results. We propose a way forward.

In the absence of data from issuers, some investors are seeking to estimate the carbon footprint of specific green bonds. This could help them identify and pursue outcomes linked to carbon emissions targets, such as net-zero goals, and to measure progress with more accuracy.
There is no standard estimation methodology, and the approaches available produce very different results. We propose an approach that builds on a standard from the Partnership for Carbon Accounting Financials (PCAF) and accounts for the lack of data reported for green bonds after issuance.
We offer case studies to illustrate the impact of differing assumptions, the need for relevant assumptions and data, and why a different approach is needed for financial services. They also illustrate the implications for conventional bond portfolios: to represent an issuer’s overall carbon footprint accurately, once the carbon footprint of green bonds is estimated, the carbon footprint of the issuer’s conventional debt needs to be adjusted to avoid underreporting emissions.
A standardised approach, with sufficient coverage, would lead to benefits for investors, issuers and policymakers pursuing wider sustainability objectives. We therefore encourage issuers to disclose the carbon footprint associated with projects financed by green bonds using widely accepted industry standards and believe this would be best achieved by an update to the ICMA Green Bond Principles guidance to issuers. We are also seeking to encourage collaborative industry groups to agree and establish a standard: this may mean further work on the PCAF standard so that it can be practically applied or updating the GHG Protocol.
Even if the options today are imperfect, choosing and applying an estimation methodology means investors will more closely reflect the reality of carbon footprints in their portfolios.

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Carbon footprinting for green bonds: a way forward | Insight Investment

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