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50 Shades of Green: Mighty Earth’s Green Bonds Challenge

Credit: Vector Portal


In the world of sustainable finance, green bonds have emerged as a catalyst of positive environmental change. However, this impact comes with many complexities. As a relatively new financial instrument aimed at achieving ambitious environmental objectives, green bonds carry the inherent risk of falling short in fulfilling their intended environmental outcome. In this analysis, we'll investigate how this security operates, explore its regulatory framework, review a recent event related to these issues, and consider steps toward a more environmentally responsible future through these securities.

What are Green Bonds?

Environmental, Social and Governance (ESG) considerations have become increasingly prominent in the realm of corporate finance. ESG now plays a pivotal role in shaping strategies and operations as stakeholders prioritize sustainable practices. Green bonds finance clean energy and environmental projects. Over the past five to seven years, they have become part of a larger trend of socially-responsible ESG investing. While they operate like traditional government or corporate bonds, offering profit at maturity, the appeal to most investors lies in funding projects that set the world on a trajectory towards a sustainable, zero-carbon economy.

Credit: S&P Global

Recent examples of green bonds include:

  • In 2019, PepsiCo issued a 30-year, $1 billion note yielding 2.875%. The proceeds have been used to finance sustainable packaging, decarbonization of the supply chain, and water sustainability.

  • In 2022, General Motors raised $2.25 billion, with $1 billion of 5.4% notes due in 2029 and $1.25 billion of 5.6% notes due in 2032. The proceeds will finance their transition to electric vehicles.

How are Green Bonds Regulated?

Due to the absence of a universal global standard or recognized legal definition, coupled with market criteria based on voluntary compliance, clearly classifying certain bonds as "green" is challenging. The main concern with green bonds is the risk of "greenwashing," wherein issuers promote sustainable intentions to attract investment but fail to direct funds to genuine eco-projects.

As such, in order to align investors’ values through green bond investments, they emphasize the importance of ensuring the proceeds truly benefit the environment as initially reported. While green bonds offer tax advantages like exemptions and credits, the primary focus for this debt instrument has been the proper regulation of its proceeds.

In an effort to ensure the credibility of green bonds, issuers rely on frameworks such as International Capital Market Association’s Green Bond Principles (GBP). GPB outlines best practices for issuing socially and environmentally-focused bonds, emphasizing guidelines that prioritize transparency and disclosure. GPB has established four core components for alignment: (1) Use of Proceeds, (2) Process for Project Evaluation and Selection, (3) Management of Proceeds, and (4) Reporting.

Mighty Earth v. JBS

In January of 2023, Mighty Earth, a global advocacy group, filed a whistleblower complaint with the United States Securities and Exchange Commission (SEC) calling for a full investigation into the alleged misrepresentation and fraudulent "green bonds" issued by the prominent Brazilian meat conglomerate, JBS. JBS raised $3.2 billion by issuance of sustainability-linked bonds in 2021. These bonds were linked to JBS' commitment to decrease its environmental impact and achieve a net-zero status by 2040.

Mighty Earth and others have raised concerns about the actual extent to which JBS will decrease its carbon footprint. From the onset of the issuance, the immediate issue with the bonds was the exclusion of Scope 3 supply chain emissions. A substantial portion of a company's emissions, often around 70%, comes from its Scope 3 emissions. JBS stated “While we acknowledge the importance of measuring and ultimately reducing Scope 3 emissions, a widely-accepted method for measuring scope 3 emissions does not currently exist for our industry.”

Roughly 91% of JBS’ emissions are Scope 3. In spite of carbon-neutral initiatives, their total emissions have increased 51% over the past 5 years. Being the world’s largest meat producer, JBS has operations and a supply chain that reaches environmentally sensitive areas like the Amazon rainforest. This results in significant carbon dioxide and methane emissions.

Mighty Earth has pointed out that a significant issue lies in granting permission to "greenwashing" firms. These firms use U.S. capital markets to generate substantial funds from unsuspecting investors through green bonds that supposedly pledge to advance climate neutrality. The urgency of this matter arises from JBS's ongoing pursuit of an initial public offering (IPO) in the United States, with intentions to have its shares listed on the New York Stock Exchange (NYSE) before the conclusion of 2023. This has been met by over 16 environmental organizations, including Mighty Earth and Rainforest Action Network, urging the cancellation of JBS’ IPO due to unacceptable company conduct, misleading statements, and a lack of disclosure.

In 2021, the SEC created a Climate and ESG Task Force in order to “develop initiatives to proactively identify ESG-related misconduct.” The task force has already charged a few massive companies including Goldman Sachs Asset Management LP and Vale SA, one of the world’s largest iron ore producers, with penalties including false and misleading claims as well as policies and procedures failures. Mighty Earth’s attorney, Kevin Galbraith, stated that the task force will most likely analyze Mighty Earth’s complaint against JBS and penalties may range from a monetary fine to preventing JBS executives from occupying boards of public companies.

Moving Forward

In the future, the most likely effective ways at addressing these issues raised with green bonds are to (1) hold companies accountable for greenwashing and violating the purpose of the bonds and (2) create a comprehensive regulatory oversight scheme over the bonds. First, if companies like JBS are held accountable by the SEC, it could signify greater progress in eliminating other wrongdoers in the market. Continuing to hold violating companies accountable may deter other companies from being deceptive. Moreover, these actions may lead to verification agencies and financial intermediaries to become more strict with how they classify green bonds which would further prevent greenwashing from occurring. Next, by creating a comprehensive regulatory oversight scheme that stresses transparency through annual reporting, the issuers will not be able to get off scot-free and investors will be more informed. Putting an end to companies taking advantage of labeling themselves as green would prevent the waste of important investments in decarbonization. Instead, it would allow these resources to support companies whose environmentally protective objectives are not just bait for investors. Overall, holding violating companies accountable and creating a more comprehensive regulatory scheme over green bonds will make it more likely the bonds will achieve their intended purpose of promoting an environmentally responsible future as well as prevent investors from being misled by companies using the bonds.

*The views expressed in this article do not represent the views of Santa Clara University.


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