Researchers at the Stern School of Business found that only 2% of the money U.S. corporations allocate toward green bonds, or federal loans for more sustainable initiatives, is put toward funding projects with innovative environmental benefits. 

The study — titled “Green Bonds: New Label, Same Projects” — was published last month and analyzed how municipal and corporate bodies in the United States used proceeds from the bonds they had labeled as “green.” A team of professors found that 30% and 45% of proceeds from corporate and municipal green bonds, respectively, are used to pay off existing projects, and the rest is used to expand or initiate projects with no “clearly novel” sustainability factors.

Jeffrey Wurgler, a Stern professor and one of the lead researchers, said the study aimed to find how companies use proceeds from green bonds and provide more insight for environmentally cautious investors.

“I noticed that some of these bonds were just refinancing,” Wurgler said in an interview with WSN. “They were just continuing a project that was already ongoing — which made me wonder, ‘What is the point of green bonds in the first place?’”

The researchers labeled bonds on a scale from one to five — bonds ranked at level one simply refinance ordinary debt while bonds ranked at level five support new projects. They called the framework “additionality” and used it to assess green bonds sold by corporate and municipal issuers between 2013 to 2022. The study’s authors argued that universally implementing the additionality system could raise awareness as to how corporations evaluate their funds.

Pauline Lam, a visiting scholar at NYU from Columbia University and author of the study, said that most of the information relating to green bonds isn’t public or accessible to investors who want to make investments that promote environmental change.

“They can benefit a lot from different levels of classification,” Lam told WSN. “So, if they actually think about it that way, it would be a bit easier for them to make decisions and understand what is being offered from the issues and different kinds of assets.”

As the U.S. green bond market skyrocketed in 2023, sustainability advocates have called for more transparency in bonds and other forms of greenwashing. Europe, for example, has introduced a voluntary European Green Bond Standard, which outlines specific sustainability requirements that companies must meet in order to issue green bonds in the European Union. Lam said she believes more thorough requirements, such as those in Europe, are critical for addressing the energy transition.

The study was conducted with financial support from the NYU Stern Center for Sustainable Business, which provides grants to Stern researchers who study corporate sustainability trends and behavior.

Tensie Whelan, Stern professor and founding director of the center, said she believes the research will lead to shifts in what corporations define as “green” and how bonds can be advertised.

“The researchers’ findings point to the need for more rigor in determining the use of green bond proceeds, to better support the need for capital to invest in the low-carbon transition,” Whelan said in a statement to WSN. “I suspect, as the need for more capital investment in material sustainability issues becomes more pressing, we will see more demand for capital, and green bonds will be more closely aligned with their purpose.” 

Contact Malavika Rajesh at [email protected].