Since the Paris Accords, a spate of regulations, financial instruments and new products and services have become available to help organizations reduce emissions and reach their sustainability goals. But it’s sometimes difficult to correlate emissions reduction directly to a particular initiative. Now the Bank for International Settlements (BIS) has issued a report demonstrating a measurable correlation between companies’ issuing green bonds and a drop in those companies’ emissions.
A green bond is a fixed income security that raises capital for projects related to limiting climate change or otherwise benefiting the environment. A green bond is designed to support sustainable development by financing initiatives such as renewable energy, energy efficiency, clean transportation, sustainable water management and biodiversity conservation that mitigate or offset the environmental impact of economic activities.
Since 2015 and the introduction of the International Capital Markets Association’s Green Bond Principles, the BIS report said, the market for green bonds has skyrocketed from roughly $500 billion in 2018 to nearly $3 trillion in 2024. “While this is still small relative to corporate bond markets more broadly,” the report said. “Green bonds are no longer a niche market. This growth has been underpinned by greater regulatory support across many jurisdictions and increased investor demand for green assets, reflecting growing awareness of the financial risks associated with climate change.”
BIS data shows that, for firms in carbon-intensive sectors or those that had been heavy emitters, issuing a green bond has become a good indicator of reduced corporate emissions.
The researchers used data from S&P Trucost, which accounts for roughly two thirds of global GHG emissions, to track the Scope 1, Scope 2 and Scope 3 GHG emissions of listed firms. The data for downstream Scope 3 emissions were incomplete so researchers substituted those for upstream Scope 3 emissions, together with Scope 1 and Scope 2 emissions.
Starting in the year of an initial issuance, and looking in aggregate, the emissions of green bond issuers fell by more than 10% in the four years following. Emissions per unit of firm revenue–a measure of emissions intensity–shows an even starker drop of 30%, a faster pace than the one observed across the entire population of listed firms over the last decade.
The results show a positive correlation between policy stringency and the size of countries’ green bond markets. An increase in the aggregate policy stringency by one standard deviation is associated with around 2.4% higher annual issuance of green bonds, the report said. The data showed that sectoral policies, ie those that apply to specific industrial sectors, appear to have a louder echo in green bond issuance: a one standard deviation shift towards greater stringency is associated with nearly 3% more green bond issuance.
For firms that did issue green bonds, their increase in emissions between 2015 and 2019 was noticeably milder.
