Countries have raised more than $500bn by selling sustainable sovereign bonds. This has paid for railways and very little else. Chart from Barclays:
The transportation category shown above includes stuff other than trains, such as low-emission buses and roadside EV charging pods. Mostly, though, it’s trains.
The UK’s 2020-22 Green Financing Allocation report shows that 37 per cent of the £16bn raised went towards rail track renewal, upgrades and maintenance. Its budget use is among the most diverse. Belgium, Spain, Denmark, Chile and Israel have all spent 90 to 100 per cent of green bond proceeds on railway infrastructure, says Barclays.
Since 2016, when the market for green government debt came into being, 50 countries have issued ESG-labelled securities:
Green bonds tend to trade at a small premium to regular govvies, though extra auditing requirements mean the cost of financing isn’t that much cheaper. The main incentive for issuing green sovs seems to be that they sound nice.
Nearly all the bonds were sold on the idea that the proceeds would go towards renewables and energy efficiency projects. Those categories are in the eligible-use-of-proceeds criteria as regularly as transport, but are allocated a tiny fraction of the cash.
This bait-and-switch works because, as usual with ESG, green sovereign bonds are largely unregulated with no agreement on what their various labels mean. In addition to “green”, “social” and “sustainability” bonds, there are transition bonds ( relatively popular in Japan ) and sustainability-linked instruments like loans. Only the latter has a pre-determined target that, if missed, results in a higher coupon. The rest are regular bonds, priced off the creditworthiness of the sovereign, with no direct link to the success or failure of the projects being financed.
The International Capital Market Association offers some guiding principles for green bonds but puts no restrictions on the projects that can be funded. The job of deciding what’s green is delegated to local and regional agencies, which often don’t exist. Where they do, sovereign issuers tend to ignore them:
Very few areas of investment are specifically ruled out. In the Netherlands, stereotypically, anything goes. All other issuers pledge not to use the money on fossil fuel projects while a majority (including France, oddly ) eschews nuclear power.
Then why trains? One incentive may be that benefits are fairly easy to estimate. Improvements can be measured in reduced air pollution, noise pollution, road accidents and congestion. An upgrade to rolling stock or a step-free platform also helps boost qualitative measures like community spirit, which 20 per cent of sovereign issuers include in their impact reports. “Kilometres of railway installed” is the second most popular KPI after “emissions avoided”, Barclays finds.
Not that the KPIs count for much. Only half the bonds have a provision to lose their green label if projects funded are found not to meet eligibility requirements, according to the bank.
Another risk, says Barclays, is that green bonds are being used to refinance the same old projects.
None of the sovereign issuers in its sample commit to only making new investments. About half include some airy commitment to prioritising capex over opex, though promises to keep investors updated on the split have been quickly forgotten.
One way to limit the chances of funds being recycled into white-elephant projects is to impose a short lookback period, meaning limiting the time from the date of a project’s original financing that it can be refinanced with bond proceeds. European sovereigns including the UK, Germany and France set their lookback period at 12 months. Elsewhere, 36 months is more common. Fifteen per cent of sovereigns include no lookback period at all.
In all, there’s a lot to improve. The EU’s Green Bond Standard comes into effect at the end of 2024 and includes some fairly unremarkable requirements including annual post-issuance impact reports that are vetted independently. Currently, two sovereign green-bond issuers, New Zealand and Israel, don’t even reach that standard.
Barclays offers its own “four-pillar framework” for improvement:
What isn’t obvious is whether any of this will make the trains run on time, or why it should be expected to.