Debt capital markets can do more to prevent climate catastrophe and nature loss, finds new WWF report

Posted on 01 October 2021

A new WWF report, ‘Can debt capital markets save the planet?’ reveals that while large international banks make ‘zero carbon’ pledges, their investment banking arms often continue with a business-as-usual approach, ignoring the environmental impacts of most of the bond deals they arrange or underwrite.
While the growth in green and sustainable bond instruments is welcome, as a whole, global debt capital markets currently finance more harm than good to climate and nature. Transforming the world’s largest capital pool, with around US$1 trillion changing hands every day, must be a priority for the financial sector if the markets are to support a just transition to a carbon neutral, nature positive economy.

Margaret Kuhlow, WWF Finance Practice Leader, said: “The science tells us we need to change and we need to change now if we are to avoid the worst impacts of a warming world. Debt capital markets have the potential to mobilise all the finance we need to meet the Paris Climate Agreement target of limiting warming to less than 1.5°C. Financial institutions will have to play their part if we are to tackle climate change in this decade.”

Despite the transparency advances in the green bond market, the report highlights that the vast majority of bonds traded on debt capital markets still provide very little, if any, information on their environmental impacts, with only 10% of global bond issuances in 2021 showing specific labelling of their environmental, social or sustainability benefits. With impact at the core, the report asks what if those vested in debt capital markets – governments, central bankers, investor coalitions and investment bankers – took bold action to step away from a business-as-usual approach and embrace a net-zero, nature-positive economic transition. What if they ensured that financial flows support activities that preserve, restore and protect the planet and the vital services it provides to people and our economies?

The report lays out the progress made in the last five years in the labelling, definitions, measurement metrics, and issuance of sustainable and green bonds, and emphasizes that those behind these transactions, including market practitioners, financial regulators, supervisors, and central bankers, must build stronger incentives to rapidly reduce financing of significant environmental harm and increase green capital raising efforts.

The report also highlights that in the past five years the top 30 investment banks, which play a pivotal role in raising and distributing capital, have facilitated almost US$3.6 trillion in environmentally-harmful fossil fuel debt, earning fees totaling almost twice the amount generated from arranging or underwriting green transactions.

Jochen Krimphoff, WWF initiative lead, sustainable bond markets said: “We need debt capital markets to be net-zero carbon and nature-positive. Investment bankers still underwrite far too many fossil fuel deals. They need to take into account the environmental impact of every single deal they are involved in, not only those labelled as ‘green’. 

“Investment banks must stop doing more harm than good by the end of 2021, commit to become net-zero, nature positive by 2025, and deliver on these commitments”, he added. “Central banks, regulators and supervisors of debt capital markets must support this trend, listen to the scientific evidence, recognise the link between climate risk and financial stability, and respond as quickly as they have with COVID-19.” 

To provide investors with a clearer picture of where and how debt capital markets significantly harm global environmental objectives and building on the traditional Fixed-income League Tables that quarterly rank underwriters of global bonds, WWF has created the ‘More-Harm-Than-Good-Indicator’, which compares the volume of capital arranged or underwritten that is fossil-fuel-related against the volume which is labelled as green. The Indicator reveals that the largest players in the underwriting business tend to be laggards in financing or underwriting projects that reduce carbon emissions.

Sebastien Godinot, Economist at WWF European Policy Office said: “Investment bankers like to big up the green side of their funds - but actually they are giving far more support to dirty sectors, as WWF's new tool shows. This is yet more proof of the need for an official EU list of harmful activities - an 'unsustainable taxonomy' - to bring greater transparency to where people's money is going. This will, in turn, push the move to more sustainable investments."  

For more information: 

Ines Abbas
Communications Officer, WWF European Policy Office
+32 488 99 27 65.