TOKYO -- The popularity of environmental, social and governance investing has risen sharply in recent years, but many so-called green bonds have drawn accusations of "green washing" for having little, if any, environmental benefit.
Green bonds raise funds that are used to subsidize projects with an environmental benefit. The size of issuance has risen in tandem with their popularity.
Critics, however, have pointed to varying standards and projects of questionable merit, some of which are seen as little more than exercises in PR.
One fund that has come under fire for green washing is a bond issued by the operator of China's Three Gorges Dam that backs wind power projects in Europe.
Stephen Fitzgerald, the co-founder of British green bond manager Affirmative Investment Management, considers the $840 million project to be a typical example of green washing and is concerned that it misleads investors.
The problem lies not in the project itself, but with the issuer. The Three Gorges Dam has been criticized for years for water pollution and damage to the surrounding ecosystem.
But that did not stop investors from Europe and Asia flocking to the bonds when the operator began touting the wind farms' environmental benefits.
In 2017, global issuance of green bonds doubled on the previous year to $155 billion, and the amount for 2018 could reach up to $300 billion.
The rise has been most evident in China, where many green bonds have been used to push "clean-coal" projects. The technology reduces greenhouse gas emissions by burning coal more efficiently, but such projects generally do not meet international standards.
AIM has established its own set of ESG standards and removed bonds from its list of investment targets if the associated projects fall short of the criteria.
Money raised by green bonds can only be used for environmentally friendly projects. Yet the money to finance coupon or principal payments do not necessarily have to come from the project's return. Green bonds are easy for institutional investors to buy and help investors push their own corporate responsibility credentials.
Therefore green bond issuance has seen fast-paced growth but the quality of the bonds can be questionable.
Nippon Life Insurance plans to invest 200 billion yen ($1.87 billion) in green bonds by the year ending March 2021.
To avoid investing in dubious bonds, the company intends to implement a series of checks, such as making sure the funds are under separate management and insisting on full disclosure of a project's progress.
Being too diligent, however, would "prevent the growth of issuance, stunting market development," said Hiroshi Fujikake, deputy general manager of Nippon Life Insurance's credit investment department.
With the market at the stage it is, maintaining discipline without stifling growth is far from straightforward.
Many advocate a pragmatic approach, basing investment decisions on each project's credibility, without focusing too much on international standards.
The growth of ESG investment signals a significant change in direct financing.
"Traditionally, finance has been about returns. But what's happening especially with the millennial generation is investing in your values," said Rakhi Kumar, a senior managing director and head of ESG investments at U.S. asset manager State Street Global Advisors.
"They are integrating their values and their finance to achieve objectives."
There are many advocates of ESG investing. However, if investors focus solely on achieving targeted asset goals, they risk pumping money into projects that do little to help the environment.
In terms of equity investment, corporate disclosure is essential in the selection of companies with credible ESG records. This, however, may not be developing at the same pace as the growth in investment volume.