Green bond issuance by automakers reflects global energy conundrum

Toyota Motor Corp announced May 26, 2023 it will issue 100 billion yen ($740.5 million) worth of green bonds or sustainable bonds. The move reaffirms a trend seen among automobile manufacturers who are focusing on electric vehicles in their growth and financial plans. 

Toyota is the world’s largest automaker by sales. The Japanese company will use the money raised through green bonds for research and development as well as capital investment in battery electric vehicles (BEV) and fuel-cell electric vehicles (FCEV) and their components, it said in its communication. 

Green bonds are debt instruments that are used by entities to raise money for their sustainability-focused initiatives. Entities seeking financing have two basic options to raise funds: Stocks (equities) and bonds. Bonds are a form of debt, whereas stocks are a form of ownership. 

The specific use of the funds raised — to support the financing of specific projects — distinguishes green bonds from regular bonds. Thus, in addition to evaluating the standard financial characteristics such as maturity, coupon, price and credit quality of the issuer, investors also assess the specific environmental purpose of the projects that the bonds intend to support.

The International Bank for Reconstruction and Development, a unit of the World Bank, launched the first labelled green bond in 2008 of around $440 million.

General Motors is another large original equipment manufacturer (OEM) that issued green bonds in 2022 to attract investments for its entire clean transportation ecosystem. This is a part of GM’s Sustainable Finance Framework that also includes measures to ensure sustainability, equity and inclusion in their supply chains, along with the commitment to publish an annual sustainable finance report. 

GM and Toyota are just two of the several global automakers that have issued green bonds to drive investments in their electric vehicle initiatives. Many other OEMs, including Ford, Honda and Daimler have also issued green bonds to power their electric vehicle investments. 

Toyota's green initiatives, however, may be jeopardised or delayed if the current board is dissolved as its chairman, Akio Toyoda, faces removal vote. 

Nonetheless, the recent issuance of green bonds by automakers is a testament that sustainability is no more a fringe issue for the sector. It is at the forefront of government and corporate agendas as well. But it may still have to fight the boardroom battles against profitability benchmarks and corporate red-tapism. 

India’s first sovereign green bonds framework was formulated in 2022. Further, CICERO, an independent and globally renowned Norway-based second party opinion provider, was appointed to evaluate India’s green bonds framework. 

Its assessment has highlighted that under the clean transportation project category, the following types of projects will be financed / re-financed by the Government of India from the proceeds raised from sovereign green bonds.

• Promote public transportation including its electrification and transport safety
• Subsidies to adopt clean fuels like electric vehicles including building charging infrastructure

However, these criteria for project evaluation are unclear, incomplete and myopic. The question that arises here is ‘how green is the source of electricity powering the EVs?’. 

If the electricity for BEVs and hydrogen for FCEVs continue to be produced from greenhouse gas-emitting coal power plants, there will be no use of the extensive exercise of global fleet electrification. 

As we transition to EVs, we must ensure that the sources of these ‘green fuels’ are also clean.