Some of the borrowers used the cash to repay debt, finance a SPAC deal and for other corporate expenses, promising to spend equivalent sums on sustainability in the future.
Many of those bonds also included fine-print warnings that the companies might not fulfill their environmental pledges, according to documents reviewed by The Wall Street Journal.
The rise of junk-rated green bonds is part of a surge in sustainable investing, as money managers and investment banks race to adapt to changing customer demand.
Dana is committing to electric-vehicle technology and cutting greenhouse gas emissions at least in half by 2035, a company spokesman said.
Companies that issue green bonds create frameworks specifying the use of proceeds for objectives like transitioning to renewable energy.
“There are no mechanisms to ensure investors that the green investment will actually occur,” said Mitu Gulati, a law professor at the University of Virginia.
That wasn’t viewed as a risk when green bonds were first issued about a decade ago by investment-grade borrowers with long-held sustainability commitments, such as the World Bank.
Issuance of green bonds hit a record $270 billion last year and is on pace to exceed that amount in 2021, according to data from the Climate Bonds Initiative.
Luxembourg-based packaging manufacturer Ardagh issued $2.8 billion of high-yield green bonds in February to fund the partial merger of its metal-cans unit to a SPAC, or special-purpose acquisition company.
Bond language has unusually biblical overtones—investor protections are called covenants—and when a company or government violates those proscriptions, it can be sued for repayment and damages.
One alternative that Wall Street bankers and lawyers started to offer environmental, social and governance, or ESG, investors last year is sustainability-linked bonds.
Wall Street is pushing the new product in part because it will allow the sale of more bonds with an ESG label by including companies that, like Pfleiderer, don’t have large-scale green projects to fund.