UN: Robust standards would help green bond market drive low-carbon economy

Green bonds have the potential to drive the global low-carbon transition in the wake of the Paris Agreement, but standardised criteria will be critical for the future credibility of the market, a new report from the United Nations (UN) has concluded.

The UN report highlights that a broad-based interest in the green bond market from both the private and public sector has led to extraordinary growth in recent years, with a ten-fold rise of bond sales from $3bn in 2002 to $36.6bn in 2014.

Analyst forecasters predict strong future growth fuelled by demand, environmentally-friendly projects and the adoption of the Paris Agreement last December. For example, Moody’s ratings agency expects sales to exceed $50bn this year, in comparison with $42bn in 2015. 

HSBC green bonds and corporate credit director Michael Ridley suggests that the growing green bond market can act as a tool to implement to Paris Agreement, claiming “the successful climate change talks in Paris last December should prompt agencies, banks and companies to identify further green projects requiring finance”.

New issuers

While green bond issuance was largely the domain of multilateral banks and the World Bank until 2012, a host of companies in the energy, utility, consumer goods and real estate sectors have since entered the fray, with national development banks also joining the market.

Major retailer Sainsbury’s struck an agreement for a £200m corporate ‘green loan’ to invest in its carbon reduction and sustainability projects, while a potential £60bn green investment pot in Britain has paved the way for the UK’s first ever council solar bond in Swindon.

For its part, HSBC has pledged $1bn for a portfolio of green, social and sustainability bonds focused on renewables, energy efficiency, clean transport, adaptation and related sectors. 

Ridley insists that the financial community has caught up with the concept. “The Moody’s credit-rating agency is to start assessing new green bonds. This should stimulate green-bond issuance from the second half of 2016, particularly with US issuers and clients. Many US institutions are not familiar with the European organizations that currently provide independent opinions and verifications,” he added.

‘Complexity and confusion’

However, the requirements to ensure the credibility of green bonds are still a work in progress. The UN report highlights that proceeds can damage reputations, if not the market itself. For this reason, investors are calling for robust, transparent standards for the investment community.

Research from WWF has suggested that industry standards in the green bond market are needed in order to overcome the “complexity and confusion” that is currently hampering investor confidence in financing green projects.

The research revealed that the majority of frameworks and guidelines currently in place are only looking at current environmental impacts prior to the granting of a bond, instead of assessing what benefits would be created throughout the lifetime of the bond.

This trend could lead to continued “greenwashing” as more bonds are perceived as green, despite only offering minor environmental benefits and improvements. A new report from market analysists The Crowd released on Monday (11 July) noted 93% of companies are self-funding projects such as maintenance improvements and staff satisfaction despite the rise of third-party green finance funds.

KPMG believes that the engine that drives standards can still be fine-tuned, calling on issuers to publish annual reports which show that environmental benefits have been achieved.

“Standardised criteria for what makes a bond green are critical for the future credibility of the market,” KPMG’s global head of sustainability reporting and assurance Wim Bartels said. “If too many issuers have the green credentials of their bonds challenged, this could affect the growth of the market by discouraging both future investors and issuers.

“In the meantime, my advice to issuers is to only issue green bonds that meet tested criteria that avoid below-market environmental efficiency improvements, that relate closely to the major environmental challenges we face such as climate change and water scarcity, and that do not fund controversial projects.”

George Ogleby

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