Green bonds designed specifically to help finance the fight against climate change are attracting rapidly growing interest from issuers and investors alike as governments worldwide step up their efforts to combat global warming.
Issuance of green bonds has accelerated following the signing of the Paris climate agreement in December 2015, when more than 190 countries committed to fight global warming.
Moody’s, the rating agency, is forecasting that green bond issuance this year will be nearly $120bn, eclipsing the record of $93.4bn set in 2016.
Green bonds can be issued currently under a variety of voluntary standards. But no monitoring mechanism exists to ensure compliance with either the Green Bonds Principles or Climate Bonds Standards, the two main frameworks. China has also developed its own separate green bonds standards. Critics say this fragmentation creates uncertainty for investors and will slow the growth of the market in future.
Last year, the World Wide Fund for Nature, the conservation organisation, warned that widely-accepted industry standards were “urgently needed” to address the growing risk of “greenwashing” where unsuitable projects are financed through green bonds.
“Only a bond for which the issuer can demonstrate measurable environmental benefits, certified by an independent party according to such widely-accepted, fully developed standards, should qualify as a green bond,” said the WWF.
But others believe this reform is unachievable.
“We need to harmonise definitions as much as possible but total alignment will not be possible. We need to help investors, issuers and policymakers really understand the similarities and differences between green bond definitions to ensure transparency,” said Anna Creed, head of standards at the Climate Bond Initiative.
More also needs to be done to develop reporting metrics that will help investors understand what kinds of effects have been achieved by green financing, according to Eugene Howard, an economic adviser in the energy efficiency and renewables division of the European Investment Bank.
Mr Howard said that measuring the “greenness” of a project could be problematic as some have objectives beyond climate change mitigation, such as the reduction of pollution and ensuring biodiversity.
Chris Varco, senior investment director at Cambridge Associates, the investment consultant, said clear indicators of environmental benefits, such as carbon emissions mitigated per dollar invested, were often absent from green bonds.
This leads to difficulties for investors that want to understand how their efforts to manage their exposure to greenhouse gas emissions in their equity investments can be reconciled with allocations to green bonds when some of the issuers are companies with significant carbon reserves, according to Mr Varco.
Liquidity in the green bond market is an even more pressing problem for many institutional investors. Around $203bn has been issued since the green bond market was launched less than a decade ago, according to the Environmental Finance website. But this represents just a minuscule fraction of the annual fixed income issuance of governments and companies worldwide.
“There is more demand than supply at the moment. There is a clear need to grow the issuer base to meet that demand,” said Richard Sherry, director of alternative credit at M&G, the UK asset manager.
Important steps in improving liquidity are under way with governments now starting to issue green bonds. Poland sold the first ever sovereign green bond in December and this was followed by a milestone event when France raised €7bn in January through the largest single green bond sale to date. Issues by other governments including the Philippines, Nigeria, Bangladesh and Morocco are expected to follow this year.
Some of the most pressing needs for green bond financing lie in developing countries that are already struggling to deal the effects on climate change on their economies.
The International Finance Corporation, the private-sector arm of the World Bank, announced in March that it would to invest $325m in a new green bond fund designed to support the financing of environmentally friendly projects in developing markets.
The IFC has partnered with Amundi, Europe’s largest listed asset manager, with the aim of raising up to $2bn from other international investors to create the biggest green bond fund dedicated to emerging markets to date.
Few banks in emerging markets have issued green bonds so far, creating a gap in the market the IFC and Amundi want to plug.
“This fund will essentially create a green bond market where there was none,” said Philippe Le Houérou, chief executive of the IFC.
In an effort to improve liquidity, Zurich Insurance announced in 2013 that it would invest $1bn into green bonds and doubled that commitment to $2bn in 2014.
Manuel Lewin, head of responsible investment at Zurich Insurance, said that green bonds provided a “tremendous tool” to raise awareness among issuers about the risks of climate change, encouraging them to measure the contribution they are making to address global warming.
Mr Lewin also said that issuing green bonds could also help an institution signal to its investors that it had a developed a long-term strategic approach to addressing the risks of climate change.
“No one in the mainstream was even thinking about these things a few years ago and now these conversations are happening everywhere,” he said.
