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Green bonds are crying out for global standards

This article is part of
Delivering income

What effect has the US withdrawal from the Paris Agreement had?

US President Donald Trump’s rejection of this agreement caused a significant backlash and, inadvertently, popularised green investment as a counter-action to his rejection of climate change.

The International Energy Agency estimates that $93trn (£69trn) of energy investments are needed between now and 2035 to follow the 2 degrees path. Governments and supranationals will be unable to provide all the capital and capital markets will therefore have to fill in the shortfall with investments, such as green bonds.

When is a green bond not a green bond?

While demand looks set to rise even faster in the months and years ahead, it has not all been plain sailing.

One problem has been a proliferation of definitions, each claiming to accurately describe the characteristics of a green bond. For example, the commonly accepted definition of a green bond in China requires only 50 per cent of the revenue from a green bond to be used for green projects, compared to a general international rule which expects 95 per cent of revenue to contribute. Had this been adhered to in China, one-third of green bonds issued in 2016 would have had the label rejected. 

Widely accepted industry standards are needed to address the growing risk of greenwashing, damaging trust and actual efforts to finance environmental projects.

How are these challenges being met?

In response, multiple efforts have been made to develop commonly accepted standards for green bonds to ensure a level-playing field. These include:

1.    The Green Bond Principles (GBP)

First published in 2014, the GBP are seen as the most developed framework. They state that green bonds should be assessed through four core components: the use of the proceeds, which should lead to clear environmental impacts; transparency detailing how the bond is eligible to be described as ‘green’; tracking and careful management of the proceeds; and reporting on the use of the proceeds.

2.    The Climate Bonds Initiative (CBI)

Like the Green Bond Principles, these standards agree that the use of funds and revenue must be tied to green projects. However, it also provides a framework which sets out the eligibility criteria, by sector, for green projects, thereby lending itself more readily to immediate applications.

3.    Moody’s Green Bond Assessment (GBA)

The ratings agency Moody’s has developed a public methodology for the assessment of green bonds. It has the potential to be a useful tool for investors, allowing the credible ranking of issuers in a granular system.

In the absence of a global standard, the majority of issuers commission external reviews of their green bond investment frameworks for the benefit of investors.

Several companies, such as Deloitte, Vigeo and Cicero have responded to this need. Cicero is the leading provider of second opinions and through its rating system, assigns each bond a ‘shade’ of green – the darker the green, the greener the bond.