Green bonds are one of the fastest rising trends today, but is this rise sustainable or will a lack of regulation and standardisation hamper further progress?

Figures collated by Climate Bonds showed total green bond issuance of $155.5 billion as of the end of 2017, up a remarkable 78 percent on a year before. There were over 1,500 green bond issues by a total of 239 issuers domiciled across 37 countries. Of these, 146 issuers and 10 countries were new to the market. The largest single bond issued was for $10.7 billion.

Issuance was expected to continue surging this year – S&P predicted issuance to surpass $200 billion this year – but the first half performance turned out to be more sluggish than forecast, rising just 4 percent on the previous first half.

Still, despite external factors such as international trade tensions and difficult Brexit negotiations, there remains confidence that growth in green bond issuance can pick up the pace again. Nordic Bank SEB (which in 2008 issued the first green bond) in August predicted a year-end total of $185 billion.

The green bond really took off with the emergence of sovereign green bonds in 2016, when Poland issued a 750 million euro ($850 million) green bond to back its national renewable energy plan. Further sovereign issues by France, Nigeria and Fiji last year, and Belgium and Indonesia in 2018, highlighted not just green bonds’ entry into the mainstream as governments joined the market, but the growing prominence of emerging market issuers.

China and India are the biggest emerging economy issuers. Issuance from China even included climate bonds from three of the country’s giant state banks: Industrial and Commercial Bank of China (ICBC), China Development Bank (CDB) and Bank of China (BoC). China overtook the US as the leading issuer of green bonds in 2016. Malaysia is leading the field in the development and issuance of green sukuk, or Islamic bonds.

Growth of green bond market follows increase in environmental awareness
The growth of the green bond market, of course, follows the increasing acceptance of the need for finance to address vital environmental issues such as climate change, particularly by younger investors. Particular areas requiring finance include renewable energy, energy efficiency, low-carbon projects, sustainable water management, green buildings and sustainable transport. A report by London’s Imperial College Business School and British financial industry body TheCityUK found that environmental issues are becoming a growing priority for businesses.

Although this report noted that it is difficult to see how green bonds raise any more money for environmental projects than conventional capital-market instruments, its authors found that one advantage of a green bond is that “it can broaden the pool of interested investors outside a firm’s traditional market.”

But as the popularity of green financing rises, so too does the problem of “greenwashing” – or companies dressing up operations as green that are anything but. Although most green bonds are as claimed, growing accusations that some companies are less than truthful on this issue could, if investors lose trust, threaten future growth.

This has become such an issue of late that it will be discussed at the World Green Economy Summit in Dubai October 24-25. Participants at the summit will consider how investors can tell whether a bond is truly green and what governments and financial communities can do to improve transparency in the market.

One area that could greatly benefit the future of green bonds is the development of better global standards and regulation. Other than the issue of greenwashing there is the question of what constitutes a green bond? China’s definition of a green bond being one that has at least 50 percent of its revenue earmarked for green projects may have helped the country to the top of the issuance board. Other countries generally expect 95 of revenue to have a green purpose.

Internationally accepted standards could enhance growth of market
The establishment of internationally accepted standards would do much to trust and thereby contribute to continued growth in the green bond market and increase money raised for environmentally friendly projects. Although there is as yet no globally agreed set of standards, various attempts have been made to get the ball rolling, such as the Green Bond Principles, the Climate Bonds Initiative and Moody’s Green Bond Assessment, but even here interpretations of these guidelines vary widely.

For now, most issuers commission external reviews of their green issuance. But there are no specific rules to be followed, and some sort of regulation would help. Suzanne Buchta, global head of green bonds at Bank of America Merrill Lynch, has told the Financial Times “it would make sense for there to be some regulation around who can write such opinions in the same way that there is regulation of the agencies that write credit opinions.”

As the advisor is paid by the issuer, here is an obvious conflict of interest, and internationally agreed regulation in this area is clearly required if assessments are to be fully trusted.

In an effort to address this, China is bringing in a licensing scheme for green bond assessors, and the European Commission is also considering an accreditation system. It is essential that the green bond market is better regulated and standardised if it is to continue to grow.

The World Green Economy Summit (WGES) brings together world-class experts in critical sectors from around the world to directly focus on advancing the global green economy and sustainability agenda, achieving the UN Sustainable Development Goals and implementing the recommendations of COP21 & 22. Organised by the Dubai Electricity & Water Authority and World Green Economy Organisation, the event is strategically supported by Thomson Reuters.

Any opinions expressed here are the author’s own.

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© Opinion 2018