THE GREEN BOND inner-circle are a testy lot. Some of the negative reactions to the supportive piece I wrote about the market back in May were, let’s just say, rather indecorous and I was harassed and hounded. Bemusing, since I’d merely postulated the idea that if voluntary standards weren’t tightened, definitions should be prescribed by regulatory diktat to give the market the robust underpinning it needs in order to scale. I stand by my position.
Conscious then as now that market participants are at great pains to avoid even more regulation, my challenge is for the market to raise the bar, and create the more standardised and harmonised framework that everyone apparently craves. Ironically, some of the points I raised (eg, questioning labelled issuance by pure-play companies non-compliant with Green Bond Principles) were subsequently taken up in June in the updated GBP.
Given that up to US$7trn will be needed annually for the next 15 years to meet the demand for green investment, the labelled GB market will always likely play second fiddle in the face of such huge numbers. But that doesn’t mean it should fight formalised definitions or resist a more formal adjudication process.
I MUST SAY I was rather disappointed, therefore, to see that while the G20 recognised in its Hangzhou communiqué the need to up-scale green financing, I think it missed a trick by supporting the voluntary options developed by its Green Finance Study Group (GSFG) to “enhance the ability of the financial system to mobilise private capital for green investment”.
I say disappointed since among the scaling challenges, the G20 cited a lack of clarity in green definitions. The GSFG’s Green Finance Synthesis Report, which accompanied the communiqué, failed to question the embedded notion of voluntary adherence. It hammered this home via 20 references: to voluntary adoption, voluntary commitments, voluntary disclosure, voluntary guidelines, voluntary initiatives, voluntary options, voluntary practices, voluntary principles and voluntary protocols.
In an emailed letter to GBP members and observers highlighting the G20’s reference to green finance (for transparency, IFR’s parent company Thomson Reuters is a GBP observer) the GBP secretariat felt the need to stress that G20 recommendations were all framed as voluntary.
Odd, since among the disadvantages of the GB market commonly cited by investors as raising confusion, the input paper “Green Bonds: Country Experiences, Barriers and Options” listed a lack of unified standards, which can lead to complexities in research and a need for extra due diligence that may not always be fulfilled. The paper pointed out that issuers may choose not to label bonds as green due, inter alia, to concerns about lack of standardisation.
Written in support of the GFSG by lead authors Ma Jun (PBoC and Green Finance Committee of the China Society for Finance and Banking); Christopher Kaminker (OECD); Sean Kidney (CBI) and Nicholas Pfaff (ICMA), the paper acknowledges that the bond market has yet to play a comparable role in green financing to the role it plays in standard corporate funding.
It reckons scaling will depend in the short term on policy, market and institutional barriers constraining its development being addressed. In the longer term, it believes the primary constraint is the “slow pace of development of climate-change mitigation and adaptation investments by governments”. Let me add three more: lack of clear rules, lack of a single standard, and global fragmentation.
Issuers should certainly be aggressively dissuaded from self-labelling; this practice should be phased out. There needs to be more control over and scrutiny of external opinion-providers. And should, I ask with quivering trepidation, the GBP and the CBI Standard be merged? (Can two standards promote double standards?)
On fragmentation, the Hangzhou communiqué called for efforts to promote international collaboration to facilitate cross-border investment in Green bonds. That’s a fair shout, as is the call to improve the measurement of green finance activities and their impacts.
Right on cue, S&P was out a couple of weeks ago with an answer to what it sees as a lack of market standardisation – which it believes acts as a barrier to issuance – with framework proposals for GB and ESG evaluation tools. The rating agency posted white papers on both tracks (www.spratings.com/infrastructure; comment deadline October 17).
It says its proposed tools will assess risks to sustainability both at individual project and corporate levels. The GB tool will conduct impact assessments of projects or initiatives funded by Green bonds and score bonds against transparency, governance, mitigation and/or adaptation metrics, assigning a final evaluation that’s an amalgam of the weighted scores.
Moody’s unveiled its Green Bonds Assessment methodology in March, using five metrics (organisation, use of proceeds, disclosure on use of proceeds, management of proceeds, reporting and disclosure) to evaluate an issuer’s approach to projects financed by green bonds on a composite GB1 to GB5 score.
ALL STEPS IN the right direction, but surely not enough to move the climate-change mitigation needle. The clock is ticking and I just don’t believe voluntary principles for green finance will get us to where we need to get. China has imposed rules for its domestic GB market and has very quickly grown to account for 10% of the market – 13% on a country basis excluding supranational issuance. That puts it third behind the US and France.
The G20, through the Financial Stability Board, felt sufficiently moved to impose a global standard for bank capital – TLAC – in efforts to prevent another global systemic risk event. Why, I ask, can’t they come up with an obligatory framework for Green bonds? After all, what’s worse: a banking risk event or destruction of the planet?
