Global Capital Green Finance Report: Overview

Global Capital Green Bond Report, IMF editions, October 2015

The green bond market, and the climate investment universe more broadly, can be assessed in two divergent ways. On one hand, it has created out of nothing an increasingly deep and diversified pocket of the fixed income markets through which capital can be channelled directly to environmentally supportive projects. It has captured the attention of some of the world’s biggest institutional investors, and put their money towards initiatives worldwide from Bogota traffic to Swedish water filters.

But on the other is an uncomfortable suspicion that not one project funded by climate bonds wouldn’t have been funded anyway by conventional means. Whether this is simply an evolutionary stage – or whether it even matters at all – is a subject for reflection.

Certainly, the market has developed critical mass. “We are seeing a number of milestones and tipping points,” says Christopher Flensborg, head of sustainable products and product development, fixed income and DCM, at SEB. Flensborg is considered very much an architect of the green bond industry, along with the World Bank, having helped to invent the concept in 2007. “The product we created was basically designed to enable institutional investors to have an interaction with financial specialists and project specialists. Every day, you see new people coming in and engaging. All of them have a strength: water management, efficiency, public transport. And for every one coming on board we get a clearer picture of what’s needed.”

Numbers support the view of a market finding its feet. Looking purely at the green bond universe – which, as we’ll discuss, is not the whole story – there were $65.9 billion outstanding as of June 2015. There are mixed feelings about its direction: the market doubled in size during an outstanding 2014, but has not kept up that pace in 2015, though we may see an increase later in the year in the run-up to the UN Climate conference in Paris. The biggest issuers so far have been the European Investment Bank (Eu10 billion), World Bank ($8.5 billion) and, lately, KfW ($4.78 billion).  Developments banks in Asia, Africa and Japan have been active too.

There are clear signs of market evolution. “Since 2013, the market has asked for benchmark investment instruments,” says Aldo Romani, deputy head of funding – euros at the European Investment Bank, one of the major green bond issuers through its Climate Awareness Bonds, the first of which appeared back in 2007 in what is believed to be the first instance of ring-fencing proceeds in a dedicated liquidity portfolio for investment into projects contributing to climate action. “Before then, transactions were really targeted at specific pockets of demand.” EIB has been instrumental in building a benchmark curve, issuing Eu10 billion to date including a Eu3 billion issue that remains the largest green bond outstanding in any currency, and a Eu1.25 billion 12-year bond due in 2026 which is the longest green benchmark in existence. It has bellwether issues out there in euros, dollars and sterling. Between 2007 and 2013 alone, climate awareness bonds proceeds were allocated into 55 projects in 19 currencies.

Below the multilateral level there are signs of activity from municipalities (recently in the US, led by Massachusetts Institute of Technology and DC Water, and in Europe notably from the Swedish city of Gothenburg and France’s Ile-de France), from corporates (big early entrants were EDF and GDF Suez), and even high yield (NRG Yield, Abengoa Greenfield, Paprec and Terraform Power being examples). Most deals come in euros and dollars, but in fact labelled green bonds have appeared in 23 currencies from the Turkish lira to the Indian rupee.

Morever, there’s more to climate finance than the ring-fenced green bonds one sees from the multilaterals. “Labelled green bonds don’t make up the sum of the whole of all bonds associated with climate,” says Sean Kidney, CEO at the Climate Bonds Initiative, a not-for-profit he founded to mobilize the bond markets towards climate change. “The broader issue is how do we get capital allocated at scale to addressing climate change.” He cites figures from the International Energy Agency saying that $3-4 trillion a year needs to be committed towards climate solutions and says “we think we need about a trillion a year of bonds overtly related to climate solutions.”

While that sounds an unthinkable number in the context of a $65.9 billion universe of labelled green bonds, in fact it’s not as distant as it might seem. The Climate Bond Initiative, in the Bonds and Climate Change report it put out in July, identified a far greater pool of bonds that could legitimately be labelled climate-related, but don’t carry the green bond badge; putting those into the mix, the universe becomes a $597.7 billion market of 2,769 bonds from 407 issuers as of June 10 2015, across transport, energy, buildings and industry, agriculture and forestry, waste and pollution, and water. Just under half of it, $266.3 billion, falls within mainstream indices. (The precise methodology involves screening the Bloomberg data universe for companies for whom over 95% of revenues are from climate-aligned assets.)

By far the largest part of this, incidentally, is transport, and within that, rail, which accounts for over $400 billion of the total. Energy is next, making up $118.4 billion of the climate-aligned universe through a range of hydropower, wind, solar, bioenergy, geothermal and nuclear production.

The report calculated that the climate-aligned universe had increased by $95 billion in the space of a year, $30.6 billion in new labelled green bonds and most of the rest in issues financing rail from China and India to France and the UK. It also provided some reassuring context around range of maturities – most relevant outstanding issues having tenors over 10 years, reflecting the long-term nature of assets such as rail infrastructure bonds – and diversity, with 37 currencies represented. It would be a shrewd market commentator who guessed the most widespread one: the renminbi, because of the many Chinese rail and hydro bonds. While it’s almost entirely an investment grade market, it is quite widespread in rating; filtered through some mainstream index-like rules to make a $266.3 billion accessible universe, the market breaks down as $70.1 billion AAA, $79.4 billion AA, $47.4 billion A and $69.4 billion BBB.

While all of this sounds positive, it hasn’t visibly cheered up Sean Kidney, who swears magnificently throughout a passionate interview conducted via a midnight Skype call from his hotel room in India. “In the long run what we are trying to do is green the whole economy,” he says. “By any axis of measurement, we’re a long way from success. All we have really been able to do is gently get a few shoots up through the soft earth. To be useful, it needs to be a whole tree. A forest, in fact.”

“We should not be about issuing bonds that make us feel soft and cosy now because they’re called green bonds,” he says. “It should be about designing a trillion dollar plus a year market which can contribute to making a difference which the current market palpably does not. The investment flow is nowhere near large enough to make a difference and we are under no illusion of the work ahead of us.”

Kidney gets particularly angry when discussing the failure of government to do enough to shift policy away from fossil fuels and towards climate mitigation – “As Jeffrey Sachs says, we’ve spent 20 years pissing in the wind and wasting our money on lawyers in Paris and emissions have continued to increase,” is a fairly representative comment – but whatever governments do, there is clearly opportunity there in the attitude of private investment if it can only be harnessed, and that is largely the point of what Kidney is trying to achieve. “The big win so far is that we now have investor demand. We have investors left right and centre saying they want these bonds: ‘give me a deal’. But they can’t find enough issuance to buy.

“We have $45 trillion-worth of pension funds in the world who have signed up to statements on the importance of acting against climate change,” he says. “Every one of them is interested in green – if they can also meet their fiduciary obligations.” And this is the point: finding a way to attract finance that does meet the compliance obligations of vast and cautious retirement savings vehicles. Governments, Kidney says, have a role to play here, rolling out investments at scale that create buying opportunities similar to the assets that pension funds already hold: “shifting portfolios,” as Kidney puts it, “from green crap to brown good. But governments have to pick up part of the risk here.”

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Kidney is absolutely right to say that investors are ready to take part. If anything, investor demand exceeds supply. Public promises to build significant green bond portfolios have come from Zurich Insurance, Deutsche Bank treasury and KfW among others, while fund managers building green bond funds include SEB Asset Management, BlackRock, Nikko Asset Management, State Street and the specialist Natixis subsidiary Mirova, which recently launched a green mutual fund. “There are sufficient bonds out there now for a diversified fund,” says Christopher Wigley, who manages the fund. “We’ve got more than 40 in our dedicated green bond fund, diversified not just by issuer but by currency, maturity and credit rating. There’s a lot more diversity than when the market started.”

Not only are they willing, they are increasingly savvy and demanding too. Romani at the EIB says: “The question of accountability has changed from a quantitative dimension – a transparent description – to a qualitative one, which is people asking: what is the impact of the projects that are receiving allocations?”

The key to the success of green bonds is that a fund manager doesn’t have to do anything different in order to be allowed to buy one. As Flensborg puts it: “If you can buy a bond, you can buy a green bond. Why wouldn’t you?” This is crucial, since it’s not easy for a fund manager or insto to completely change their stance on investment. “Our first consideration is financial return,” says Ashley Schulten at Blackrock, which manages over a billion dollars worth of green bonds including a significant mandate from Zurich. “It all has to be done with a view on the market, spreads, rates, curves and available supply. It’s a work in progress: issuance has definitely gotten better and as standards have improved, the process becomes easier.”

A question: if issuers can qualify as green bonds, and if there is a fervent investor base waiting for them, why are most of them not doing so? The Climate Bond Initiative hopes they will do so, “taking advantage of the marketing benefits of the green label, winning new investors, reinforcing investor loyalty, and being seen to be part of a larger, more liquid bond universe.” Some are doing so – Vestas, the wind power company, for example, has issued mainstream bonds for years but only in 2015 decided to label a corporate bond as green – and perhaps others will do the same. “Companies just have to track and be able to report annually on qualifying assets, and get a certification or credible independent review,” says the CBI. “Simple.”

Is it? Questions of certification, endorsement and standardization pepper discussions around green bonds. And here things become a little more complicated.

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Standardization is a tricky subject. The idea is that if there is a standard template that all investors can look at when assessing a green bond, showing precisely what green project the proceeds will go to and what the environmental impact will be, it will be easier for them to participate. The argument against is that something as complex and diverse as climate challenge cannot be boxed and partitioned like other credit.

“I’ve always said that with the green bond market, because it is young and growing, that we are walking a tightrope in terms of standardization,” says Wigley at Mirova. “On one hand, we do not want the market to be too rigid. It needs to be flexible as it grows, and it needs to be innovative, so great are the challenges from climate change that it needs to address. On the other hand, the green bond market has always held integrity to be very important and we need to maintain that.”

Issuers see this too. “For smaller investors who cannot do all their own research, standardization is helpful,” says Tom Meuwissen at NWB Bank, which finances the Dutch water authorities and has completed two labelled green bonds to date. “But bigger investors might rely on their own research and standards anyway, judging projects on their own regardless of the general opinion on their greenness.” For those bigger names, a cookie-cutter standard that removes diversity from the market might actually be off-putting.

Asked if standardization is necessary for the market to grow, Flensborg responds: “I disagree, heavily. I do agree that standardization is needed on the definitions of what is what – what is a green bond – but too much standardization will kill the market, not create it. It is unrealistic to believe that any two cities will have the same challenges around infrastructure or pollution, or have the same definitions of what is green, or the same solutions. Those cities need to be allowed to have that difference in order make a transition to a green economy.”

Still, one argument for standardization is that it reduces the risk of sub-standard issuance getting into the market – because reputation, here, is enormously important. “We don’t want to see any disappointments, or anything that weakens the market in any way,” says Wigley. There is a danger, already, that this could be happening. “It’s been the case this year that at least two issues have come to market and been self-labelled as green, but with no link to identifiable projects,” he says, declining to name them beyond being green technology specialists. “It is vital any green bond has a link to an identifiable project, otherwise that money could be used elsewhere.”

Equally, though, it is perhaps part of the evolution of any market that there will be mis-steps. “When we started out, the World Bank was being extremely careful and prudent in what it was doing – it still is,” says Flensborg. “But now we are seeing people trying to loosen the quality quite a bit, to allow people to have different approaches and philosophies. And as that very strict policy of the early issuers is built out into a loose one, we will see some failures.” That’s not all bad, he suggests. “It will cause the market to find a more strict definition of what is and is not acceptable.”

The Green Bond Principles are an attempt to impose some order on the burgeoning field; their first iteration came out in 2014, they were strengthened and revamped in March 2015, and will likely evolve again by 2016. Backed by Citi, JP Morgan, Credit Agricole and Bank of America Merrill Lynch, the principles are governed by a membership secretariat of green bond issuers, investors and intermediaries, and represent a voluntary set of best practice guidelines for labelled green bonds, focusing on transparency of use of proceeds, the process for project evaluation, and reporting. The principles are hosted by the International Capital Markets Association.

Alongside that, in acceptance of the fact that standards of green-ness are not going to be the same for everyone, the green assessment group Cicero has launched something called a Shades of Green methodology. Director Kristin Halvorsen explains that Cicero has three shades: dark green, implementing a 2050 climate solution today; medium green, on the way to a 2050 climate solution; and light green, offering short-term gains but not a long-term climate solution. In practice, renewables like solar or wind tend to get the deep green methodology, efforts in sustainable buildings and energy efficiency are more likely to be medium, and projects that bring a short-term reduction in greenhouse gas emissions but don’t move away from fossil fuels will be light green. “Our shades of green aim at giving investors a better indication of how green the projects they want to invest in really are,” Halvorsen says.

This brings us to a second key issue: certification, which is clearly crucial for investor confidence. The most common method is to seek an independent review, often known as a second opinion, most commonly issued by Cicero or Vigeo. “A CICERO second opinion gives investors and issuers comfort,” says Meuwissen.

Beyond certification, there is also increasing interest in understanding impact. Possibly the most widely discussed document in the industry right now is the World Bank’s Impact Report, a June 2015 document that spells out in detail the 77 green bond eligible projects that have so far been supported by the IBRD’s Bank’s 100 green bonds up to June 30, involving US$13.7 billion of commitments (total loan amounts that will be disbursed over time) and US$5.6 billion of disbursements so far. For each of them, it discusses the projects, the data around projected impacts, such as energy savings, or other results, depending on the sector and project.

The results themselves are not really the point, so much as their actual disclosure, and the guidance this gives to the industry to encourage them to do the same. “The impact report not only tells you how money is used, but what to expect to obtain in terms of an environmental outcome,” says Laura Tlaiye, sustainability advisor at the World Bank. “The importance was in demonstrating that it is possible to provide investors with information that they can use, whether by project by region or by sector, to get an idea of the scale of the outcomes and impacts of their investment.”

Heike Reichelt, head of investor relations and new products at the World Bank, adds: “Any information issuers can provide about the expected impact gives investors additional information that will hopefully feed into every investment decision that they make.”

Fund managers seem encouraged. “Issuers who were reluctant to provide reporting a year ago have come around and see the investor arguments for it. We’ve been working with the World Bank and EIB to create a uniform template for impact reporting,” says Schulten at Blackrock. “When we request impact information form issuers, they often say: what do you want to see? We’re working with the World Bank to answer that.” There are, for example, potential nuances about how reports are given over the life of the project, and what exactly needs to be reported. “There are some issuers I have been pleasantly surprised by what they provide, and some where I have been disappointed. But we are all in a learning process.” She says “impact reporting is what we need to push the market further.”

Much of this process is just a question of a new and improved dialogue. “What is happening with climate finance is that you are merging two languages,” says Flensborg. “There is impact management on the environmental side, and also the economic side. We talk about break-evens and returns, and the environmental people talk about CO2 and methane and pollution, and these languages actually meet at the end of the day, but until now they have not been spoken in the same room. Green bonds are now allowing that to happen.”

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Beyond questions of structure and regulation is a more fundamental and awkward question: is any green project being funded today through green bonds that wouldn’t be funded anyway through conventional means?

“The straight answer is no,” says Flensborg. “But it is creating a financial infrastructure that can accommodate new flows towards climate finance.”

It’s a conundrum that bothers Eugene Howard, economic advisor in the energy department at the EIB. “The next real challenge is how does this market translate into an impact on the actual project?,” he says. “Does the fact that we are looking for a supply of bonds have any impact at all on the initiation of that project? At the moment there isn’t a direct connection between green bonds and projects: projects do not get added benefits, consumers do not pay extra, they are commercially-rated bonds with no green premium. A future step is making a connection between the deployment of green bonds, and more direct and real impacts on the development of projects. But I don’t foresee how or over what time period this may be developed.”

A common response is that it’s just a question of time, and all part of what has already been a rapid evolution. Tlaiye at the World Bank says: “You could say green bonds fund investments that might have happened in any case because people were planning to do them, but are labelled in a very different manner. The next generation of bonds will be for projects that would not have happened without green bonds.”

Or, if not that, then at least green bonds will influence the way a project is done. “I think as the green bond market takes hold, what we hope you’ll begin to see is that issuers will re-think some of the projects they might otherwise have been trying to finance,” says Peter Ellsworth, senior manager of investor programmes at Ceres, a non-profit in Boston that advocates for sustainability leadership. “They will find ways not only to characterise them as green, but actually transform them into green – perhaps considering an energy efficiency measure requiring finance that they might not have considered without the green bond market.”

As with all things, price will be a factor. “We will get that [financing of projects that wouldn’t otherwise happen],” says Schulten at Blackrock. “At some point you will find that green finance bonds may trade at better levels than non-green. If momentum continues, issuers will therefore get more attractive funding for being green than not.”

And even if the answer’s no and all these projects would happen anyway, perhaps it doesn’t matter. “We believe they are transparent and that actual projects are benefiting from them, but some people say perhaps these projects would have been financed anyway,” says Wigley. “But we feel the green bond market is growing and that increasingly it will be seen as a pool of capital available for further green projects.”

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In considering where the green bond market goes from here, it’s worth evaluating the challenges it faces, which are varied from the logistical to the personal. “The biggest challenge is greed and ego,” says one banker. “There is a risk that some people or institutions will focus on how they can benefit from this and try to drag the market in a way that takes it away from its intentions.”

On the practical side, some things will presumably sort themselves out in time, like liquidity and issuer range.

“The bid side liquidity is as good as in any non-green fund,” says Schulten. “But on the offer side, bends tend to get put away and you don’t see them floating around in the secondary market. There is strong investor demand to buy and hold – and once you sell, you can’t get them back.” She notes wryly that “bankers always promise more supply and it doesn’t materialise. But I would like to see better supply, not just more supply. If an issuer is not ready with third party verification or an impact report, I’d rather not see them issue.”

Ellsworth would like to see more corporate issuance, but accepts there is a natural progression to take place. “It’s easier being second than it is first, and third rather than second,” he says. “You are going to see an entire second tier of corporate issuers emerge because they are being shown the way. The first hurdle is to get a critical mass of top tier companies issuing green bonds that are credibly received by the market, and after that it’s going to be a lot easier.

“In five years we will look back and wonder what the fuss was about in 2015 when we were not seeing as many new issues of green bonds as we thought we might.”

Getting more issuance below the supranationals, though, does require there to be something in it for the issuer. “The reason for the success [of EIB’s issues] is that a link is established between funds and disbursement, but the investor continues to be exposed to the risk of EIB, not the project,” says Romani. “Now we need more participation in the market by corporate issuers, and there, things become a little more difficult. In order to issue these bonds a company needs to put in place parameters on impact assessment, disbursement, monitoring…. The responsibility has a cost, but there is no funding advantage, yet.” The benefit then is mainly reputational at this stage, “a positive picture they can provide of themselves,” but if that’s not enough of a reason then corporates won’t issue. Getting them to do so will otherwise be a question of policy.

A more fundamental question is whether we will eventually see a market that puts its money where its mouth is and is priced differently, even at a premium, to conventional, so that there is a clear additional sum of money that serves an environmental purpose – in other words, institutional investors not just getting to feel good about their green bonds but paying extra to support that environmental mandate.

Today, the tyranny of expected returns is a barrier for investors spending more on a bond just for its green characteristics. “Until the way investor performance is measured changes, it will be hard for that to happen [different pricing or additional cost for a green bond],” says Reichelt. “Right now performance is based on benchmarks that don’t factor in climate cost. There isn’t a “price on carbon” for every investment yet. If that’s what you have to benchmark against, that’s what you have to beat. The next generation might be different.”

Indices are beginning to appear, which is a start; S&PDJ indices launched a Green Project Bond Index in 2014. There is a Barclays MSCI green bond index, and State Street is believed to be launching a tracker fund linked to it.

And one must never forget that investors must always be driven by returns; we can, perhaps, go too far in the admiration we give the investment management sector for its green aspirations. “People sometimes overestimate how much investors can care,” says Reichelt at the World Bank. “They will invest in a bond based on its financial merits, because that is what they are measured against. If it’s green that’s an added bonus. A green bond might get you on to the radar screen of more investors who wouldn’t otherwise have heard of you, or to those who manage dedicated green funds but the market has a long way to go before it is priced differently” to conventional bonds. “I believe that green bonds are catalyzing an overall development in the capital markets that will take a generation.”

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Nevertheless, it’s striking how far the market has come already, and its pioneers have no problem admitting that it’s a work in progress.

“It’s difficult to be first but we have created a reference, a model for how it can be done,” says Flensborg. “Eventually we will see critical mass, with 10, 15, 20 issues in each category, and then eventually it becomes more odd not to do it than to do it. That’s the acceleration we are seeing, day by day and week by week. The awareness-building is done. People are aware of it. Now it’s more about timing and policy.”

Heike Reichelt, head of investor relations and new products at the World Bank Treasury, believes green bonds are “a piece of the puzzle”, alongside other elements like donor money coming through climate investment funds, and putting a price on carbon. “What the green bond market has done is give mainstream investors a chance to be part of an environmentally effective market through a product that they understand and know anyway.”

There is a lot more to do, not all of it easy. “We will see failures. Some people will be very angry about them,” says Flensborg. “But the key principle will be that investors will need to do their homework, and as more due diligence is put on the table, it will be easier to make decisions. Failures won’t kill the market. They will just be hiccups. The market will continue.”

Flensborg sees the green bond as “a beta product, at its first stage. It’s not a solution yet, but it has allowed people to understand these projects, and we can use our experience to create an alpha product.” Similarly Reichelt at the World Bank calls green bonds “a starter product, to put your toes in the water as an investor, and move on from there. But it might change completely how you look at your investments overall in fixed income.”

BOX: The activist view

What do the big activist groups make of climate finance? Groups like the World Wildlife Fund have clear and sophisticated objectives around climate change, and see the mobilization of capital as a critical part of it.

Samantha Smith in Oslo heads the WWF’s Global Climate & Energy Initiative. For her, direct finance to clean energy is as much about stopping it going anywhere else – specifically fossil fuels – as it is about getting it into renewables. “One of the obstacles in the transition out of fossil fuels into energy efficiency and renewables is that money is still flowing into fossil fuel projects – a lot of public money, often in the form of subsidies for both consumers and producers but without many benefits to the poor,” she says. Groups like the WWF put considerable effort into stopping that flow, by advocating a phaseout of fossil fuel subsidies and divestment. WWF highlights examples such as Norges Bank Investment Management (which runs the more than $800 billion Government Pension Fund Global sovereign wealth fund) divesting its interest in coal, and a similar commitment from the California legislature, as examples of the changes they want to see.

Nevertheless, they very much support green bonds too, at least in principle.  “Having vehicles to aggregate finance for renewables and energy efficiency is very important to attract institutional investors. In fact, it will be critical,” says Smith.

Aggregation is a key word, because she notes that renewable energy projects tend to be decentralised and local rather than bigger utility-type projects. Their small size is a challenge. “My sense is that green bonds are funding some projects which otherwise wouldn’t get done, not necessarily because they are not commercially viable but because the projects taken one by one are too small to attract investment,” she says. “Green bonds can be a way of aggregating projects and providing a fixed return from them.”

Unsurprisingly, groups like the WWF want a green bond to be GREEN, rather than some opaque shade of lime.  “Green bonds need to be really green, and there need to be agreed criteria on what greenness is,” she says. “We say the standard of greenness needs to be high not just because we are environmentalists, but because if you are trying to encourage investors to make long-term decisions – particularly institutional investors – you want to provide them with something that is still going to be seen as green three, five or even 10 years from now.

“If there is one thing we know, it’s that technology improvements, climate science and climate impacts will increasingly raise the bar for what is green enough.”

There is much less discussion of carbon credits these days, and the WWF does not seem inspired by their potential. “Carbon pricing can be an important tool at the national level,” says Smith. “The main thing it does is to change some of the economics of using fossil fuels for power and stimulates some energy efficiency in manufacturing and industrial production. But it’s not sufficient. We also need targets and other incentives for massive scaling up of renewables and energy efficiency.

“We don’t see carbon credits as playing a major role in financing now,” she says. “Many renewables and energy efficiency projects are commercial. The bigger issue is the mismatch between big investors and small projects, and the need for better vehicles for green investment. Carbon credits don’t really help you with that.”

“The other issue with carbon credits,” says Smith, “is that there is massive oversupply and the prices are very low. That is all about political will, because that’s what creates the demand.”

BOX: What investors want

Ceres is a non-profit in Boston that advocates for sustainability leadership and brings together networks of investors, companies and public interest groups. It has been instrumental in driving the Investor Network on Climate Risk, which combines more than 110 investors representing more than $13 trillion in assets committed to addressing risks and (equally crucially) seizing opportunities resulting from climate change and other sustainability challenges. Following the publication of the Green Bond Principles in January 2014, Ceres and INCR convened a group of investors active in the green market to offer an investor perspective concerning disclosure, impact reporting statements, project eligibility and second party opinions. These discussions led to a Statement of Investor Expectations for the Green Bond Market, released in February, aspects of which were incorporated into the March 2015 update to the Green Bond Principles.

Peter Ellsworth, senior manager of investor programmes at Ceres, is quick to point out that what they came out with was a statement of investor expectations, not standards. “The market is in an evolutionary phase,” he says. “Five years from now it’s entirely possible there may be a set of more prescriptive standards.” He says there is a “surprisingly strong consensus” on standards and expectations. “Issues on project eligibility, disclosure and assurance really generate a great deal of common ground.” If there’s a fault line, or a sense of something that needs to be done, it’s probably the fact that there is no independent entity to legislate what is green and what is not. “I think we’ve seen a couple of cases where bonds have been labelled green and they haven’t been received as well as the issuer might have been expecting. Some of them may have pushed the envelope a bit, some lacked adequate transparency. Like any market, you’re going to see some excesses from time to time, but the market is doing a pretty good job of self-regulation at the moment.” He says experienced green bond investors, issuers and organizations like Ceres “are also doing their part to foster a credible market.”

Perhaps the conclusion will be that a voluntary set of standards is not enough. “There is increasing convergence around voluntary green bond principles,” says Samantha Smith, leader of the Global Climate & Energy Initiative at the World Wildlife Fund in Oslo, “but where we will probably need to go is a regulatory or quasi-regulatory solution that allows investors globally to evaluate the ‘greenness’ of a particular bond issue.” International regulation would be complex, she says, but since corporations sometimes use green bonds to finance activities in multiple countries a global or coordinated multilateral solution is best. There is potentially a role for the rating agencies. “I’m not saying this is something that will happen immediately. But when we look at the need for green financing vehicles and the speed with which this has to happen, you see that we need a high standard, it needs to be very credible with investors and it must be more than voluntary.”

BOX: A global field

The green bond industry is so filled with visionary Scandinavians that it is tempting to see the movement as a European phenomenon, but in fact the market is global, even if one leaves aside China’s dominance of climate-related finance through its railway bonds. Brazil has a Green Bond Market Development Committee led by its banking association, Febraban; Brazilian food producer BRF launched the first labelled Brazilian green bond for Eu500 million in June 2015. Mexico was, at the time of writing, about to launch a green asset-backed deal underpinned by energy efficiency loans to SMEs with credit enhancement from the Inter-American Development Bank. India’s first labelled green bonds came from Yes Bank in February 2015, a INR 10billion bond to finance renewable energy; and South Africa has been active in green bond issuance since IDC and Nedbank launched issues in 2012, followed by the first emerging market green muni from Johannesburg with a $1.4 billion issue in June 2014. China is expected to launch a formal regulatory mechanism for approving green bonds later this year.

“We have clients in Australia, in most of Asia, in the Americas, in Africa,” says Flensborg, who has a team member specifically responsible for Asia, and another for Africa and South America. “This is a global drive.”