Can green bonds be the ‘Trojan horse’ of sustainable financing?

Green bonds are key to convincing the finance industry about the benefits of sustainable investing, but growth is being ‘strangled’ by overly complicated bond frameworks, said experts at a sustainable investment event in June.

Green bonds can act as the Trojan horse of sustainable financing by proving to investors that investing in environmentally beneficial projects can yield good returns, said the head of an international green bonds organisation.

Speaking at a sustainable investments conference last month, Climate Bonds Initiative’s chief executive officer Sean Kidney said the strong uptake and good returns of green bonds in the last few years means they are sneaking into the consciousness of mainstream investors.

“Green bonds are the Trojan horse for tapping into the trillion-dollar pot of investments that is the capital market,” Kidney said.

Kidney elaborated that green bonds can demonstrate to investors the viability of green financing if deals are structured correctly, and make green investments common in the market.

Green bonds, which are similar to regular bonds besides the fact that proceeds are used to support projects with positive environmental outcomes, have seen strong growth since the 2015 Paris Climate Agreement, achieving 78 per cent growth between 2016 and 2017 alone.

But Kidney cautioned that the growth of green bonds is today being hamstrung by unnecessary impact reporting criteria due to a one-size-fits-all regulatory approach.

To grow green investments, regulatory bodies should distinguish between various types of green bond projects and design type-specific assessment requirements to improve the efficiency of impact reporting, he urged.

 “We need to minimise the work of the issuance and maximise the work of the broader framework in which bonds are issued,” Kidney said on a panel at the ASIFMA Green Finance Conference, organised by the UN Climate Change Secretariat and the UN Economic and Social Commission for Asia and the Pacific.

He pointed to how certain green bond standards make it compulsory for issuers to report on greenhouse gas (GHG) emissions, which he said is an unnecessary complication for solar energy projects.

“We all know solar energy is a critical path going forward, regardless if it is a solar farm in Iceland, Poland, China or Nigeria. We just say, it is a green project,” he said.

But for frameworks for geothermal projects, where there is drilling and greenhouse gases emitted during operations, greenhouse gas emissions must be taken into account. “Geothermal is more complicated. The Turkish geothermal project has a footprint of big black coal plant, so you have to have greenhouse gas reporting for it.”

Kidney also urged regulators to be clear about which projects qualify for green bond issuance to make it easier for bankers, corporates and the government to see where their investments would have a positive impact. “A vast gas plant in Nigeria would not qualify as a green project, whereas clean energy projects around the world do; manufacturing a hybrid hummer should not qualify, whereas electric cars should, wherever you put them,” he said.

Valued at $155.5 billion in 2017, the green bond market still constitutes less than one per cent of the total bond market today

Issuers ‘strangled’ by green bond frameworks

However, it is not only impact reporting and a lack of clarity over what projects qualify as green that is holding back green bonds.

The differences between national, regional and international green bond standards and frameworks—which provide guidelines to what constitute green investments—make it difficult for issuers to address the expectations of both domestic and international investors.

Mark Robinson, manager of sustainability services at DNV GL Business Assurance, who spoke on a panel at the same event, said there was a need to simplify green bond issuance frameworks, at the risk of stifling capital flow into green bond development otherwise.

“Regional regulators should take a broad temperature of what global investors want and provide robust structures so that the domestic or regional issuers can have good access to the international market while maintaining the integrity of the bonds,” said Robinson.

Caroline Waqabaca, chief manager of financial markets of the Reserve Bank of Fiji, expressed a similar sentiment. “We are strangled by all the standards around green bonds and when an opportunity comes, we cannot move forward.”

Currently, the Green Bond Principles acts as the overarching impact reporting guidelines at the international front, while other green bond frameworks exist at the national or regional level, such as the Chinese Green Financial Bond Guidelines and Catalogue, the Republic of Indonesia’s Green Bond and Green Sukuk Framework, and the Asean Green Bond Standards, which was launched last year.

The lack of a clear, streamlined regulatory framework in many emerging green bond markets also deters green bond issuance. Esther An, chief sustainability officer at City Developments Limited (CDL), said that listed companies face a lot of scrutiny from investors and analysts on whether they meet the different reporting requirements such as those from sustainability rankings, sustainability reporting and sustainability stock exchanges.

“Corporates have a lot on their plates. Spending five weeks with an auditor is not something any corporate would like to do,” An said. “Green bond standards and requirements can be simplified a bit in order to fast-track the development and the adoption here.”

An added that simplifying green bond requirements does not mean “lowering the standards”, but rather, that frameworks and guidelines should be “interpreted with good judgement”.

Kidney said that layering complex green bond requirements also restrict issuers’ funding sources to a niche market; it also leads to complex reporting processes that adds to operation costs.

“We need to grow markets in the areas that we need to achieve emission savings fast. We need to get scale quickly,” Kidney said. “We need to take away the work from the issuers because every time we have to explain to a treasurer one more thing they have to do, it is one other reason why they do not do it.”

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