As the green bonds market gains support from investors, issuers and underwriters, key questions are being asked. One of the most frequent and important is: "when and how will a green bond standard emerge and be accepted?"
There is no easy answer. 'Greenwashing' regarding projects financed by labeled green bonds could undermine the short-term credibility of the market, and with it, its long-term growth.
Yet, prescribing standards also comes with risks and the need to resolve hard practical questions. What projects are eligible? Who would legislate? Who would arbitrate legitimate controversies? How might it affect fiduciary responsibility to clients with different understandings of green? How might it deter issuers from venturing into the green bond market?
In February, a group of investors convened by Ceres' Investor Network on Climate Risk (INCR) issued a Statement of Investor Expectations for Green Bonds. The word "expectations" was chosen carefully over "aspirations" or "standards." Here's why.
It's not unreasonable to consider the eventual possibility of an International Green Bond Market Association, perhaps evolving from the Green Bond Principles, which could help formalise standards and processes
The progression from expectations of disclosure to standards will occur as the market gains critical mass. This will take time. A precedent to look to, perhaps, is the four years it took between the first financial swap in 1981, between IBM and the World Bank, and the establishment of the International Swap Dealers Association in 1985, which codified the conduct of swap participants. It's not unreasonable to consider the eventual possibility of an International Green Bond Market Association, perhaps evolving from the Green Bond Principles, which could help formalise standards and processes. Such a development would take time, however, and require a green bond market that has greater scale and maturity.
In the meantime, the process will be iterative, evolutionary and organic and be shaped by activities that are already occurring and will only gain momentum. Principal among them will be the conversations investors have with issuers and underwriters during the "road shows" that often precede a new bond issuance. Through that dialogue, issuers learn what investors are prepared to invest in. And as issuers and investors arrive at increasingly common understandings concerning transparency, disclosure and green guidelines for projects, the market will gravitate toward a common baseline.
Third-party assurers, by providing the market with opinions about green bond issues, will begin signaling a de facto standard. Similarly, formal certifiers, such as the Climate Bonds Initiative, will set a high but reachable bar for issuers to aspire to. And NGOs, as well as the press, can contribute to market integrity by calling attention to green-washing.
Green bonds are a prime vehicle to finance the transition to a low-carbon, clean energy, environmentally sustainable economy and society. In clean energy alone, more than a trillion additional dollars per year needs to be invested to avoid the worst impacts of climate change – an amount characterised as "The Clean Trillion."
There is strong investor appetite for green bonds – and more issuers are needed in order to meet that demand. While it may be true that new issuers entering the green bond market may not get it entirely right the first time, they will learn from investor and stakeholder responses and be better aligned as the market continues to grow.
A good starting point for all issuers, experienced or not, are the newly updated Green Bond Principles and the Statement of Investor Expectations for Green Bonds, which complements and clarifies the Principles from an investor perspective. For more information, visit http://www.ceres.org/ or email: ellsworth@ceres.org.
Peter Ellsworth is senior manager of investor programmes at Ceres, a non-profit organisation advocating for sustainability leadership.
