09 January 2018
Developing European standards for green bonds would boost market growth and bring clarity to financial institutions looking to identify sustainable assets, the High-Level Expert Group on Sustainable Finance (HLEG) says in its interim report. Eila Kreivi, Director and Head of Capital Markets at the European Investment Bank, explains why green bond standards are a top priority of the expert group.
Environmental Finance (EF): What is your view on the state of the green bond market in Europe right now?
Eila Kreivi: The market is in pretty good shape. Europe is leading the way on green bonds and the EU is now at the forefront of developing green bond standards. The market has been growing at an accelerating pace –ultimately, green bond growth is linked to the assets available to finance and demand from bigger investors. Green bonds are for large players per definition since no one issues green bonds in the EUR 10m-20m range, at least not public bonds. But I'd say the market is doing pretty well
EF: You mentioned being at the forefront of developing standards. Can you explain why a European Standard for green bonds is important and has been recommended by the HLEG?
Eila Kreivi: Standards are essential to help expand the green bond market. A lot of potential issuers feel that they want to issue a green bond but they are uncertain how green bonds are defined. Unseasoned issuers can look at a European standard and say 'If I do it like this, I will do it right'.
Standards are also important to get central banks more involved in the green bond market. We talk to central banks and they are interested but they – being conservative institutions by nature – want to see guidelines and standards on what is green before getting involved. Government, regional and municipal activity should also see a boost from standards coming into force. The importance of standards is probably more pronounced on the public side than on the private side. Private players, like an asset manager, they have a client mandate that they follow. They don't have to debate in quite the same way what is green and not. But standards will be helpful for the entire green bond market.
Also, standards will bring solidity to the market. While these are European standards only, they can be exported to other regions. Others can look at us and say 'Ok, this is how Europe is doing this'. I think this could help boost green bond issuance globally.
- The European Commission established on 22 December 2016 a high-level expert group on sustainable finance (HLEG) to advice on developing a comprehensive EU strategy on sustainable finance
- The group comprises 20 senior experts from the finance sector, civil society, academia as well as EU and international institutions
- HLEG should provide advice on how to steer the flow of public and private capital towards sustainable investments; identify steps financial institutions should take to protect the stability of the financial systems from environment-related risks and how to deploy these policies on a pan-European scale
- The group published an interim report on 13 July 2017 and will publish a final report by January 2018
- The Commission will decide by Q1 2018 at the latest on the concrete follow up that it will give to the recommendations of the HLEG
EF: What's the timeline for an introduction of European green bond standards?
Eila Kreivi: I want to clarify that the HLEG recommendations are just recommendations. The HLEG was put together by the European Commission to make propositions on how to develop the EU strategy on sustainable finance. This is part of the Commission's plans to unveil an Action Plan on green and sustainable finance in 2018.
It's up to the European Commission if, how, when and in what order they adapt or adopt something. The recommendations are not necessarily going to become European legislation very soon – they may, of course - but they will be taken seriously. But I think they are intending to proceed soon at least on some of the recommendations of the group.
On a separate matter, HLEG also contributed to the Commission's review of the role of the European Supervisory Authorities (ESAs), which oversee overbanking, insurance, occupational pensions and securities markets, and at the end of September, the Commission proposed that the ESAs will now "promote sustainable finance, while ensuring financial stability".
EF: So what are the next steps?
Eila Kreivi: Before you develop green bond standards, you need a taxonomy for green assets and investment activities. And I don't mean broad, high-level taxonomy – it needs to be granular with sub-sectors, criteria and indicators. To have a standard before a taxonomy just doesn't work. You can't just say any energy efficiency-related bond is a green bond. You need criteria on how much energy usage should be reduced for something to be defined as energy efficient, for example. This high level of transparency and accountability provided by the taxonomy enables comparisons of green bond standards
The EIB is now working on taxonomy and criteria for climate mitigation. We started there because it was the most low-hanging fruit – a lot of work has been done on defining climate mitigation previously, within the multilateral development banks community, as well as with China's Green Finance Committee and the Climate Bond Initiative (CBI). In the final HLEG report, which will be published in January, our climate mitigation taxonomy will be included. After that, there are areas like climate change adaptation, resource efficiency, pollution control and reforestation, for example. They all need their own criteria and indicators.
HLEG and Green Bonds
- HLEG's interim report, published in July 2017, recommended a European standard and label for green bonds and other sustainable assets
- HLEG argues that official standards would enable Europe to increase the continent's green bond issuance, which it estimates to have the potential to reach $74.6 billion/year. It notes that Europe was the pioneer in green bonds but has seen its share of new issues decrease to around 30%
- The interim report notes that market participants' experience with green bonds confirms that the absence of a single accepted system of classification for project policy objectives and project sectors creates uncertainty and hampers efficiency
- Introducing green bonds standards is a step towards HLEG's long-term goal of establishing EU labels and quality standards for all sustainable assets.
- HLEG says green bond standardisation is within reach and should be leveraged by the EU institutions and addressed as a priority.
EF: That sounds like a daunting job. How long has it taken to develop a climate mitigation taxonomy?
Eila Kreivi: It is a huge task, but if you do it piece-by-piece it is less daunting. The bulk of green bonds fall in the climate mitigation category, so a big part of the task has been done. Climate mitigation covers a.o. both renewable energy and energy efficiency. We've worked on the taxonomy for climate mitigation throughout this autumn. The EIB has been the co-ordinator and we've worked with other organisations too, including the Green Bond Principles, the CBI, the Nordic Investment Bank and China's Green Finance Committee. Going forward, such consultations should be the basis of the work on taxonomy.
The Commission is taking the need for a taxonomy seriously. At the recent One Planet Summit in Paris, the Commission highlighted the idea of a taxonomy to clarify how green and sustainable assets should be defined.
EF: And after developing a taxonomy, what's next? What will make the standards complete?
Eila Kreivi: The idea is to also have a standard on the process for issuing green bonds. This already exists – the Green Bonds Principles has developed such a process. Guidelines on reporting and external reviews, for example, they're all there and can be used in the development of a European standard.
When it comes to completing the standards, I don't think this is something that's going to be done one day and then set in stone and always stay the same. These markets develop fast. Technology keeps improving. For instance, energy efficiency isn't going to be the same forever. An energy efficient building today will not be as energy efficient in 10 years, maybe not even in five years. You need to take into account what's going on in the market. It's a work in progress and will be for a long time, but that's the nature of it.
EF: In addition to standards, what else needs to be done to support the growth of Europe's green bond market and how can the EIB help? How can climate policies improve to boost green bonds?
Eila Kreivi: The policy strategy we need to follow was pretty much defined in the Paris agreement. The EIB will help funding the investments that need to be made to meet global climate targets. Climate lending is close to our heart, in fact it's the only area where we have a lending target – at least 25% of our lending should be dedicated to climate action.
EF: What were some key developments in the European green bond market in 2017?
Eila Kreivi: For example, we saw a large government benchmark issue from France. That's a major development. France's sovereign green bond has shown the way for other countries that this can be done. Some had previously had the view it couldn't be done because of budgetary rules, but I'm now confident we'll see more sovereign green bonds in Europe and some have already been announced.
Actually, last December 13th, a network of 8 central banks and supervisors was created for greening the financial system. One of their goals is "to mobilize capital for green and low-carbon investments", which refers to green bonds among other solutions.
The Green Bonds Principles also made progress in the year by publishing a set of Social Bond Principles. It's a positive step that we're expanding the scope of the green and sustainable bond market. These are exciting times and if we have this conversation again in a year I'm sure we'll see a lot of things have progressed.
The European Commission's sustainable finance strategy
- The European Commission intends to present a comprehensive action plan in March 2018 with initiatives to stimulate the market for sustainable financial products.
- The Commission is considering a number of reforms and other initiatives to incentivise private investment in the green transition. The aim is for these measures to help attract the estimated €179 billion of additional low-carbon investments needed annually to meet the Paris 2030 targets.
- In line with the recommendations in HLEG's interim report, the Commission is exploring the development of a taxonomy for sustainable finance. It is also looking into developing EU standards and labels for green bonds and green investment funds.
- Other ideas include the possibility of lowering capital charges on bank financing for climate-friendly projects as well as to integrate sustainability factors into investment mandates