Green Bond Market Needs for Standardization

Green Bond Market Developments

In 2017 green bond issuance soared to a record high, attracting USD 161 billion worth of investment, up from USD 2.6 billion in 2012 according to a report earlier this year from Moody’s Investors Service. Despite slower growth in 2018, the green bond market is expected to hit USD 200 billion in 2019, driven by increased demand for green and sustainable investment products, governmental focus on climate change mitigation and a growing number of repeat issuers.

Green bonds are generated to attract funds for projects that have a positive environmental or climate benefit, such as energy efficiency, renewable energy, agriculture, transportation and water management. These bonds are typically "use of proceeds" bonds, meaning they are earmarked for green projects specifically, and backed by the issuer’s entire balance sheet. Issuance of green bonds can incur additional transaction costs through tracking, monitoring and reporting on the use of proceeds. However, these costs are generally offset by the benefits they bring to issuers by promoting green assets and business, driving positive marketing and diversifying the investor base.  

Diversification by Sector, Region and the Use of Proceeds 

While overall volume of investment in green bonds is rising, the Moody’s report highlights how issuance is also diversifying by sector, region and use of proceeds. Whereas previously issuance of green bonds was led by supranational organizations and development banks, an increasing variety of parties are bringing bonds to the market. These include sovereign states, financial and non-financial corporations, and even subnational public sector issuers. This diversification in green bond issuers is mirrored by a similar trend in the use of proceeds for green bonds. Although energy projects remain a primary use of green bonds, from 2014 to 2018 the share from energy has declined, while that of buildings, transport and water has grown.

Needs for Standardization and Reporting

These trends are all positive news for action on climate change. However, a recent article in the Financial Times highlights the need for clearer metrics to assess green bond authenticity. Lack of agreed standards for investments combined with inadequate reporting and weak commitments means that investors often have little or no assurance regarding what their investments are funding or their "green" impact.

Initiatives such as the European Commission’s Green Bonds Standard (EC GBS), which released a report on market standardization in June this year, are critical in order to provide investors with transparency, comparability and credibility, and to ensure investment continues to grow and is channelled effectively. In September, the Climate Bonds Initiative, a London-based NGO, will launchthe third version of its Climate Bonds Standard framework. This framework will act as a "universal adapter" for the EC GBS and aims to provide “a compatible harmonized platform for investors to compare and analyse a green debt product from any nation, including disclosure requirements, climate impacts and low-carbon credentials.” Efforts to standardize both monitoring and reporting are essential in order to maintain growth of the market.