The International Energy Agency estimates that a shift of $53 trillion in investment towards climate change and environmental solutions is required by 2035 to avoid catastrophic global warming, and while the green bonds and climate bonds markets are growing strongly, there are also growing calls for standards to be developed to avoid “greenwash” bonds cashing in on the trend.
At a Reuters Global Climate Change Summit held last week in London, Zurich Investment CIO Cecilia Rayes said the credibility of the market was at risk. She said trust was key in capital markets, and if there was going to be a lot of green-washing, the “market will die”.
Michael Wilkins, managing director of Infrastructure Ratings at Standard & Poor’s also warned of the need for some form of green standards.
“One of the big issues with green bonds is standardisation, classification and ensuring there is credibility in terms of what is being financed,” Mr Wilkins told the summit.
Tim Kelly, fixed interest portfolio manager at Australian Ethical Investment, said there were ways investors could assess whether a bond is as green as it claims to be.
“When evaluating a green bond, investors should expect the issuer to have a strong commitment to transparency on the use of the proceeds of the bonds throughout its life, not just on issue,” he told The Fifth Estate.
“At Australian Ethical, we will continue to monitor this information flow to ensure projects remain in line with our expectations and with the Australian Ethical Charter.”
Nuclear jumps on the bandwagon – but not everyone’s buying it
An example of a potentially questionable green bond was European nuclear power station operator EDF Group’s 1.4 billion Euro issue last year, where the claim to be green is founded on the argument that nuclear is a low-emissions form of power generation. Australian Ethical said this would not meet their criteria for investment, and the Climate Bonds Initiative is also not including nuclear energy projects in the bonds that meet its standards.
“We are concerned with low and zero-carbon assets, and assets that will support the transition to a low-carbon economy. The standard development process therefore prioritises assets which meet this criteria and have no significant drawbacks attached to them such as renewable energy,” the CBI has stated.
“For assets that present more complicated issues, a thorough and transparent standard design process will consider these issues and indeed whether such an asset type is relevant under a low carbon economy.
“This applies to nuclear energy assets with waste management and other complications, as well as to biofuel-type assets with land use complications. Decisions about project types will be made by the Standards Board.”
The CBI has developed and finalised standards for wind and solar renewable energy projects, and is in the process of approving a standard for green property, and has working groups in progress developing standards for water projects and public transport projects.
“Without broadly acceptable standards we will have a race to the bottom with environmental-themed bonds,” the CBI has stated.
“We already have seen a weakening of the idea of “carbon offsets” because of a lack of standards about acceptable (environmentally rigorous) schemes. In the current market poor quality offsets are, for most buyers, not readily distinguishable from high quality offsets. In such circumstances the poorer quality will come to dominate for price or availability reasons, sparking a race to the bottom, or an abandoning of the sector.
“Early intervention is needed to avoid the negative effects of a lack of robust standards and a consequent undermining of the credibility of the thematic approach.”