The Paris Agreement, which entered into force on 4 November, covers more than 55% of global greenhouse gas emissions. A recent United Nations Environment Programme report emphasizes the difficulty of adequately estimating the costs for global adaptation to climate change, but suggests that the required financial resources could be three times higher than expected for the period 2010–2030, and four to five times higher for the period up to 2050.
In this scenario, it might be expected that the creation of bonds with an explicitly environmental purpose, named as green bond, is seen as an unique opportunity to bridge the funding gap required to address global climate change. According to a new European Commission study released on 2 December , a total of £57.9bn of green bonds have been issued globally since they were first implemented in 2007.
The World Bank Group began issuing green bonds in 2008 and was soon joined by other development banks.
Much of the growth of the last two years has come from private sector issuers. Chinese banks, in particular, have become some of the biggest issuers in response to pressure from Beijing to reduce pollution. Within the European Union, France and the UK are the biggest issuers with more than $60 billion (£46.8bn). With almost 50 per cent of issuances globally, the renewable energy sector was the main beneficiary of green bonds in 2015, but the least profitable of them, like forestry and agriculture, are under-financed.
In the transition to low-carbon and climate-resilient development and growth to meet the UN Framework Convention on Climate Change goal (2009) of limiting global warming to 2-degrees Celsius above preindustrial temperatures, the green bond market is likely to continue to grow. However, stakeholders stress the importance to ensure that the proceeds from green bonds are actually used in projects with real environmental benefit, which would not have happened otherwise several issuances in the last two years have been sold as “green bonds,” but the money raised didn’t go to environmentally friendly projects.
There are various initiatives and approaches to set standards for green bond. The Climate Bond Initiative and the World Bank have been working on establishing a series of principles and criteria enabling investors to better assess what is green and what is not. But currently, there is no complete consensus in the market on what qualifies a bond as "green".
The discussion also debates how to assess the environment impact of green bond. A comprehensive and credible reporting is also one of the most efficient ways to address the issue of 'greenwashing' that often accompanies the public debate about climate finance. In this respect, World Bank and European Investment bank, EBI, have developed harmonized frameworks for impact reporting in the sectors of renewable energy and energy efficiency. Last June, the International Capital Markets Association (ICMA) announced the 2016 update to its Green Bond Principles (GBP ) that are widely used guidelines for determining whether a bond qualifies as green. But currently, there is no complete consensus in the market on what qualifies a bond as "green".
However the potential environmental impact of their green bonds remains hard to measure. In light of this uncertainty, markets and jurisdictions have begun to integrate elements of the voluntary GBP guidelines into domestic Green Bond regulations and mandatory market criteria. Standard & Poor’s in September announced plans to launch a new tool for assessing the environmental impact of projects financed by green bonds. The People’s Bank of China a year ago released a set of standards for screening which assets and projects are eligible to be financed using green bonds. Yet, in order to help provide investors with some additional insight into the overall "greenness" of a green bond, it is also common for issuers to hire a second-party consultant to provide a review or "opinion”. Therefore, NGO representatives that were interviewed for EU Commission study mentioned that the quality of second opinions has not always been satisfactory. Many of them lack, for example, details on the human rights impacts of investments
More significantly, investors with reasonable doubts that a bond actually fulfils the expected environmental requirements only have limited opportunities for legal enforcement of the green integrity of the bonds “In the future, it may be relevant for investors to seek penalties if the bonds do not achieve the expected green impacts. Such penalty mechanisms do not exist to date and different types of mechanisms could be tested”, says the study. On the other hand, issuers see this point as critical and argue that the risk of facing penalties when not fully complying with their stated environ-mental objectives may discourage them from issuing green bonds. “This may reduce the supply of green bonds available to the market”, they claim.
However establishing standards for green bonds and assessing their environmental benefits is likely the real issue for the development of a robust green bond market intended to accelerate the spread of a low carbon economy.