Have we recovered the financial Holy Grail?

kaarina_kolle2_printGreen bonds must be worthy of their name to truly preserve natural capital

For anyone who has kept their finger on the quickening pulse of the sustainable finance trends it should come as no surprise that green bonds are picking up the pace in the capital markets. With the Paris Agreement ratification expected to be completed by the end of 2016 all eyes are on the investor community to shift the capital to greening the global infrastructure, in particular, to meet the Herculean task of less than 2 degrees and aiming for 1.5 of global warming and a decarbonised economy in mere 34 years. In the meanwhile, the loss of biodiversity and depleting natural resources call on an urgent shift in the capital flows and require the scope to widen much beyond the climate concerns. The G20, hosted in the Chinese city Hangzhou, highlighted the importance of greening the financial system – explicitly mentioning green bonds – in the summit’s annual Communiqué for the first time. It is not an understatement to say that the instrument is gaining traction.

Green bonds could soon carve a significant slice out of the debt market to support the green transition, providing investors with fixed-income investment opportunities. However, they should not yet be considered a fail-safe solution. While the green bond market is vigorously shaking off its niche market status it is high time to ensure that the industry standards keep abreast of the mushrooming interest. This is relevant to point out as not all bonds have been able to uphold full environmental integrity. Only a bond for which the issuer can demonstrate measurable environmental benefits, certified by an independent party according to widely-accepted, fully developed standards, should qualify as a green bond. WWF’s recent report Green bonds must keep the green promise has been produced to explicitly respond to this need. It lists seven critical elements that should be considered by all the key stakeholders of the green bond market: issuers, underwriters and green bond investors alike.

Another significant obstacle revolves around ensuring true additionality. Most market practitioners tend to agree that the vast majority of projects that are currently financed by green bonds would have found access to finance on the mainstream market anyway – at a comparable cost of capital. This could prove to be a passing issue as the young market develops but, currently, the finance gap required to halt the degradation of the natural capital rests on the assumption of being genuinely new money – rather than just better labelled as ‘green’.

The Nordic countries have been a testbed for green bonds. The first green bond of the region was issued by the City of Gothenburg in 2013 and the number of bonds has steadily grown ever since. Gothenburg was initially assisted by SEB, one of the green bond pioneers, also from the region. The only latecomer has been Finland with its relatively late entry to the game with the MuniFin’s USD 500 M green bond launched in 2016. While not necessarily offering scale globally, the already issued Nordic green bonds do offer learning experiences and demonstrative issuance with, hopefully, also best practice government policies to follow. However, the current size of the market is merely USD 42 billion while the transformation of the energy system, preservation of the ecosystems and ensuring good status of global water resources are estimated to soak up as much as USD 2000 billion. In short, the financial community – equipped with the right conditions for scaling up – must turbocharge ahead and aim for nothing less than mainstreaming.

What makes green bonds thrilling is the opportunity for the financial and environmental community to truly collaborate. If the essential questions surrounding quality through established science-based standards, we are looking at no sacrifice for return. However, the credibility of green claims should be regarded as equally critical as creditworthiness and, by respecting the environmental integrity, genuinely add a feather in the cap of the investment community for playing a part in solving global environmental challenges. However, it is inevitable that eventually the rest of the wider bond universe needs to reflect the science but ensuring high-quality green bonds is certainly a start. Maybe, then, we are on our way to recovering the Holy Grail that can shift the badly needed trillions.

Kaarina Kolle

Climate and Energy Officer | Ilmastoasiantuntija | Klimatexpert
WWF Suomi | WWF Finland | wwf.fi
kaarina.kolle @ wwf.fi
Kuva: Aki-Pekka Sinikoski / WWF