Beyond green bonds
Green finance is booming. Interest in green finance is booming even more.
They are not the same thing. According to the latest report from the developers of the Global Green Finance index (GGFI), “perceptions of green finance are ahead of market reality”.
This, it suggests, “underlines the scale of the transition needed, the attention it is receiving, and that respondents expect green finance to be growing rapidly in significance”.
The GGFI was launched in spring 2017 to measure how ‘green’ financial centres are and to catalyse growth and improvements in this area. It is developed by think tank Z/Yen and non-governmental organisation Finance Watch.
Green finance is not just about green bonds, but they get a lot of attention and are what our report focuses on.
The first green bond was issued more than 10 years ago and the market has grown rapidly in recent years.
Green bonds allow investors to contribute to financing investments in environmentally-friendly projects. They could also be a risk management tool, to the extent that green bond-issuing corporates, for example, can be seen as more future-fit than corporates that do not.
“Green finance is not just about green bonds, but they get a lot of attention“
But if green finance is ultimately about financing investments to rein in greenhouse gas emissions and meet international climate goals, it is going to take more than just more green bonds. According to some people, they might not be having the impact that is associated with them.
The think tank 2° Investing Initiative has argued that evidence is lacking to conclude that green bonds contribute to increasing investment in environmentally-friendly projects. It is an interesting perspective.
The think tank has ideas for a framework to assess green bonds’ impact, and for the way forward if it were shown that they do not really move the dial. One recommendation is to focus on asset-backed securities linked to green projects. Securitisation’s potential is, indeed, being explored, and there is talk of the first green CLOs emerging this year.
These might not be possible for many institutional investors and for them, the 2° Investing Initiative suggests an enhanced version of current green bonds could be needed – a sort of ‘green bond-plus’.
Green bonds are a captivating issuance and investment proposition, and considerable effort is deployed to ensure their integrity and credibility. That should include verifying the difference they make, so that any necessary adjustments can be made. There is much to play for.