Institutional investors and governments alike are putting increasing value on the environment, and that has been a great tailwind of green bonds. But although the bonds are almost a decade old, efforts to take them mainstream are still stymied by transparency and standardization issues.
A new report from RBC Capital Markets reveals that green bond issuance reached $82 billion globally, according to the Globe and Mail
. Large governments including the US, Canada, and China are stepping up their infrastructure and climate programs. Meanwhile, major institutional investors are increasingly accounting for climate risks in their due diligence, with some increasing their capital budgeted for green investments.
All that adds up to one thing: an outlook of acceleration for green bond issues.
But the increasing momentum still doesn’t spell a breakthrough into the mainstream, according to participants at the climate-focused GLOBE Capital conference. “I think there’s this sort of false divide between wanting to do something good and wanting to do something that makes financial sense,” said Sarah Baker, who heads the North American strategic engagement unit at the London Stock Exchange Group. According to her, investors need clarity on the value proposition of green bonds.
A major obstacle to that clarity is the fact that the definition of “greenness” is still nebulous. Despite efforts to quantify and score it, the term means different things depending on whom you ask — which makes due diligence in green investments more costly.
“At the end of the day, when you’re talking about green at the same time as you’re talking about finance, you have two due diligences instead of one. Meaning that it costs more,” said Christopher Flensborg, head of climate and sustainable financial solutions at Stockholm-based Skandinaviska Enskilda Banken AB, during the conference.
A green bond veteran, Flensborg said people generally don’t like being told what’s green and what’s not. This applies even in Canada, where provinces have different takes on which energy sources are environmentally friendly. “There’s going to be a lot of friction if you start telling people what’s right and wrong,” he said, noting that it would be better to find a harmonized way to communicate about green investment.
That may prove difficult as the largest ratings agencies start measuring the environmental impact of bonds using their own scoring systems. Meanwhile, various green bond indices have come up with their own standards for a bond to qualify for inclusion.
But there’s a definite push for green bonds to be understood more broadly. According to Flensborg, this has been helped by issuers who are approaching new debt more creatively. He cited the Ontario government’s bank-shopping before issuing its third round of green bonds, which raised $800 million for transportation and infrastructure.
Ontario said that “for you [bankers] to be able to pitch for our green bond, you actually need to tell us why we should choose you for green bonds, not just traditional [debt],” Flensborg said. This forced banks to work with specialists and understand green finance more clearly; the government, meanwhile, got to hear new ideas on bringing the bonds to market.
“It’s the only place in the world I’ve seen this done, and it works,” he said.
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