EC report backs Climate Bonds on standards and explores policies to accelerate EU green bond market growth – Forward looking views on building green finance and investment

Green bonds could play a key role in helping to finance the investment needed to achieve the EU's 2030 Climate and Energy objectives and the UN's SDGs

 

A few weeks ago the European Commission released “Study on the Potential of Green Bond Finance for Resource-Efficient Investments”, a comprehensive green bond report.

The report includes many positive recommendations on the potential of green bonds to help meet the EU’s 2030 climate and energy targets.

We like the focus on standards and public sector action to support further market growth. We’ve worked hard on science based quality and assurance measures and at the same time advocated for national and international polices to accelerate green issuance and avoid greenwashing.

These themes are explored in some detail, making the report and its associated toolkit a must read in our opinion.

 

Here are a few of our favorite takeaways:

 

Recommendation: Develop a European GB Standard that builds on Climate Bonds Standard and the Green Bond Principles

We are particularly excited about the recommendation to develop an official European Green Bond Standard. It is great to see the report recommending a clear standard that includes criteria for what projects qualify as green, as well as conditions for the issuance process.

We have long argued the benefits of a common green bond standard in the EU: standards help create an environmentally robust green bond market with minimal transaction costs.

The forward-looking recommendations don’t stop there.

The report proposes using existing market-led standards as the foundation for an official green bond standard. It explicitly highlights the potential to use the Climate Bonds Standard and the Green Bond Principles (GBPs) as the basis for the European Green Bonds Standard.

You’re probably not surprised to hear that we support that direction!

What makes it even easier for policymakers to implement this recommendation is that the Climate Bonds Standard fully incorporates the process guidelines of the GBPs, in addition to criteria for what is green: they are not two competing approaches.

 

The EU sets an example for other country-level GB standards around the world

Countries outside the EU should make note of this move towards a common green bond standard that builds on the Climate Bonds Standard and the GBPs.

The EU is the world's biggest economic zone, and emerging markets in particular can benefit hugely from aligning their country-level green bond standards against a future EU standard.

Common green bond standards can help reduce transaction costs, facilitating cross-border investment.

 

Beyond standards: public sector support to scale the GB market

We are also happy to see that a number of public sector support mechanisms are explored – and that they are very much aligned with our own work on the topic.

Basic recommendations include:

  • Raising awareness of the benefits of green bonds (e.g. through a guide supporting the green bond market development targeted to national authorities);
  • Leading, establishing or joining a coordination mechanism with the main market actors (such as a Green Bond Market Development Committee);
  • Collecting a list of planned green investments to support the development of a green project pipeline to support the supply of green bonds (e.g. through requiring such list from each Member State);
  • Requiring mandatory disclosure of green indicators regarding bond issuances and investments (the recently released recommendations of the FSB task force on environmental disclosure should be of help).

 

Further recommendations: Innovative public sector tools

The report also highlights the potential for more innovative public sector tools (including tax incentives, altering risk weightings for green investments and getting central banks involved), although they are cautious here, highlighting the importance of considering potential unintended consequences to financial stability.

Some of these tools are already gaining support from other actors, such as the French Banking Association’s call for a ‘Green Support Factor’ to alter the risk weightings of green investments.

We have also seen a few central banks in emerging markets declare that they are investing some of their reserves in green bonds, most recently Morocco (last month). Bangladesh announced they have been investing foreign reserves in green bonds since 2015. 

We recognize some of these policy tools may be seen as controversial, but given the extreme urgency and scale of the climate change challenge, we believe it is necessary to consider the whole toolkit available to grow the market, from the basic recommendations to the more innovative options.  

Policies to scale up green bond markets should complement broader sustainable growth targets and efforts to deliver more stable financial systems that also address environmental risks and long-term value creation.

 

A final word

In response to the report, Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, said

“Promoting long-term and green finance is one of the priorities of the Capital Markets Union Action Plan. Green bonds are an important instrument to raise capital market finance for environmentally-friendly and more sustainable investments. The new High Level Expert Group on sustainable finance will help define steps towards greener capital markets.”

 

What’s next

We look forward to seeing the Expert Group in action in 2017, now that an excellent set of green bond recommendations is on the table.

We also applaud the cooperation between DG ENVIRONMENT that prepared the report and DG FISMA that will take the topic further under the Capital Markets Union.

Well done to the European Commission!

 

'Till next time,

Climate Bonds

 

 

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