Last Thursday the EU officially launched its proposals for a Capital Markets Union, with the aim to boost investment, growth and jobs through enabling diversification in the region’s sources of funding and reducing the reliance on bank lending.
What’s really exciting is that recent draft documents reveal that green bonds are explicitly on the agenda as part of the Capital Market Union reforms. Great news! Policy support has the power to turbocharge the already rapidly growing market, and considering low-carbon investment in the market design from the beginning is a lot easier than making retroactive changes to a well-established system.
The key thing though is to make sure that the reforms in the other priority areas are also aligned with the region’s low-carbon agenda and the growth of a green bond market. Alongside green bonds, other key initial reform areas have been announced as: common standards for high-quality securitisation, covered bonds and corporate bond issuance; preferential capital requirements for insurers and banks investing in infrastructure; and simplifying prospectus’ requirements for companies, particularly for SMEs.
How to make it work for green bonds: Standards for securitisation should include standards specific for green securitisation (green mortgages, energy efficiency loans, renewable energy assets and so on); covered bond reforms should include standards for green covered bonds as well as expanding the eligibility pool of covered bond assets to renewable energy; preferential capital requirements for infrastructure investors should be conditional on the infrastructure in question being green.
More policy recommendations for green bonds in the context of the EU Capital Market Union were presented by Aviva, an insurance and asset-management company with EUR300 billion (US$340) of assets under management, back in December. Aviva’s recommendations were published in a paper called “Capital for Sustainable Growth”, filled with many action points to enable the growth of a green bonds market. These included supporting standards development around green assets, providing tax incentives and credit enhancement to improve the risk-adjusted returns of green vs non-green bonds.
Policymakers need to start applying these tools that they use in other areas, such as general infrastructure, to support green investments. As Aviva highlights, one specific option for the EU is to expand the Project Bond Initiative, a credit enhancement scheme, for low-carbon investments.
Aviva also mentions that the EU can support the green bonds market on the demand side by allocating shares of their ABS and covered bond purchasing programmes for green, as we mentioned when the European Central Bank launched their asset-purchasing programme back in September. Though this requires that the market is large enough for there to be a deal-flow to invest in, meaning in the shorter-term, policymakers can support development of standardised contracts for green and aggregation facilities for green assets.
Great to see that policy support for green bonds is making it onto mainstream agendas, both those of policymakers and mainstream investors (having EUR300bn of assets under management will hopefully make policymakers sit up and listen!).
That there are many opportunities for policymakers in the green bond space is not just the case in the EU but also elsewhere: China has already started seriously exploring this agenda, as we mentioned back in November.
2014 was the year of explosive green bonds market growth with issuance tripling compared to 2013; will 2015 be the year we see policy support for green bonds take off? The Capital Market Union certainly provides a great opportunity for the EU to be a leader on this front; we look forward to seeing what measures for green bonds make it into the CMU action plan expected in Q3.