Although there is currently no legal definition of a ‘green bond’, several industry associations such as the International Capital Markets Association (ICMA) and stock exchanges have set out certain essential elements which bonds must have to qualify as ‘green bonds’, principal among which is an express covenant to use the cash proceeds of the (green) bond to finance new or existing projects that have positive environmental and climate benefits. Other than these elements which allow bonds to be classified as ‘green’, green bonds are regular bonds – in other words, they are financial instruments evidencing a debt under which the issuer promises to pay the holder the amount borrowed, usually with interest, on a specified future date, the proceeds of which will be used to finance an environmentally-friendly project. In this respect, any issuer of traditional debt securities, such, sovereigns, state agencies and state-owned entities, supranationals, financial institutions, municipalities and corporates can be issuers of green bonds. For example, on in January 2017, the French treasury launched the first French sovereign green bond, the Green OAT 1.75% due 2039, for an issuance amount of EUR 7 billion, while in November of that same year, Barclays Bank issued EUR 500 million 0.625% notes due 2023.
While, the principal purpose of issuing green bonds would be to raise finance for green (or sustainable) initiatives and operations, however, there may be other benefits associated with the issuance of green bonds, for example the possibility of advertising the issuer’s green (or sustainable) plans, which in turn has a positive reputational impact. Similarly, green projects may also fit squarely with issuers’ corporate social responsibility requirements, something which is increasingly being focused on by global regulators. Green bonds can also help in internal integration of teams and departments which do not typically mix. For example, after issuing its USD 500 million sustainability bond, Starbucks noted that “integrating our corporate sustainability strategy with a core part of our capital structure has raised our level of integration and cooperation”. Issuing bonds with a ‘green element’ can also enhance their attractiveness by, for example, attracting institutional investors with an environment, social and governance mandate or an environmental focus.
Testament to the benefits of issuing green bonds is the growth of the green bond market since the first green bond was issued in 2007 by the European Investment Bank. In fact, according to a report published last June by the EU Green Bond Standard Working Group, by June 2019 the green bond market represented a total of approximately EUR 550 billion outstanding. Furthermore, according to Moody’s Investor Services, green bond issuances represented more than 2% of global bond issuances in the last two year; while in Europe green bond issuances represented approximately 5% of the total amount of non-government bonds issued in 2018.
A significant contributor to the marked growth of the green bond market is market-standardisation which was greatly facilitated in 2014 when the Green Bond Principles (the Principles) were published by several banks, and subsequently supported by the ICMA, and adopted by the vast majority of market participants. The Principles are built around four key mandatory principles: (i) the description of the use of proceeds which need to finance assets and projects with positive environmental impacts, (ii) the requirement of a clear process for the selection of projects and (iii) a description how the funds are allocated or tracked and (iv) reporting on the use of proceeds with, if possible, information on the environmental impact of the projects.
The European Union has also gone down the path of market-standardisation as a means of helping the green bond market flourish, in order to ensure that green bonds can keep acting as drivers for sustainable finance. To this end, the European Commission drew up an Action Plan in 2018, with the aim of setting out the EU’s strategy for sustainable finance. ‘Sustainable finance’ generally refers to the process of taking due account of environmental and social considerations in investment decision-making, leading to increased investments in longer-term and sustainable activities. In its Action Plan, the Commission committed (a) to publish a report on an EU green bond standard and (b) to specify the content of the prospectus for green bond issuances within the framework of the Prospectus Regulation. Although the Commission delegated act on the content of a prospectus for green bond issuances is still to be published, last June, the EU Green Bond Standard Working Group published a report on the creation of a voluntary, non-legislative EU Green Bond Standard (GBS) to enhance the effectiveness, transparency, comparability and credibility of the green bond market and to encourage the market participants to issue and invest in EU green bonds.
Building on best market practices, the hope is that the GBS will solve several barriers in the current market, including reducing uncertainty on what is green by linking it with taxonomy, standardising verification and reporting processes, and having an official standard to which incentives could be attached.
Legislative developments such as the GBS will help consolidate the green bond market and ensure it can develop and thrive in the future. It is only through proper regulation that we can ensure that markets are geared to incentivise financial instruments that promote greener finance, and as a consequence, a more sustainable way of life. Urgent action is needed to adapt public policies to the reality that is climate change. In this regard, the Malta Stock Exchange’s recent initiative, as part of its capital markets strategic plan, to promote the issuance of green bonds is laudable, but this cannot be done in a vacuum. As a tool in combatting the devastating effects of climate change, everything that can be done to incentivise the issuance of green bonds to finance green projects should be done, with Government, issuers, investors and other market participants all having a role to play.
This article was first published in the Times of Malta, 17 December 2019.