Green Bond Review 5 July – The Green Bond Debate – Part 2

Stockholm (NordSIP) – Following the first part of the green bond debate, which we started last week, here are some of the arguments heard at the Environmental Finance’s Green Bond Conference, which took place in London a couple of weeks ago. In a debate moderated by Tanguy Claquin, Head of Sustainable Banking, Credit Agricole CIB, Stan Dupre CEO of the 2° Investing Initiative and Lars Eibeholm, Head of Treasury at the Nordic Investment Bank weighed the pros and cons of the green bond market.

After Dupre opened the argumentation with some of the conclusion of a paper published by the 2° Investing Initiative, as presented last week, Eiberholm presented some arguments in favour of the green bond market. The size of the market, of course, is a crucial factor. There is a point when a particular instrument has enough demand and supply to influence the rest of the market. Green bonds are not mainstream yet, and it may be too early to call whether or not it will ever have any impact. Furthermore, many believe that green bonds can have an effect, beyond the financial. Green bonds can change corporate behaviours and move cultures. Handelsbanken, whose Chief Sustainability Officer, Elisabet Jamal Bergström, presented earlier at the same conference, is an example where the decision to issue green bonds forced the organisation to change the way it looks at the environment. Going down the green route may force companies to step up to the plate.

This argument plays into the hand of Dupre whose report argues that, yes, green bonds are a way to raise awareness, just like a hot air balloon. However, it’s nothing more than that. For proponents of green bonds to succeed, they certainly need to maintain speed in the development of the market and ensure that a high bar is set for integrity. A significant expansion can take place in the covered bonds space, as well as ABS, where physical assets are included into a pool. The reasoning, after all, may be more challenging for senior bonds, given that the risks linked to a green earmarked project remain on the balance sheet of the issuer at the same place where the rest of the company’s risks lie, as explained in the first part of the debate last week.

For Dupre, the hot air balloons prevent the introduction of new instruments that would be more interesting, even from an awareness-raising point of view. However, the larger picture remains: if in a few years time, twenty percent of the market is green, will it not change the availability of capital for some players? Every time a green bond is issued, there is a pledge, and those are the efforts which will eventually move the environmental needle. For Dupre, however, the pledge is still not relevant at this stage, because it does not represent a real commitment to change. Labelling of bonds does not finance projects that would not have gotten money without it. A green bond is a free lunch for everyone! Issuers benefit from the publicity, as well as investors, based the fact that their investments are green. Even policymakers are happy. That’s why there is no debate in the industry.

Green bonds could still be an instrument that will facilitate the transition to lower financial risk for issuers, even if, today, green bond frameworks barely mandate the issuers to have an exposure to green assets. Impact reporting could be a decisive next step in the development of the market. Companies modifying their actual strategies on the back of green bond financing would be a game changer.

For one of the attendants who intervenes in the audience, a green bond creates an irrevocable pressure from the inside for the issuer to change strategy. “Once you issue a green bond, the other bonds become dirty! There is no free lunch,” he says.

On the menu of the free lunch, there could be two sandwiches, nevertheless:

The first sandwich is that the mechanisms behind the bonds are too complicated for an activist like Greenpeace to go after a bank if they issue a green bond. No one is interested in fighting against the details. The second sandwich is made of policymakers. Policy making is not evidence-based. Endorsements are won on the back of fairy tales. In the case of green bonds, as for low carbon indices, criteria don’t include impact, and that’s where the key lies. The instrument and the will are there, but so far, no one has gone the extra mile to obtain real accountability. Perhaps the system only needs another little tweak?

The answer may come sooner rather than later from the new task force put together by the EU Commission. The question is: will anyone take the issue of additionality seriously even on a technical basis? Everyone agrees in principle that policy should be evidence-based but interests are conflicted, and many may want to keep riding the green bond train momentum.

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