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Green Bonds: Too much of a good thing?

Publication Date: 25 Jun 2018 - By Market Mogul By Market Mogul
Actionable
Differentiated

Environmental, Social & Governance Fixed Income/Credit Commodity Consumer Energy

Last week, the Environmental Finance’s Fixed Income & ESG and Green Bonds Europe Conference took place. The one-day conference looked at the status of the green bond market and ESG trends in fixed income. Taking stock of best practices available and in the making, both panellists and delegates contributed by bringing their expertise and experience to the event. The audience, rather bullish on the green bond market evolution, predicted a further surge between $200bn and $250bn over the course of this year.

Such an evolution would set another record in the market that already witnessed an exceptional issuance to the tune of $175bn in 2017. Amid some dissent, what is for sure is that the green bond market is here to stay and so are green bonds. Now that the European Commission has taken the decision to ‘invest’ in them by devoting a good part of its Sustainable Finance Action Plan and Taxonomy work, it is nearly certain that this will not be just a fad. Green bonds are now permanent or at least they have the full backing of the institutions to be inscribed in the multifaceted world of sustainable investment tools.

So, what can be done to further increase their growth? An interesting proposal at the conference came from Belgium, which issued its inaugural green bond in February this year. Explaining the ‘behind the scene’ of this issuance, Anne Leclercq, director of the treasury and capital markets department at the Belgian debt Agency, used words such as ‘cumbersome’ but also recognised it as a ‘great promotional tool’. What Ms Leclercq emphasised was the lengthy process that was linked to the issuance of the bond which casts a shadow on the rest of the national issuance program worth a total of €35bn per year. A possible solution favours the creation of green credit rating for sovereigns.

Providing a clear ‘green’ rating alongside a country rating would also stimulate countries to continuously improve their performance, Leclercq suggests. Capitalising on the positive message green bonds give today, linking concrete policy dynamics with sustainability objectives of corporates and governmental administrations, creates a clear virtuous circle. It is difficult to consider these arguments and not make a natural connection with another hot topic the European Commission is in the course of exploring: the integration of ESG in credit rating. Creating more alignment in the rating would certainly simplify evaluations and the advantages of assimilating this as the norm would have benefits that go beyond the green market.

Another argument that can be linked to this reasoning is the quest for a greater supply of SDG bonds. The ‘SDG phenomenon’ which keeps coming back in the investors’ community, is much praised and much condemned by those in search of impact. Strong signs of encouragement are there to push issuers forward whilst great emphasis should be on doing a better job in linking the use of proceeds to the different goals.

This is another issue that raises problems around definitions and metrics. In fact, looking at the ‘E’ in ESG, one cannot help but ask: ‘A European taxonomy on green is good. But how long do we have to wait before the other elements of the ESG trilogy are being explained, categorised and acknowledged?’

Hopefully not too long; otherwise, all the hard work that is being done to back the sustainable development and growth of green bonds will not be enough to feed and support a larger and fairer sustainability framework.

This post appeared first on The Market Mogul.

 

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London, United Kingdom

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