The Growth of Green Bonds

Today, PwC through Damian Regan, UK Financial Services Sustainability Assurance leader - joins the Climate Bonds Standard Industry Working Group. The group’s role is to create a bridge between climate science and the bond market.

 

During 2014, the green bond market has taken off with over $35bn issued; triple the amount issued in 2013 ($11bn). Green bonds have been created to fund projects that have positive environmental and/or climate benefits, the key difference between conventional and green bonds is the specified use of proceeds.  Investors are increasingly focused on integrating environment, social and governance (ESG) factors into their investment processes - green bonds meet the environmental objective.  It provides investors with the benefits of funding green projects without taking any additional risk or cost and providing greater transparency into a bond’s use of proceeds.

 

Key questions arise around ‘what is green’ and ‘what is the impact of being green?’   Financing a wind-farm, a hydro-electric dam or a nuclear power station for example, may all help reduce the economy’s dependency on carbon but, investors may disagree whether all of these alternatives are actually ‘green’ depending on their own perspective on this matter.  They may also question the wider social and environmental impact of building a wind-farm in a rural location, flooding a valley to create a dam or investing in nuclear power.  It can also be seen as hypocritical for a ‘non-green’ company to seek finance for a limited ‘green’ project and promote it under the ‘green’ banner?  Can we ask whether an issuance of a green bond promoting financing of additional projects is actually deepening environmental benefits or simply re-financing an existing set of projects with an environmental theme?

 

A number of industry bodies are considering such questions and this is in order to help the development of green bonds as a credible mechanism to finance solutions for climate change issues, through increasing transparency and establishing reporting guidelines for issuers and their bonds.  A leading body, the Climate Bonds Standard Industry has set up a Working Group to ensure those Standards are both scientifically robust and practical for the bond market.  As PwC’s UK Financial Services Sustainability Assurance leader, I have been invited to join this working group and look forward to helping the development of clarity and transparency in the market.