With Green Bonds, Legitimacy Comes to Those Who Verify

This post is part of an EDF+Business ongoing series on sustainable finance, highlighting market mechanisms and strategies that drive environmental performance by engaging private capital. EDF is actively engaging leaders with the capital and expertise needed to catalyze sector-wide changes—from accelerating investment in energy efficiency and clean energy, to protecting tropical forests, restoring depleted fisheries and saving habitats of endangered species.


Namrita KapurGreen bonds have been hailed as a key vehicle for driving clean energy investments both before and after the signing of the Paris climate agreement. And the range of organizations utilizing them continues to diversify – Apple issued its own $1.5 billion bond last month to finance energy efficiency and renewable energy projects for its operations. But as the pool of bonds issued each year grows, investors are increasingly concerned that clear standards are needed.

Through 2013, the World Bank was the primary issuer of green bonds. The simplicity of the market made it easier to verify the environmental benefits. As the market has grown, so has the need for institutionalizing transparency to validate the promised benefits.

While roughly two-thirds of global green bonds issued in 2015 received either third-party verification or second-party opinion, only two U.S. municipal offerings received any external review, casting doubts on the U.S. market’s credibility. Investors like insurance firm Allianz are concerned that many of the funds earmarked for sustainable development projects are not achieving the desired impact, and are calling for strong standards to help provide the market with increased certainty.

Bankers and investors are driving progress on transparency

Two groups, in particular, have been working to answer investors’ concerns. The Green Bond Principles (GBP) provides a set of voluntary guidelines calling for increased transparency and assists investors in evaluating the environmental impact of their green bond investments. In 2015 the number of signatories to the GBP reached a milestone 100 signatures, ranging from investors like TIAA-CREF and Generation Investment Management to issuers like Unilever, to underwriters like Barclays, Goldman Sachs and Wells Fargo. Early issuers – global institutions and governments like the World Bank and the state of Massachusetts – now make up only a small subset of the signers. The vast majority of issuers are banks and wealth management companies, including Blackrock, JPMorgan Chase and Zurich.

The Climate Bonds Initiative (CBI), an investor-focused nonprofit, has also developed a green bond standardization and certification scheme. Since our interview last September with CEO Sean Kidney, CBI has released a new set of green bond standards, which fully integrate and build significantly on the Green Bond Principles. A key highlight of the new standards is a requirement that organizations report annually on how bond proceeds are being used. The updated standards also include eight sector-specific areas – wind, solar, low-carbon buildings, geothermal, forestry and agriculture, bioenergy, low-carbon transit and water – to tailor bonds to the relevant impacts.

Green Bonds

A recent example of the standards being applied is New York’s Metropolitan Transportation Authority’s (MTA) announcement last month that it would be issuing $500 million in green bonds aimed at achieving CBI certification. MTA services (e.g., bus, subway and commuter rail), which connect New York City’s five boroughs and significant portions of New York and Connecticut, help reduce the state’s greenhouse gas emissions by 15 million metric tons of carbon emissions. The MTA’s bond proceeds will go toward upgrading public transportation offerings in the state, and are the first bonds certified under CBI’s Low-Carbon Transport Standard.

Keeping the investment oxygen in the room

While more transparency and universal standards seem like positive steps, some investors and lenders are concerned this will stifle growth. Extensive reporting and third party verification on projects add costs to issuing green bonds compared to regular bonds.

The CBI is also playing a key role here—educating both corporations and investors to see verification as the pathway to growing confidence and scale in the market. They recently announced a partnership with the World Business Council on Sustainable Development (WBCSD) aimed at driving more corporate issuance of green bonds. Both organizations maintain that as the benefits of green bonds become better understood, “the corporate market will gain further scale […] and the lower financing costs [will] outweigh verification and reporting efforts.”

Risk versus reward

How the desires of investors are balanced with the costs to issuers will affect both the quality and expansion of offerings over the next year. If there are no reforms and no issuance of universal standards, the market for green bonds could lose credibility—an outcome we seek to avoid.

Apple and the MTA issued their first green bonds last month because they believe it could attract new investors. However, new investors could also leave the green bond market  if they don’t see the environmental benefit of their investments fulfilled. If we can ensure transparency in this burgeoning sector, then the green bond market will be positioned to not only grow, but do so sustainably.


Follow Namrita on twitter: @namrita_kapur