What Next?
In 2016, the G20 Green Finance Synthesis Report highlighted that, ‘The lack of clarity as to what constitutes green finance activities and products (such as green loans and green bonds) can be an obstacle for investors, companies and banks seeking to identify opportunities for green investing’.
The global emergence of taxonomies that define sustainable economic activities has the potential to enhance clarity here. GSS bonds are key in this endeavour: by applying the taxonomies and clarifying which economic activities contribute substantially to sustainability, the GSS bonds will also drive the classification of other areas of the economy, helping the transmission of strategic knowledge that will ultimately benefit society at large.
Such processes, says EIB, can increase international comparability between markets and highlight different approach strategies, further facilitating cross-border capital flows through eliminating uncertainty in the sector.
There’s a lot of corporate jargon buried here, but the reality is simpler; the more green bonds the world delivers, and the more they sing from the same hymn sheet, the faster we can grow sustainable business.
In the future, says EIB, all economic activities should be mapped across climate, environmental and social objectives according to consistent sets of criteria; enforcing this new reality.
Compare and Contrast
Harnessing the potential of GSS bonds on a global scale will require an increase of international comparability to reduce uncertainty and facilitate cross-border capital flows. As the G20 report highlighted in 2016, this could be achieved via internationally comparable indicators and does not necessitate a one-size-fits-all approach.
In 2017 the EIB, together with the China Green Finance Committee, developed a methodological and practical blue print in a white paper on the need for a common language in green finance. The International Platform on Sustainable Finance is now continuing and extending this initiative in its working group on a “Common Ground Taxonomy”.
With the EU Taxonomy Regulation and the proposed EU Green Bond Standard, the European Union aims to establish a framework in which market forces can efficiently deploy capital at the service of sustainability.
The immediate challenge ahead however lies in making this ambitious legislative framework work in practice. In its Climate Bank Roadmap, the Bank commits to progressively aligning its sustainability lending and funding with the framework of the EU Taxonomy Regulation as this develops over time.
Wider Picture
EIB isn’t alone in its positive assessment of where green bonds stand today. The Climate Bond Initiative (CBI) notes China’s green bond market rebounded rigorously in 2021. The rapid expansion was underpinned by President Xi Jinping’s September 2020 commitment to the twin goals of carbon peaking before 2030
and carbon neutrality by 2060.
But equally, the CBI 2021 China Report shows that the current level of green and low-carbon investment cannot support China’s carbon neutrality goal and a much larger scale is needed. CBI expects the growth momentum seen in the 2021 green bond market to continue, with the support of further reform in green financial policy and surging demand from investors.
Further, The Governing Council of the European Central Bank (ECB) has decided to take steps to include climate change considerations in the Eurosystem’s monetary policy framework.
It recently decided to adjust corporate bond holdings in the Eurosystem’s monetary policy portfolios and its collateral framework, to introduce climate-related disclosure requirements and to enhance its risk management practices.
Via a mechanism called tilting, ECB aims to gradually decarbonise its corporate bond holdings, on a path aligned with the goals of the Paris Agreement.
To that end, it will ’tilt’ holdings towards issuers with better climate performance through the reinvestment of the sizeable redemptions expected over the coming years. Better climate performance will be measured with reference to lower greenhouse gas emissions, more ambitious carbon reduction targets and better climate-related disclosures.
“With these decisions we are turning our commitment to fighting climate change into real action”, says ECB President Christine Lagarde. “Within our mandate, we are taking further concrete steps to incorporate climate change into our monetary policy operations. And, as part of our evolving climate agenda, there will be more steps to align our activities with the goals of the Paris Agreement.”
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Bonds for Good
Almost daily, news seems to land on the issuance of new green bonds and finance, plus the burgeoning importance of the sector to both investors and climate-pro business.
More money is always needed and Net Zero is anything but cheap. Nonetheless, the world’s financiers are upping their game, amid a new realisation the low carbon economy and financial stability must walk hand in hand.