Blog Post

Green bonds: who is to certify ‘sustainability’?

Poland’s issue of a green bond earlier this month was the country’s second financing of this type, and the first ever repeat issue by a sovereign. It has revived the debate as to whether there should be a single regulatory standard to certify the environmental quality of financial assets. This will be a key issue for the EU’s sustainable finance strategy which is due to be released shortly.

By: Date: February 19, 2018 Topic: Finance & Financial Regulation

Global climate targets, and in particular the Paris Agreement of 2015, have fuelled investor demand for ‘sustainable’ financial assets. This is now reinforced by the scrutiny that supervisors apply to the carbon exposures of the financial industry, and the attempt to mitigate the financial stability risks of a transition to a low-carbon economy.

As a conventional bond, a green bond is debt contracted for projects with an extended life-time, though such projects must have certain environmental qualities. By holding such assets institutional investors demonstrate their adherence to their own sustainability targets, and reduced exposure to climate-related financial risks. There are now 17 dedicated green bond funds in Europe, and the investor base increasingly comprises foundations and the treasuries or pension funds of large companies. Issuers of green bonds gain visibility with their own sustainability strategies and will access a wider investor base. This could be an important benefit when liquidity in corporate bond markets recedes, and market access becomes more uncertain.

The green bond market is, as yet, a fraction of the international debt market. Total international issuance of both public and private green bonds of $120 billion in 2017 pales in comparison to overall global bond issuance of around $21 trillion.

But growth has been very rapid in the last three years, which may explain the policy attention that the market now attracts. As the range of issuers and sustainability objectives widens, the challenge is to safeguard the reputational benefit of a green bond issue.

Disclosure must be adequate to prevent superficial labelling (‘greenwash’) and ongoing evaluation should discipline the flouting of announced sustainability targets in the use of proceeds (a ‘green default’). Unlike a project-specific bond, a municipal or sovereign issue will suffer from the inherent fungibility of proceeds within a large and complex public budget. France’s recently announced pipeline of long-term green projects likely sets a standard in this regard.

Clearly, for the green bond market to grow further, a credible common standard is needed. This should allow the investor to verify the environmental quality of the underlying assets, and account to its own beneficiaries. A common standard reduces due diligence costs compared to a process of self-certification and decentralised assessments by individual asset managers, however good the level of disclosure by the issuer. The question for the EU capital market is who should set this standard.

So far, certification has been led by the industry. The Green Bond Principles of 2014 make broad recommendations for the use of proceeds, project evaluation and reporting. The Climate Bond Initiative is more demanding, as it certifies compliance with criteria in many of the 46 sectors that it tracks. Rating agency Moody’s has designed an evaluation standard that also offers an ongoing assessment throughout the lifetime of the bond. Several EU financial centres, including the Luxembourg stock exchange, have adopted issuance standards that are based on these industry norms.

It is clear that a single EU standard could foster transparency, scale and liquidity in the market for sustainable financial assets

The opposing case for a regulatory harmonisation has now been made by the EU Expert Group on sustainable finance which released its final report last month.

In its view, a single EU standard should bring greater clarity over the underlying assets and their compatibility with sustainability goals set by the EU. At first harmonisation would be limited to stricter documentation standards and the accreditation of private-sector companies that evaluate green investment objectives. But ultimately the EU green bond label would be based on a European sustainability taxonomy. It is likely this would narrow down the objectives currently supported by private-sector labels.

The expert group also developed its proposals for so-called supporting factors in the prudential treatment of sustainable financial assets. While it is problematic to mix objectives in environmental sustainability with those in financial stability, this proposal would no doubt depend on there being a single EU-wide norm for green assets.

It is clear that a single EU standard could foster transparency, scale and liquidity in the market for sustainable financial assets. A single asset class could more easily be defined, and issuance premia and performance relative to other financial benchmarks could be tracked. Financial innovation, including structured products or securitisation, could attract additional capital.

That said, private standards have kick-started the market and have remained responsive to the issuers’ underlying portfolios, and technological change in the industry. ‘Greenness’ of projects is of course a fluid concept in a highly innovative industry. External evaluations of issuer information draw on deep industry expertise in environmental accounting (e.g. specific mitigation claims). As the Commission now prepares its sustainable finance strategy it should be cautious in imposing a single taxonomy that may not do justice to the complexity and dynamism of the industry.

Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

Central banks in the age of populism

Two years of elections have shown that we live in an age of increasing political and economic populism. What are the consequences of that for central banks? We explore opinions about it, from both 2017 and more recently.

By: Silvia Merler Topic: Finance & Financial Regulation Date: March 19, 2018
Read about event More on this topic

Upcoming Event


Could uncertainty derail the European recovery?

It is a contradictory time for Europe. The economy is recovering but the political climate is uncertain. There is excitement about common projects but also rifts and increasing nationalism and populism.

Speakers: Franco Bruni, Maria Demertzis, Zsolt Darvas and Marietje Schaake Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

Which sectors would be most vulnerable to EU-US trade war?

As the US administration imposes new tariffs on steel and aluminium and considers further protectionist measures, we look at bilateral trade flows between the US and the EU28 across different types of products.

By: Francesco Chiacchio Topic: Global Economics & Governance Date: March 15, 2018
Read article

Blog Post

Breaking the Stalemate on European Deposit Insurance

Many EU-level reports have highlighted a European Deposit Insurance Scheme (EDIS) as a necessary component of banking union, but none of these options has met sufficient consensus among euro-area countries. The authors of this blog propose to end the deadlock with an EDIS design that is institutionally integrated but financed in a way that is differentiated across countries.

By: Isabel Schnabel and Nicolas Véron Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: March 5, 2018
Read article More on this topic More by this author

Blog Post

Getting accustomed to Brexit - UK and the customs union scenario

The Labour Party’s support of customs union membership has the potential to change the course of Brexit, with 13 months left to close negotiations. This week we review the commentary around the possibility of a post-Brexit EU-UK Customs Union.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: March 5, 2018
Read article More on this topic More by this author



Euro-area governance: Where next?

Bruegel deputy director Maria Demertzis hosts this episode of 'The Sound of Economics', with Gideon Rachman, chief foreign affairs correspondent at the Financial Times, and Manfred Weber, chair of the EPP Group in the European Parliament, joining Bruegel director Guntram Wolff for a discussion of the future of euro-area governance.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: March 1, 2018
Read article More on this topic More by this author

Blog Post

Clouds are forming over Italy’s elections

While the prospect of a gridlock reassured investors about the short-term risk of an anti-establishment government, Italy still needs a profound economic shake-up and is in no position to afford months or years of dormant governments.

By: Alessio Terzi Topic: European Macroeconomics & Governance Date: February 28, 2018
Read article Download PDF More by this author

External Publication

European Parliament

Note on the interactions between payment systems and monetary policy

This paper analyses the interactions between, on one hand, monetary policy and financial stability responsibilities of the ECB and, on the other hand, Post-Trading-Financial Market Infrastructures. In the author's opinion, payment Systems are critical for monetary policy while Central Counter Parties (CCPs) are critical for financial stability. However, in stressed conditions CCPs can be the source of risks also for monetary policy.

By: Francesco Papadia Topic: European Parliament, Finance & Financial Regulation, Testimonies Date: February 26, 2018
Read article More on this topic

Blog Post

Why a good Brexit outcome matters (and it’s not just the economy, stupid!)

Uncertainty still reigns over the future shape of the EU-UK relationship, as Brexit negotiations rumble on. Though the two parties are parting ways, a more cooperative approach from both would greatly improve the longer-term economic and political prospects for all concerned

By: Maria Demertzis and Nicola Viegi Topic: European Macroeconomics & Governance Date: February 22, 2018
Read article Download PDF More on this topic

Policy Contribution

The Western Balkans on the road to the European Union

Given its geographical location, the region is important to the EU in terms of security, stability, trade and transit routes. The Western Balkan countries’ economic and political prospects and their future within a European framework should remain one of the top priorities for the EU.

By: Marek Dabrowski and Yana Myachenkova Topic: European Macroeconomics & Governance Date: February 22, 2018
Read article More on this topic More by this author


Portugal in a new context of capital flows

The euro area is now the world’s largest exporter of capital. Here we look at the post-crisis transition of one euro-area country – Portugal – from net recipient to net provider of capital, in the context of the European Commission’s plans for deeper capital markets.

By: Inês Goncalves Raposo Topic: Finance & Financial Regulation Date: February 20, 2018
Read article More on this topic More by this author

Blog Post

What is the financial balance of EU membership for central Europe?

EU membership led to major financial and economic advantages to central European Member States, partly by encouraging foreign investment. Widespread foreign ownership of capital brought many benefits but also resulted in large profits. Since central European governments are doing their utmost to attract even more foreign capital, foreign profit is set to increase further.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: February 6, 2018
Load more posts