By Cesare Milani and Alice Gunn

With US$100 billion of issuances anticipated by year end, the green bonds market is increasingly attracting the attention of corporations, supranational entities, multilateral banks, cities and municipalities seeking to raise capital for projects or investments with a positive environmental impact.

There was a threefold increase in green bond issuances in 2014 (compared to 2013) and, in 2015, the first high yield green bond offering in France by independent recycling company, Paprec Group, was further evidence of not only a growing market, but a maturing one.

For the market to continue to grow, however, there may be merit in clarifying the definition of green bonds.

The Challenges of Defining Green Bonds

In 2014, the International Capital Markets Association (ICMA) established voluntary guidelines, known as the “Green Bond Principles.” These defined green bonds as bonds where the proceeds are exclusively used to finance or refinance green projects, and which follow the four principles regarding: use of proceeds; process for project evaluation and selection; management of proceeds; and reporting.

Even with these established guidelines, certain challenges still exist in defining green bonds:

  • Verification – The spectrum of views on what makes a bond “green” has fuelled concerns over “branding” and “greenwashing.” Such divergence is evidenced by differing inclusion rules on the variety of green bond indexes. For example, the Barclays MSCI Green Bond Index adopts a conservative approach and excludes hydropower projects with generating capacity of more than 25MW and corporate energy efficiency projects.
  • External Assurance – Whilst designed to create a universal definition for green bonds, ICMA’s principles recommend that issuers use external assurance, such as second opinions and audits in order to track the use of funds.
  • Credibility – There is a distinction between green bonds which invest in “green” products (such as solar panels) and those which provide financing for products to be manufactured in a “green” way (such as energy efficient buildings). Both categories are acknowledged as vital in transitioning to a low-carbon economy, yet energy efficiency improvements are perceived by some as “business as usual,” rather than “green” projects. It is argued that labelling energy efficiency as “green” lowers the standard of credibility.
  • Environmental Value – Many green projects have both positive and negative impacts on the environment. For example, a solar project where the panels are manufactured in a way which damages the environment, or a hydropower project which adversely affects biodiversity.

Sustaining Momentum with Regulation

With a track record of significant market growth, significant investor opportunities and a growing appetite for environmentally beneficial investment, regulators need to strike a careful balance between implementing standards and fostering growth to protect investors and the green bond market’s credibility.

Environmental lawyers are well positioned to drive the development of green bonds by meeting the external assurance challenge presented by the ICMA’s Green Bond Principles.

  • For issuers, environmental lawyers can assist in selecting second opinion providers, submitting information for issuer credentials and the opinion, including following any due diligence guidelines, and managing any post-issuance obligations regarding the use of funds.
  • For investors, environmental lawyers are key in evaluating the second opinion, including carrying out independent verification given the qualitative nature of the opinion, as well as analysing impact reporting and ensuring that information regarding the proceeds of the issuance is adequately disclosed and obligations fulfilled.

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