Green finance pushes the boundaries as controversial issuers eye SRI bonds
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Green finance pushes the boundaries as controversial issuers eye SRI bonds

Greenfinance

The green bond market is well on its way towards $100bn of issuance this year but for the market to maximise its potential, it will need fully developed and widely accepted industry standards, says experts including the World Wildlife Fund. Meanwhile, sovereign issuers are on their way

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Sean Kidney, Climate Bonds Initiative

The green bond market is going from strength to strength, with volumes on target to more than double in 2016 to $100bn — but at the cost of bringing some firms involved in clearly polluting industries to the market. NGOs such as the World Wildlife Fund have called for stricter standards to help the market fulfil its potential.

Earlier this year, Mexico City Airport issued a green bond, successfully convincing investors that the goal of a “carbon neutral” airport, using solar energy and energy efficient buildings, could overcome the inherent environmental costs of the aviation industry. The issue achieved the top environmental rating of “GB1” from Moody’s.

But Pemex, the Mexican state oil company, had to pull a planned issue which would have financed work to upgrade its pipelines and cut leaks, among other projects. At least six airlines have also considered green deals to finance upgrades to more efficient aircraft, according to Sean Kidney, chief executive of the Climate Bond Initiative, speaking at a World Bank Civil Society session on Tuesday.

Other oil companies may yet decide to brave the market — Kidney declared he would be “thrilled” if Total, the French oil company, were to issue a deal to fund its transition to renewable energy, even if the credit quality of the bond was based on Total’s oil reserves.

Controversial issuers which have been pitched green financings include the major tobacco firms, which have a clear route to reducing their environmental impact through agricultural practices — but little chance of ever having their bonds bought by ethically-driven investors.

COMMON STANDARDS

Meanwhile, the World Wildlife Fund, one of the earliest green bond investors, has called for a common standard for the market, and a focus on actual, verifiable environmental improvements, rather than promised future improvements.

“Green bonds are crucial for the future of a sustainable economy, but not everything labelled ‘green’ fulfils its promise,” said Jochen Krimphoff, sustainable finance specialist for WWF. “There must be robust standards to ensure that people get what they expect. Vigorous, credible, fully developed and widely accepted industry standards for green bonds are urgently needed to sure that the market thrives and the sustainable economy grows.”

Green bonds are typically ordinary bonds backed by promises from the issuer to deploy the proceeds of the issue on green projects. An external agency usually verifies that the promises are credible, and an issuer can deliver enough information about the use of proceeds to satisfy investors. But an issuer cannot be forced into default by a failure to fulfil its green promises, and cannot be sued by investors on these grounds.

According to green bond specialists, only the UK’s Green Investment Bank has issued debt with hard covenants on green use of proceeds, which can be used by investors in the courts to force green commitment.

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