A Comment on “Defining Climate-Aligned Investment: An Analysis of Standards Development for the Green Bond Market”
Xuanyi Sheng, PhD, University of Oxford
Investment and Assessment Management Consultant, World Bank
Environmental and climate change have attracted increasing attention globally. The sustainable development of economy, society, and environment has become a consensus of the financial and nonfinancial institutions. In this context, the demand for sustainable financial products is strong, boosting the fast development of the green bond market. The main attribute of green bonds is that the green and climate-aligned projects they support can produce positive ecological, environmental, and climate benefits besides positive economic externalities and social values. However, there is still an urgent need to clarify the core notion of greenness. The definition and taxonomy of projects; the use and management of raised funds and proceeds; evaluation and certification; and information disclosure are the four key pillars that constitute the standard framework of green and climate bonds.
At the global scale, the disunity derived from different standards of the green and climate-aligned bonds represents a key bottleneck to the development of sustainable finance. The green and climate bond market currently lacks a top-level policy framework. The market is guided by multiple organizations with diverse political, economic, and technical backgrounds. The Climate Bond Initiative (CBI), European Commission (EC), and the International Capital Market Association (ICMA) play leading roles in the market standardization. In addition, rating agencies and stock exchanges also provide various definitions and standards regarding the development of green and climate-aligned bonds. Various inconsistent voices in the market lead to more barriers to implementing the green investment plan. Therefore, it is necessary to reach common ground in order to boost high-quality market development further.
A scientific, clear, and unified definition and classification of green-bond-supportable projects is an essential prerequisite to the prevention of greenwashing and to ensure sustainable development of the green bond market. Climate bond and green bond are the common expressions across green bond standards. Although they seem to be similar, differences still remain in specific connotations. For example, the scope of relevant projects defined by the Green Bond Principles is able to cover the majority of activities of issuers and investors related to environmental protection, pollution reduction, and climate change adaptation. In contrast, CBI’s climate bond classification focuses more on climate change issues, covering a relatively narrower range of environmental activities, and with stricter technical requirements. However, fully understanding the different standards can be challenging to achieve for all the participants in the market. This difficulty may even lead to opportunistic issues such as greenwashing.
Sustainable finance now presents a trend of standardization beyond the borders of countries and continents. For example, from the EU Action Plan to the EU Taxonomy, the evolvement shows that the development of sustainable finance becomes more systematic, more institutionalized, and more mainstream. Similar advances are also observed in both developed and developing economies: for example, the United Kingdom issued the British Green Finance Strategy, Japan issued green bond guidelines, Indonesia issued the Sustainable Finance Initiative, the ASEAN Capital Markets Forum launched the ASEAN Green Bond Standard, India issued green bond listing disclosure requirements, and China worked on the development of a unified green bond standard on the basis of its original green bond guidelines.
The Climate Bonds Standard CBS V3.0 can be regarded as a step forward to confirm this trend. It is compatible with the recent EU Taxonomy; the standards of ASEAN, Japan, and India; and the Green Bond Principles of the ICMA. The overall structure of the CBS V3.0 adopts the four pillars structure that is consistent with the ICMA’s Green Bond Principles, namely the use of raised funds, project evaluation and screening, fundraising and management, and information disclosure.
Globally, the pace of achieving common ground is accelerating and requires effective coordination among different organizations and institutions. During the process of discussion, decision making, and public consultation, it is important to encourage the technical group experts to collect and consider external opinions from various channels that reflect different perspectives and levels and thus enhance the credibility of the standards. The latest TEG report on the EU Taxonomy has taken an essential step toward addressing climate change and achieving common ground on sustainable development. The Taxonomy not only takes the shape of a glossary that defines Paris Agreement-aligned performance criteria over a set of economic activities but also absorbs the latest scientific and industry experience, since it has been developed after consultation with over 200 industry specialists and scientists. This mechanism enables the Taxonomy to respond dynamically to new developments in technology, science, and industry practice.
Challenges and opportunities continue to co-exist in the journey to reach common ground among sustainable finance standards. Different organizations have different strengths in convening capacity, authority, policymaking and implementation capacities, scientific research, market-making, and monitoring. The challenges arise out of coordination complexities between different organizations when attempting to help investors, issuers, project promoters, and policymakers understand whether an economic activity is within the scope of greenness, to guide and regulate fundraising and investment activities, or generally to navigate the transition to a low-carbon economy. Opportunities for the promoters of standards, investors, and issuers, as well as policymakers, also arise from the increases of standard scalability, efficiency in investment opportunity identification, and appraisal or reduction of transaction, regulation, and monitoring costs.
Xuanyi Sheng is currently a World Bank Consultant specializing in infrastructure (such as energy and transport) and sustainable investment with a strong focus on sustainability and environmental, social, and governance (ESG) policies. This work includes performing research on financial sustainability of the transport sector in the Sub-Saharan African region in order to provide tailored tool kits assisting the investment decisions of international financial institutions and institutional investors. She holds a PhD in Development Economics and International Development from the University of Oxford, a Master of Engineering from Tsinghua University, and a master’s degree in International Environmental Management from MINES ParisTech University.