Getting mainstream investors to enter the green bond market is critical to unlocking the potential of green bond financing, which is currently less than 1% of bonds issued globally, according to a recent report commissioned by WWF & KPMG.
Wim Bartels, partner at KPMG The Netherlands, said:
“Achieving the Sustainable Development Goals and the Paris Agreement on climate change requires an unprecedented mobilisation of finance, some US$ 900 trillion over the next 15 years according to the United Nations Environment Programme (UNEP) Inquiry. So mainstream investors need to step in to scale-up the green bond market. We believe common green bond standards are key to get those investors trust the market and create sufficient liquidity in the bonds market. Current initiatives such as the Climate Bond Initiative and the Green Bond Principles provide the fundament to build on”.
KPMG’s latest green bond report aligns with recent calls by the G20 and governor of the Bank of England and Chair of the Financial Stability Board (FSB), Mark Carney, to deliver common green bond frameworks, definitions and disclosure guidelines to build local and cross-border green bond markets. The report aims to contribute to this ongoing debate in the market on the necessity of green bond standards by defining nine elements that should be addressed and laying out the potential pathways towards those green bond standards with involvement of different market players.
The green bond market needs standards that are rule-based, but flexible in their application to reflect the broad diversity of the market, as well as meeting the different needs of investors
“The green bond market needs standards that are rule-based, but flexible in their application to reflect the broad diversity of the market, as well as meeting the different needs of investors”, says Wim Bartels. “Applying a sector-by-sector approach to determine what is “green” will be key. It appears to be nearly impossible to formulate a common definition of “green” for all green bonds and local markets. To reduce confusion and duplication, the green bond standards should build as much as possible on existing standards that already exist, for example BREEAM and LEED in the real estate sector”. In the report KPMG also argues that it is key that the standards are focused on achieving actual instead of promised environmental benefits, in line with WWF’s call earlier this year on the basis of the findings1. Consistent insight into these environmental benefits will allow investors to start differentiating the pricing of various types of green bonds.
“If we want to use this fast growing instrument effectively towards a low-carbon economy, we need to see that the investments actually deliver on their promise. Once mainstream investors have that insight, they can start differentiating pricing of green bonds based on the environmental performance”, Wim Bartels says.