December 1, 2023

The global sustainable finance market, including bonds, funds and voluntary carbon markets, is set to reach a value of $5.8tn in 2022, according to the World Investment Report 2023 of the United Nations Conference on Trade and Development (UNCTAD). Capital for investment in sustainable development and the Sustainable Development Goals (SDGs), according to the report, as well as a driver of change in business mindsets and investment strategies.

The SDGs underpin the 2030 Agenda for Sustainable Development, which was adopted by all UN member states in 2015. The goals focus on strategies that improve health and education, reduce inequality and boost economic growth, while tackling climate change and working to preserve the oceans. Forest.

UNCTAD says sustainable funds remain more attractive to investors than traditional funds, although the value of this market fell from a high of $2.7tn in 2021 to $2.5tn in 2022. Despite this contraction, net inflows were positive compared to net outflows in the traditional fund market. “This shows that investors view sustainable finance as a long-term strategy and are convinced by the business case for sustainable sectors such as renewable energy,” the report said.

While perpetual bond issuance declined during this period, its cumulative value increased, reaching $3.3 trillion in 2022. Green bond issuance remained relatively resilient, falling 3% in 2022.

Rosal Veltmeijer, portfolio manager of the Triodos Sterling Bond Impact Fund, says green bonds remain the largest and most mature sector of the sustainable capital market. “While social bonds were particularly in favor post-COVID-19 in the EU, their popularity appears to be declining,” she says.

concerns about greenwashing

While sustainability-linked bonds (SLBs) were on the rise, Ms. Veltmeijer says they have faced some headwinds in the form of criticism from market participants who are concerned about the risk of greenwashing. “The market for these bonds has shrunk significantly,” she says.

Triodos Investment Management applies “very strict criteria when investing” and one reason for not investing in SLBs is that “it is very difficult to determine the materiality of key performance indicators”, she explains.

She adds that the Dutch Ethical Bank closely scrutinizes companies issuing SLBs. “Since these bonds remain on their balance sheets, we do not want to expose ourselves to fossil fuel companies through their bonds, directly or indirectly. For example, some SLBs are issued by companies that are heavy carbon dioxide emitters, and these sectors are not selected by us,” she explains. “Currently, the step up on SLBs is so low that it does not act as an incentive for the issuer company to meet sustainability targets. “Triodos doesn’t think sustainability should be a compromise.”

To address greenwashing concerns in SLBs, the International Capital Markets Association (ICMA) released an updated version of its SLB Questions and Answers Guide in September 2023, which complements its SLB Principles. The SLB Principles fall under the umbrella of ICMA’s Sustainable Finance Principles, which also cover green bonds, social bonds and sustainable bonds. The Principles are a voluntary framework that recommends structuring features, disclosures and reporting.

In a paper on market integrity and greenwashing risks in sustainable capital markets overall, ICMA identified basic areas of concern in relation to greenwashing in sustainable finance. ICMA says greenwashing is not prevalent in the green bond market, but “ambition and materiality may be insufficient in the early development of the new SLB market”.

The association identified four areas of concern for sustainable bonds:

  1. lack ambition;
  2. strategic inconsistency;
  3. mismanagement of broader sustainability risks; And
  4. Actual fraud.

ICMA emphasizes that its principles are mitigating areas of concern, and that existing or pending sustainable finance rules in many jurisdictions are “highly relevant”, including taxonomies that set and benchmark ambitions, new corporate sustainability reporting rules. that provide transparency on strategic sustainability, and ‘do no significant harm’ practices that will potentially address broader sustainability risks. “However, we underline the importance of ensuring the applicability and international operation of these rules,” the association says.

regulatory standards

Accordingly, ICMA urges policy-makers and regulators to focus on actionable areas of concern in sustainable finance; Helping to improve the availability of data on market integrity in relation to these sectors; Refer to existing law where enforcement is required; implementing current regulatory initiatives focusing on international interoperability and applicability; and continue to benefit from the positive contributions of market best practice.

The organization notes international moves on sustainable finance standards that are based on its principles, including the Association of Southeast Asian Nations Capital Markets Forum’s Green Bond Standards, Brazil’s Guidelines for Green Bond Issuance, Japan’s Social Bond Guidelines and the Issuance of Green Bonds. Kenya’s policy guidance notes on. of green bonds.

Elsewhere, the European Council adopted the European Green Bond Regulation in October, which it described as “an integral part of the European Green Deal”. This regulation establishes a voluntary standard for green bonds in Europe. Such bonds will be available to companies and public entities that wish to raise funds from the capital markets to finance their green investments while meeting tough sustainability requirements. Issuers must ensure that at least 85% of the funds raised by the bonds are allocated to economic activities that are in line with the EU taxonomy regulation. The European Commission says the regulation enables investors to easily assess, compare and trust that their investments are sustainable.

In China, ICMA advised the National Association of Financial Market Institutional Investors and the China Green Bond Standards Committee in drafting the China Green Bond Principles (GBPs), to be issued in July 2022. Based on ICMA’s GBPs, there are China GBPs unified issuance specifications. China’s green bond market and are approved by the People’s Bank of China and the China Securities Regulatory Commission.

“The principles cover multiple green bond types, such as green financial bonds, green debt financing instruments and green corporate bonds,” explains a spokesperson for China Construction Bank (CCB). ,[They] Promote the standardization process of green finance, and improve the unified green bond standard system domestically and internationally.

CCB issued China’s first green and sustainable development bonds, environmental, social and governance (ESG) themed bonds, green credit asset securitizations and carbon-neutral green bonds domestically and internationally. “The Bank also underwrote the first batch of carbon-neutral bonds, SLBs, Blue Bonds and Transition Bonds in the market, which enriched the financing instruments for the low-carbon transition and to support the development of green industries,” the spokesperson said Is.”

new initiative

At a recent meeting in New Delhi organized by the India Initiative on Climate Risk and Sustainable Finance and the Climate Bonds Initiative, delegates heard that India’s financial sector and companies are grappling with uncertainty in the absence of clear taxonomy and definitions for sustainable activities . The conference called for regulatory clarity to enable market participants to distinguish between different types of sustainable and transitional initiatives.

The official Monetary and Financial Institutions Forum – a central banking, economic policy and public investment think tank – reported that the Reserve Bank of India and the Securities and Exchange Board of India are working towards a comprehensive regulatory framework that spans both the financial and corporate sectors. Has happened. Focusing on transparency, risk management and sustainability.

Without “hard and fast standards,” a small portion of bond issuers could play “fast and loose” with ESG bonds, says Damien Glendinning, chairman of the advisory board of consultancy CompleteXCountries and former treasurer of Chinese multinational technology company Lenovo. Is.

He further added, “There is a huge emphasis being placed on ESG-related bond issuances and this is commendable.” “Steps are now being taken to tighten standards, but this may bring new challenges – often, the underlying science is not yet fully established and agreed.

“Neither banks nor corporates want to be involved in greenwashing scams. Currently, the benefit of issuing ESG bonds, if things go wrong, is moderate at best, compared to the downside – for example, when new standards declassify green bonds that were considered compliant.

right direction

Despite the challenges, green and social bonds are “very strong tools,” says Triodos’s Ms. Veltmeijer. “We prefer to invest in companies that are transparent and publish allocation and impact reports. “Looking at green bonds, we want to ensure that companies also have good aspirations regarding the environment, and vice versa.”

She explains that sustainable capital markets are moving in the right direction as companies are becoming more transparent on green and social bonds and incorporating green and social policies into their broader company strategy.

“At Triodos, we don’t want to see green and social bonds treated as a ‘side pocket,’” says Ms. Veltmeijer. “I would like to see an expansion in the types of companies issuing green bonds – currently this market is dominated by utilities, finance and real estate companies. But it would be great to see this in the future [a wider array of companies issuing] For example, green bonds aim to improve biodiversity, water and waste management.”


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