One of the reasons for this lack of common definition is that the market is young and growing quickly. It appears to be a case of waiting for regulators to catch up to bring greater certainty to the market.
This much needed compulsory universal taxonomy could be on the way. Invesco Perpetual’s head of ESG, Cathrine De Coninck- Lopez, says a European standard, leveraging existing frameworks such as the Green Bond Principles and the Climate Bonds Initiative, as proposed by the European Commission, may provide clearer guidance to corporates for future issuance.
But this would not be a global standard so will not include major markets such as the US and China, which raised $42.4bn (£30.8bn) and $37.1bn (£27bn) in 2017, respectively.
For Freedman, setting universal standards and disclosure rules is a must for the market to thrive. “The more the market grows
the more it needs to be robust to continue to grow,” he says.
Leslie Swynghedauw, senior associate, ESG research at MSCI, is part of a team that is trying to explain what green bonds are to potential investors. “Clarity is helping the issuer to feel comfortable in issuing green bonds and knowing what standards a lot of investors are going to look at.”
Swynghedauw adds that the team’s understanding of what could be considered to be a green bond is based on expertise that has been developed over decades. MSCI also consults with various market participants, such as asset managers, to understand what they consider to be green. “We have tried to reflect the market consensus on what can be considered green, which is an important aspect of our index,” she says.
“We have tried to remain flexible and we want to make sure that we update our index based on innovation in the market,” she adds. This approach led it to change its index rules in 2016 following an industry-wide consultation.
The green bond market has evolved. Not too long ago, such debt would have had a specific project focus, giving the investor single asset risk. Today, these bonds are no longer secured against one wind farm or a project that reduces greenhouse gases.
So an investor buying paper issued by a company today could carry exposure to several green schemes. French energy giant EDF is an example of a company that has raised €1bn (£880m) from the green bond market that is earmarked for a collection of projects.