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Sustainable Financing And The Regulation Of Green Bonds: A Global Perspective(By-Harshit Anand & Vaibhavi Gangadhar)
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Sustainable Financing And The Regulation Of Green
Bonds: A Global Perspective
Authored By-Harshit Anand & Vaibhavi Gangadhar
Symbiosis Law School, Pune.
Abstract
“In the coming age of financial business, Green Bonds is making its way
as an indispensable and a sustainable Investment Instrument. It is no secret
that the world is witnessing a drastic rise in temperature. Multiple scientific
studies evidence this rapid pace of climate change. Therefore, it is pertinent
for both environmentalists as well as businesses around the world to gear up
and put forth solutions to curb the impending environmental dangers. As a
result of this, the Financial Sector has devised the instrument of Green Bonds.
Falling under the broader perspective of Green Finance, the instrument is
gaining popularity among environmentally responsible investors. The reason
behind the same is that it not only facilitates environment friendliness but also
signifies Socially Responsible Investing.
This paper aims to highlight this recent growth of the Green Bond
Markets in the world. It analyses the existing shortcomings of the Green
Bond Market, such as Greenwashing. It aims to mitigate this by creating more
Standardisation, and defining the meaning of ‘Green’ for common consensus. It
further proposes possible regulations to ensure uniform adherence
to Sustainability Goals within the Global Green Bond Market. Finally,
it reaffirms the potentiality of Green Bonds and its role in ensuring
sustainability in the domain of Business.
§ Keywords: Climate Change, Green Finance, Socially Responsible Investing,
Green Bond Markets, Business, Trade, International Capital Markets Association,
Sustainability Goals.
Introduction
Today’s
Globalised and Industrial World is highly reliant on Capitalistic ideologies of
production and economic growth. It has now become the norm by which countries
thrive in the Global Economy. An unfortunate reality of this is the Ecological
Degradation that takes place in direct proportion to the Economic leaps and
bounds made by a particular country. In this backdrop, the Reformist School of
Thought has gained prevalence. This ideology aims to tie mutual knots between
the Principles of Ecology and Capitalistic Economic tendencies.[1]
Green Bonds can
be considered as a mere practical implementation of the Reformist School of
Ecology, wherein Environmental and Capitalistic interests are equally balanced
out. It is a well-known fact that the Ecological Systems of the world are at
threat. Green Bonds are essentially financial instruments which aim to fund
Green Projects.[2] The
Investors of such projects, receive a certain share of profits accruing from
the said project. The term ‘Green Project’ refers to an Environmentally
Sustainable yet profitable business venture. In 2007, the World Bank was the
first ever financial institution to issue a Green Bond and facilitate Green
Investments.[3]
Cut to the year
2022, where Green Bonds have emerged as a solution to many leading as well as
growing economies, to balance out their Environmental concerns with Economic
growth. Some of these countries have even accommodated for the Regulations of
Green Bonds under their Domestic Law. This is because they view this as a
potential solution in achieving the Sustainable Development Goals (SDGs) set by
the United Nations (UN).
While this is
true, it is important to note that not all countries are progressing towards
the Goals at the same pace as the other. There is a humungous disparity between
the Well-Developed Capital Markets and Less Developed ones. Additionally, their
progression towards achieving the said Goals also signifies the extent to which
they make use of Green Bonds. Therefore, for the uniform realisation of the
SDGs, it is imperative that a new Standard of Green Bonds is created. This must
entail a universal definition of the term ‘Green,’ list of Taxonomies which can
be deemed common for all Green Bond issuing nations and finally, a Regulatory
Model that is capable of homogenising the Global Green Bond Market.
Literature
Review
In
the report titled “Green Bonds: Current Development and their Future,”[4]
the authors Olaf Weber and Vasundhara Saravade have reviewed all aspects of
Green Bonds under different Research Parts. Under their Research Part titled
‘Market Challenges,’ they have highlighted the need for harmonising the meaning
of ‘Green’ across the world by way of a universal and homogenic definition.
This according to the report, this will function as a solution to the
phenomenon of Greenwashing that is prevalent in the Green Bond Market.
Furthermore, in the ‘Policy Recommendations’ Research Part of their report,
they call for a universal Regulation in the Green Bond Market through an
Inter-Regulatory Strategy. However, the gap in this paper is with regards to
proposing a uniform method of Taxonomy in the Green Bond Regulation. The
authors in this paper aim to bridge this very gap.
In “Context
& Challenges of the 2021 EU Green Bond Standard,”[5]
author Tudor N. Pana critically analyses the Green Bond Standard launched by
the European Union as against the Principles laid down by the ICMA. The paper
sets the tone with the importance of Green Bonds in achieving Environmental
Goals set by the SDGs and Europe’s lead in the same. Furthermore, it regards
the EU’s Standard to be the saviour of the growing number of Issuers and
Investors in the unregulated Green Bond Market, provided it is implemented aptly.
By this it means that the EU’s proposed Standard will ensure better
Standardisation and Regulation of the Green Bond Market. However, the gap in
this paper is that it does not propose any methodology of including the Global
Green Bond Market within the EU Standards and Regulations. It is this research
gap that the authors of the said paper aim to mitigate.
In
“Understanding the Role of Green Bonds in Advancing Sustainability,”[6]
authors Aaron Maltais and Bjorn Nykvist have analysed the role of Green Bonds in
attaining sustainability by specifically focusing on the case study of Sweden.
They successfully identify Green Bonds to be the answer to the growing need of
Green Projects to create a sustainable world. The standard of sustainability
that their aims to meet are those set by the Paris Agreement as well as the
SDGs. However, it is important to understand that most of the conclusions are
made with respect to the Swedish case study. The authors in this paper, aim to
provide a wholistic understanding of the Global Green Bond Market by putting
forth solutions to bridge the inequality among all countries in working towards
the SDGs as proclaimed by the UN.
Research
Questions
§
Need for Redefinition: Whether a universal
Taxonomy will prevent Greenwashing in the Global Green Bond Market?
§
Standardisation and Regulation: Whether the
growth of Green Bonds is being impeded by the absence of a unified framework?
§
Greener Pastures: Whether SDGs can be attained
by promoting uniform Green Bond Investments?
Research
Objective
The main aim of
this research paper is to examine the effectiveness of the Green Bond
Principles (GBP). It further attempts to understand the implications of GBPs
specifically with reference to Greenwashing of the Green Bond proceeds. It also
analyses the need for Standardisation and uniform Regulation across the world.
Finally, the paper seeks to assess the potentiality of Green Bonds for all
countries to uniformly attain the SDGs.
Research
Methodology
The Authors have
made use of Doctrinal Method of Research, by analysing secondary sources of
information. These include various books, research articles, online journals as
well as information posted on official websites of various International
Organisations.
I.
Need For
Redefinition: Whether A Universal Taxonomy Will Prevent Greenwashing In The
Global Green Bond Market?
It is a
well-known fact that the Green Bond Market has picked up momentum at a Global
level towards the end of the 2010s decade. This is because Green Bonds not only
presents itself as a reliable investment tool but also presents itself as a
viable solution for Capital Formation in the Climate friendly projects. Green
Bonds also presents a bounty of opportunity for investors to step into the
domain of Adaptation related projects by engaging Private Sector Financing.[7]
In this
endeavour, a common practice by all investors is to ensure that the particular
Green Bond which claims to finance an Environmentally Sustainable project, is
truly doing so as per the GBPs. The GBPs, laid down by the ICMA, are merely
voluntary process guidelines, which aim at increasing the accuracy of Green
Bond Investment. In fact, the GBPs hold the important stature of being first
Internationally recognised standard of Green Bonds, which popularised the concept
of making Green and informed
Investments.[8]
These GBPs
ensure transparency in the Green Bond Investment and maintain the credibility
of the Green Bond Market.[9]
This is done by laying down a framework wherein the investors, banks and
placement agents are able to collate all the requisite information before
making an investment. This information includes the disclosure of the Issuer
and even the procedure of investing in the Green Bond.[10]
GBPs function on four core components, which include tracking as well as
managing the use of proceeds accrued from Green Bonds, evaluating and selecting
relevant Green projects and reporting the finality in the outcome of the Green
Investment.
§ Addressing The Issue Of
Greenwashing In Light Of The Gbps:
Investors have
now begun to understand the implications of their Portfolio design on the
Environment and Climate of the world. It is this realisation that has caused a
sudden boom in the Green Bond market. A large chunk of these Investors includes
many Private Corporate bodies whose Portfolios of investment benefit from Green
Investments. While, prima facie this may seem like a big and beneficial shift
in Investment patterns of the Corporate world, there are threats of
Greenwashing in the Green Bond Market space.
The term
Greenwashing refers to a practice wherein the proceeds accrued from a Green
Bond Investment gets allocated to a project or assets which have little or no
Environmental benefits.[11]
This means that while Green Bond Investments are adding a greener value to the
Capital Market Ecosystem, the practice of Greenwashing brings down this value
addition without even being accounted for. In the growing Corporate Green Bond
Investments, any Corporate set up may use Greenwashing as a means of making hypocritical
claims of being Environmentally aware, without actually contributing to it
actively.[12] This
means that many institutions may utilise Green Bonds as branding, to promote
their services, rather than genuinely investing.
The main
causative agent of Greenwashing in the Green Bond Market is the lack of
transparency.[13] As
aforementioned the ICMA has advanced its efforts to maintain transparency in
the Investment mechanism through the four core components. While this true, it
is unable to contain the surging growth of the Market. This mainly owed to the
lack of consensus in the meaning of ‘Green Projects’ leaving
behind
uncertainties and costs for all transactors.[14]
§ Defining what is ‘Green’ for the
world in the 21st Century:
As
aforementioned, the term ‘Green Projects’ may colloquially refer to
Environmentally Sustainable projects, but the question that the 21st
Century world has to address is what makes a project ‘Green.’ The purpose of
doing this is to address the growing number of Investors as well as Issuers
across the world in the Green Bond Market. The best example that can be cited
for this is when China included ‘clean coal’ within its Taxonomy of Green Bond
Investments, but the same was not appreciated by other countries as they did
not regard coal to be ‘Green.’[15]
Therefore, in the eyes of other countries, the Chinese institution that was
investing the proceeds accrued from Green Bonds into coal, would be committing
an act of Greenwashing.
In light of
this, it is important for to constitute a universal understanding of ‘Green
Projects’ by defining the term ‘Green.’ This universal definition will lay down
a framework for all economies, regardless of how developed they are, an idea of
what projects will fall under the ambit of Green Bonds. The European Union has
recognised this very gap in the system and has begun to formulate the European
Union Green Bond Standard (EUGBS), to function as a Gold Standard for Green
Bonds.[16]
An important differentiator it claims to provide is a list of ‘Green’ Economic
Projects that Green Bonds can facilitate called the ‘EU Taxonomy.’
The EUGBS has
identified the gaps left behind by the GBPs issued by the ICMA and aims to
create a Taxonomy which is suitable to its Ecological needs. This makes the
EUGBS a framework which is more aligned to the clauses agreed upon in the Paris
Agreement, 2015 than GBPs. Furthermore, the trend seen in most regional Green
Bond Standards such as the proposed by the EU is that they provide for an
external verification of the listed projects.
Although, this
can be considered as commendable step, the EUGBS framework does not cover the
remaining signatories of the Paris Agreement in its vision.[17] It is pertinent, therefore, to take the best
of both worlds. This means, to introduce a Green Bond Standard which holds the
extent of coverage such as GBPs and the clauses of compliance as much as the
EUGBS. Additionally, it must create a definition for the term ‘Green’ by
formulating a universal Taxonomy that is applicable to all nations. This will
make all Green Bond investments, a sustainable one and even reduce the extent
of Greenwashing in the Global Green Bond Market.
II.
Standardisation
And Regulation: Whether The Absence Of A Unified Framework Is Clogging The
Growth Of The International Green Bond Market?
Over the past
decade, the green bond market has seen exponential growth. Be it a developed
economy or a developing one, there has been an increasing amount of interest
from various economies. However, considering the future, there are barriers to
the market’s further evolution. As aforesaid, there are issues with regards to
green washing and transparency, which not only limit the confidence but also
demeans the trust of new stakeholders. So, in order to determine the future
direction of this market, the economies are required to have uniform
regulations and standardisation. This is elaborated as below by analysing the
case studies of both developing and developed economies around the world.
§ Role of Standards in Green Bonds:
The issue of
transparency has been one of the major barriers in the growth of green bond
markets. Many experts of the field have suggested to introduce standardization.[18]
So, before understanding standardization with respect to the green bonds, it is
needed to know what standardization actually means. In plain language, it is a
framework which is to be adhered by all members in an industry. In other words,
it is a set of guidelines, that ensures equivalent creation of a goods and
performance of a services in a particular industry.[19]
Accordingly, to achieve this, it is needed for all relevant parties to accept
and operate as per the guidelines. It is done to enforce a level of consistency
and uniformity within the selected industry.
If this
standardization is incorporated across green-bond market, it’d result in a
robust framework. It would not only monitor but also assure of the green bond
proceeds. As the same time, the buzz of non-transparency across the green bonds
would also loosen. A standard framework for green bonds would welcome investors
from across the world to invest in a reasonable instrument without doubting its
viability. This could be elaborated from the following example. Wherein an
Institutional Investor sitting in a developed nation can invest in renewable
projects across the developing nations in Africa and Asia without encountering
local, political and legal risks.
As of now, there
are a variety of players in the International Green Bond markets. These players
have different goals. While, one focuses more on environmental concerns, the
other might focus on financial
returns and
investment.[20]
Therefore, having an International Green Bond standard would create an
accountability in their functioning. A certain level of trust and transparency
would be created in the market. This would not only new investor but also
encourage new issuers to venture into the market. As a result of this, a
company working in the renewable sector that was earlier unsure of green bonds,
would now have an opportunity to initiate green bonds on a global standard.
There are four
primary-stakeholders in the market, i.e., institutional investors, regulators,
issuers and verifiers. Implementation of standardisation would entail their
support and participation. Therefore, a uniform focus is needed on all aspects
for making a stable green bond market. This brings us to the very next issue of
regulations, which is elaborated as below.
§ Green Bonds and Regulations:
Regulation
refers to the development of rules by public authorities, or supranational
organisations. It is done to influence market-activity and behaviour of private
economic actors.
Before delving
into the aspect directly, it is needed to shed some light on the context with
which this regulation is being considered in the research. There are many
contentions that financial regulators should not regulate the environment
related instruments. This paper deals with the very opposite contention. As
aforesaid, the issue of greenwashing is affecting the green bond market. This
is mainly due to the lack of unified regulatory compliance around the
economies.[21]
Financial regulators in China[22]
and the United Kingdom[23]
have started supervising environmental instruments. Still, it is being done on
different parameters and goals.
This thereby is
creating a disparity of regulations between developing and developed
nations. No doubt, the role of
regulators is different based on the country’s economy and political system.
The amount of regulation may vary depending on the market and on national
priorities. However, considering that environment and market growth is
something common for all countries, there is a need of a common elaborated
policy at International Level. This would enable harmonization in different
regulatory environments, be it stock exchanges banks and financial services
providers. At the same time, it would also foster future sustainable growth. An
example of this coordination is the Group of Twenty Task-Force on
Climate-Related Disclosures.[24]
This group is a high-level group of developing countries to coordinating
financial regulation in the field of green finance.[25]
However,
currently, only a few financial regulators around the world are actively
involved in green financial products.[26]
They supervise the financial aspect of green products, still the greenwashing
has been on the rise.[27]
This again evidences the need of a new framework regarding green financial
sector for both international and domestic regulators. Considering the
Sustainable Development Goals of 2030, there is an ardent need to develop a
regulatory strategy in green bond market. This has been elaborated in the
subsequent section.
III.
Greener
Pastures: Whether Sdgs Can Be Attained By Promoting Uniform Green Bond
Investments?
The SDGs were
adopted in the year 2015 as Global Goals to protect the planet by ensuring
sustainability in energy creation, production processes and consumption
patterns. It is also important to note that all 17 SDGs are interrelated. This
is because, when a positive and sustainable action is taken on one end, its
benefits are seen to the effect of many ends.[28]
As a result, one small step towards sustainability will yield large results for
the entire world community. It is also important to note that, a sustainable
environment is a very important precursor to socio-economic development as well
as poverty reduction.[29]
Keeping this in
mind, the 2030 Agenda for Sustainable Development was adopted, with the aim to
achieve the said goals by the year 2030. With the acceptance of the Global
Goals, the Financial Markets have seen a wave of Instruments that promote
sustainability and environment friendly investments. The reason that the
Finance Sector is considered to be an instrumental way of attaining the SDGs is
twofold. Firstly, this sector has the ability to mobilise Private Capital
towards the Internationally accepted goals of SDGs and Paris Agreement.[30]
Secondly, the Finance Sector can be relied on to ensure efficient Capital
allocation.[31]
§ Green Financing as a tool for
Sustainability:
Financing is
considered to be the heart and soul of any Green Project. In fact, according to
the United Nations Environment Programme (UNEP), Green Finance is a Financial
Instrument which specifically aims to increase the financials flows towards
sustainable projects.[32]
The confluence of Finance and Environment arises from the rationale that the
Financial Markets hold the decision-making power in terms of Capital
Allocation. Therefore, today’s investments are bound to shape the future’s
ecosystem,
production and
consumption patterns.[33]
In order to
achieve this, the UNEP recommends all member nations’ Governments to take the
first step by modifying Policies and creating Regulatory set ups. One of the
many instrumental ways of doing this is through Green Bonds. Green Bonds, today
have gained the stature of debt instruments or finance mechanisms which will
aid in funding sustainably driven projects, that do not receive funding in the
regular Bond market.[34]
In the past few years, we have seen the sudden Green Bond boom that many
developing countries experienced. As a result, they have put Regulations in
place, so as to recognise the instrument and encourage investors.
While this is
true, it is important to note that there exists a disparity in the Green Bond
Market with regards to the traction it is receiving. For instance, many
developed European countries have already taken the lead in Green Financing,
since their first investment in 2007.[35]
On the other hand, developing countries such as India realised the importance
of the same only around the late 2010s. The Reserve Bank of India took on
initiatives, encouraging Indian Public and Private Banks as well as Indian
Investors in engaging in the Green Finance Market.[36]
§ Green Bonds in Universal
Progression towards SDGs:
As of today,
Green Bond Issuance and Investments are targeting almost six SDGs. These not
only include all those goals which aim at a better environment but also the
ones which aim to reform the production, consumption and lifestyle of Global
Citizens. A large share of the Green Bond Market is dedicated to SDG7 which
pertains to providing Affordable and Clean Energy.[37]
SDG9, on the other hand, which provides for Sustainable Industry, Innovation
and Infrastructure, has the second largest Green Bond Market allocation.[38]
Apart from these, Green Bonds also aid in attaining the goals of Clean Water
and Sanitation; Sustainable Cities and Communities; Climate Action and Life of
Land.
An important
feature of the SDGs is that they are universally accepted goals, which must be
fulfilled by all nations in the world. All countries must come together, in
partnership with each other so as to attain the Global Goals. This is the true
nature of the SDGs. But the status quo, as of today, begs to differ. As pointed
out earlier, there already exists a disparity in terms of the number of
countries that have stepped their Regulations and recognition of Green Bonds
and Green Financing as a viable Debt Instrument. This is because regardless of
the increased entries into the Green Bond Market, when compared to the Regular
Bond Market, the number of Green Bond Issuers and Investors are miniscule.[39]
As a result, it
is important that every country realise the need of their contribution to Green
Finance and particular utilise the successful model of Green Bonds so as to
attain the SDGs in partnership with other nations. This will positively aid in
Reducing Inequality and fostering Partnerships amongst nations. But in order to
achieve this, it is pertinent for a Global framework to be established, that
structures its Standardisation, Regulation and Taxonomies in an inclusive
manner, such that it is applicable to all nations. This will not only encourage
more Global participation in the Green Bond Market, but also accelerate the
attainment of the SDGs.
Conclusion
Climate Change is a tragedy that would have
long term consequences. Its impacts can span across decades and almost all the
countries. And it is no secret that people struggle to understand this
long-term consequence. So, to prevent this damage, people are required to look
beyond temporary goals. At the same time, governments are required to providing
economic and financial nudges. All economies around the world are needed to
create uniform financial and policy incentives. Green bonds are one such
financial instrument that has potency to strike a balance between climate
change and financial evolution. It can be used to raise long-term debt capital
from various investors, without compromising with environmental issues.
However, as aforesaid, there are issues
which needs to be addressed for further growth of green Bonds. Greenwashing is
one such issue and its mitigation is of the utmost importance. In light of
this, there must be a Taxonomy entailing a list of green activities that can be
undertaken by all countries alike. This will also establish the true definition
of the term 'Green' in Green Projects. Apart from this, green bonds also
function as a tool to achieve climate change-related targets such as SDGs and
Paris Agreement. Therefore, it can be said that inclusivity of green bonds is
the only solution to ensure uniformity in the progress towards attaining the SDGs.
To achieve this, the market needs to be navigated to unified regulation and
international standardisation. This would not only encourage new investors to
venture into the market but would also maintain cultivate environment
sustainability.
Article Information
Sustainable Financing And The Regulation Of Green Bonds: A Global Perspective(By-Harshit Anand & Vaibhavi Gangadhar)
Author Name: Harshit Anand & Vaibhavi Gangadhar
Title: Sustainable Financing And The Regulation Of Green Bonds: A Global Perspective
Email Id: Harshit Anand-theharshitanand@gmail.com & Vaibhavi Gangadhar-vaibhukgdhar7@gmail.com
- Journal IJLRA
- ISSN 2582-6433
- Published 2022/07/05
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International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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