Green bonds can play an important role in engaging institutional market participants in the transition to a low-carbon and climate-resilient economy.
They can help to meet the United Nations Framework Convention on Climate Change goal of limiting global warming to 2°C above pre-industrial temperatures, along with the climate mitigation, adaptation, and finance commitments as set out in The Paris Agreement (2016)—and hence scaling up green bond issuances for sustainable development has become a key aim for issuers and investors alike.
However, the speed and momentum at which the green bond market can develop in 2017 and beyond depends on multiple variables, including policy and regulatory factors, market conditions, and financing trends. It faces a range of specific challenges and barriers, such as underdeveloped domestic bond markets, issuers’ views on costs versus benefits, a mismatch between projects, bonds, and institutional investors, and a lack of commonly accepted green standards and definitions.
Over the past two years, multiple taxonomies for labelled Green Bonds – in line with ICMA’s Green Bond Principles – have been developed to provide market participants with confidence in the issuer’s claims regarding the environmental (or sometimes social) credentials of the bond.
So increasingly, market participants are calling for more alignment and single metrics for green bond assessments to speed up market growth. Over the course of 2017, we can expect to see further standardization and alignment of green bond assessment frameworks.
These developments should provide more clarity on green finance definitions, facilitate cross-border investment in green and social bonds, and improve the measurement of green finance activities and their impacts.
However, despite the emphasis that investors have put on sustainable investment and green finance issues, the green bond market itself remains relatively small, particularly when considering benchmark size deals for government and agency bonds.
So from theory into practice: how can the green bond market live up to investor expectations?
Green bond indices can help, by aligning sustainable investment and green finance goals with long-term risk/return objectives.
Hence, in 2014, S&P Dow Jones Indices launched one of the first green bond indices, the S&P Green Bond Index, which was followed by the launch of the S&P Green Bond Select Index in February 2017. This index is a sub-index of the S&P Green Bond Index that includes additional eligibility criteria and will form the basis for one of the world’s first Green Bond ETFs.
These S&P Green Bond Indices comprise a universe of global bonds that are labelled “green” by their issuers, independently assessed by the Climate Bonds Initiative (via CBI flags), and with an additional filter applied.
We are also evaluating the opportunity set for a green impact bond index, utilizing S&P Global Ratings’ new Green Bond Evaluation Tool.
For more information, read our paper Aligning Impact and Income: The Next Generation of Green Bond Indices and watch our latest video “Green Bonds: Income with Impact”.