Green bonds are on the right pathway to standardisation
What is the Climate Bonds Initiative? The CBI is an investor focused, not-for-profit organisation dedicated to promoting investments for a low-carbon and climate-resilient economy. As part of its remit, the CBI issues certification and accreditations to green bonds. To be approved, bonds must comply with the Climate Bonds Standard, a framework fully aligned with the Green Bonds Principles, although it goes a bit further. It specifies a detailed taxonomy of eligible projects and assets, plus rigorous pre- and post-issuance requirements.
A common challenge for ESG (Environmental, Social and Governance) investors is wrapping their heads around the lack of standardisation. While frameworks do exist, reaching consensus on what makes a company “good” or “bad” is easier said than done. This often boils down to personal values, priorities and preferences.
But in the world of green bonds, definitions of what makes a bond truly ‘green’ are much easier to come by. The green bond market is arguably the most standardised area of ESG investing, especially compared to ratings-based ESG funds, or thematic funds with heterogeneous criteria.
Green bonds are issued with reference to an issuance framework, generally the Green Bond Principles (GBPs) of the International Capital Market Association (ICMA). Some may use other frameworks, but these are generally issued by supranationals or sovereigns following guidelines close to those of the GBPs anyway. Most of these self-labelled green bonds then receive second-party opinions by qualified agencies and auditors. The Climate Bonds Initiative (CBI), an investor-focused not-for-profit organisation dedicated to the mobilisation of fixed income markets for climate change solutions, can also certify green bonds.
While the ICMA largely comprises issuers, banks, securities dealers and brokers with a largely issuer-focused perspective, the CBI offers more to investors. Not only is it fully aligned with the GBPs, it also goes a step further by assessing issuers based on their use of proceeds, reporting standards and adherence to a strict taxonomy. In fact, the CEO of the CBI is one of the members of the European Commission’s Technical Expert Group (TEG) on sustainable finance. The CBI’s taxonomy is thus taken very seriously.