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Guest Opinion: We Won't Solve for Green Finance Unless We Solve for Infrastructure

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Guest Opinion: We Won't Solve for Green Finance Unless We Solve for Infrastructure

(Editor's Note: The author of this Guest Opinion is Spencer Lake, chair of the International Capital Markets Association (ICMA) and former vice chairman, Global Banking and Markets, HSBC. Mr. Lake presented these remarks in a speech to the DZ Bank Sustainable Finance seminar, on March 31, 2017, at KfW in Frankfurt. The thoughts expressed in this Guest Opinion are those of the writer and do not necessarily reflect the views of S&P Global Ratings.)

The green bond market reached an estimated $42 billion of new issuance in 2015 and in excess of $80 billion in 2016. As anticipated, given the magnitude of China's environmental issues, its government has constructed a top-down push to solve the country's environmental issues. At the same time, it has created a financial policy and a set of tools to finance as much of the estimated cost to green its domestic economy.

As a result, and literally overnight, China has emerged as a thought leader in the green financing space. For example, Chinese entities issued zero green bonds in 2015, but they represented almost 45% of new issuance in 2016 and are now circa 15% of total green bonds outstanding.

While significant in terms of growth, let's put the overall market in perspective. According to OECD data, green bonds still account for less than 1% of total syndicated debt outstanding. Current estimates of spending requirements suggest that green issuance is almost infinite in terms of where it can go, but it is clearly slow in getting there.


  • Investors responsible for over $60 trillion of assets under management, most of which is fixed income, have signed up to the Principles for Responsible Investment, and are looking for suitable investments.
  • The capital markets can help by forcing the agenda on the available pipeline of products and standardization.
  • There's a need for more progress on bringing infrastructure and green finance together, by integrating green finance into everyday infrastructure financing.
  • Multilateral development banks (MDBs) can play a key role in advancing this integration through thought leadership and their practical activities.
  • We believe that all stakeholder groups have a role to play in scaling up this market. What we don't want, however, is just a larger "cottage industry."

Most green investment still remains financed through pure equity and bank credit. As we have seen in various economies at different stages in their evolution, the capital markets tend to be more efficient than bank markets. As such, the perceived potential to scale up issuance is tremendous.

On the other side of the ledger, we also know that over $60 trillion of assets under management has signed up to the Principles for Responsible Investment. The fixed-income part of this comprises circa 80%, and is a significant portion of the estimated $90 trillion in liquid and observable fixed-income money able to be put to work generally.

These funds are looking for a place to go that meets these Principles. We also know that increasingly fixed-income funds are indifferent as to whether they buy a bond or a loan. Hence they think across the capital structure, not just green bonds. This means that we should be holistic in our policy recommendations so that projects as well as corporates can be financed.

Why is it therefore that this supposed demand is not being put to work? Why so few green bonds? Part of it is the lack of a pipeline. Part of it is the lack of standardization. And part of it is the role that investors can play.

I take the view that investors have done less than they can to force the agenda on pipeline and standardization.

At the International Capital Markets Association (ICMA), we have no doubts about the potential of the global capital markets to finance our transition to a sustainable, environmentally friendly economy. We are working diligently to help in the development of standardization through our work in supporting and expanding the Green Bond Principles (GBP).

Launched in January 2014 (and updated in 2015 and 2016), the GBP provides guidance for issuers on the key components of a green bond and aids investors by encouraging the availability of information necessary to evaluate different green bonds. The principles also assist underwriters and issuers by moving the market toward a standardized process to promote the integrity of green bond transactions.

We have achieved broad acceptance with over 130 green bond issuers, underwriters, and investors becoming members and over 85 organizations becoming observers. This is now a real community that both represents the green bond market and supports its development. We are fully encouraging market authorities to align themselves with GBP so that we can have a common underpinning enabling a scaled and homogenous international market.

I would argue, however, for the abovementioned green finance imperative such that we can better link in all parts of the capital structure for investment, not just bonds. And notwithstanding my earlier comments about the success and focus of the Chinese, we must ensure that the global community sets the standards of quality, and does not just follow the potentially precedent-setting standards of one country.

How To Accelerate Market Homogenization And Internationalization?

China's presidency of the Group of Twenty was a major step forward in establishing green finance as a global theme in the finance track of the organization for the first time. And as I mentioned above, China has implemented official guidelines to assist in the growth of the green bond market. We are hoping that under Germany's G-20 presidency this focus remains.

The Green Finance Study Group has been extended for another year, which is a positive. What would be ideal is that with the change in G-20 leadership, Germany embraces the previous recommendations and encourages execution on many of them. We have seen in the past how such G-20 initiatives can quickly become white elephants.

While there have been significant market and regulatory developments in other key countries such as India and Brazil where guidance has been issued based on international practice and the GBP, more is needed--especially on the back of COP21 in 2015 in Paris where the global mandate was given.

While we don't need a "one size fits all" approach to standards, we do need enough international comparability to help investors to grow the market and limit what we see as a risk of fragmentation.

As an example, let's discuss the need for more progress on bringing the topics of infrastructure and green together, and how the thought leadership and practical roles of multilateral development banks (MDBs) can be strengthened.

Let's Align the Goals
There are at times parallel discussions about what is needed to solve for the shortage in financing infrastructure and the shortage in financing green. It has been recognized slowly that the overlap between green and infrastructure is north of 75%. Basically most infrastructure development going forward has to be green, and green finance needs are largely for infrastructure.

But on infrastructure, we in Europe for example have been discussing ways to attract private-sector money into infrastructure since the start of the financial crisis. Yet there has been very little in the way of practical solutions implemented from the top down to improve the situation.

So let's align these two goals. And let's get the major players behind both green and infrastructure to agree on the ingredients that are missing such that financing green infrastructure can morph more easily into the loan and bond markets as green loans and bonds.

MDBs, for example, which have the capacity to solve an important part of the debt needs of the green finance proposition, should find even more ways to collaborate on how their 'AAA' credit quality can be leveraged better. While there has been some progress over the past 12 months, relative to the size of the financing gap, it strikes me that more is needed. We need more boldness in creating green project bonds in every major economy.

It also makes sense for the major MDBs to better align, simplify, and globalize their risk mitigation and credit enhancement products so that we have a smaller set of scalable products and services that can be easily understood by investors no matter where they sit. We want money in Boston, New York, Hong Kong, and London to be able to compare and contrast across all markets.

There has also been some good work in various parts of the world that have shown what is needed to create a homogenized green infrastructure market. But little in the way of green or infrastructure has attained asset class status, and as such are structured as one interesting facet to the abovementioned $90 trillion of investible assets. Today infrastructure is treated as an alternative asset class that is bespoke and illiquid.

MDBs can play a major role in transforming this as well. We need to align the documentation, disclosure, arbitration, and overall asset class feel of green bonds and infrastructure loans such that investors can move more of their liquid fixed-income assets into both and properly build green capital stocks that are liquid and observable. If as a co-investment policy the MDBs enforced this and ensured global commonality, then it would help immeasurably.

MDBs that are playing a more meaningful coordinated role will increase the investable pipeline for private-sector buyers. And not only that. They are working harder to "crowd in" rather than "crowd out" such demand. We have been discussing this for several years but need to move faster. We will not solve for green finance unless we solve for infrastructure.

Investors also can play a more important role by synchronizing their expectations for standardized disclosure. Environmental, social, and governance investing has been an important, growing phenomena for several years, yet it is typically fund-specific. There should be a more coordinated "ask" via exchanges and investors for at least minimal disclosure requirements that force the borrower to create comparability across the various green asset classes.

The Need for More Progress on the Policy Front

The full engagement of authorities around the world is essential. We have all signed up to COP21, but what is less obvious is the speed with which all 195 countries are putting in place direct policy measures to influence the outcome.

China is already at the implementation stage and has set up a green bond market framework broadly compatible with international market practice.

Internationally, there are now two significant policy efforts. The first is the G-20 Green Finance Study Group that made seven key recommendations including support for "promoting voluntary principles for green finance," a direct recognition of GBP. The second is the High Level Expert Group (HLEG) of the European Commission on which ICMA sits as an observer.

It is out of the work of the HLEG for the European Commission that we can expect outputs that may directly impact the green bond and green finance market in Europe. We are making a number of practical recommendations to this group that include recognition of GBP as the basis for the further development of the European green bond market, a high-level taxonomy for green projects and use of proceeds, and possible incentives for green bond issuers and borrowers including potential regulatory developments.

But with Brexit much more of a front-burner issue, I encourage even faster progress on the broader topic of a capital markets union, and the previously thought to be "easy win pillars" such as infrastructure and green that the industry was so keen on pushing. In Europe if we do not top down do more to ensure that a truly high and consistent standard is maintained, we will ultimately follow China's lead and have debates over whether the Chinese definition of green is really the same as Europe's.

The good news is that the economics of renewable energy, a critical part of creating this new sustainable economy, are improving. In many parts of the world solar and hydropower are more economical than traditional fossil-fuel energies. This is attracting larger and larger amounts of private capital and allowing for market forces to succeed.

The Need for Even More Collaboration by All Major Market Participants

We believe that all stakeholder groups have a role to play in scaling up this market. What we don't want, however, is just a larger "cottage industry."

I have mentioned the great work that the voluntary GBP community has been doing in support of the market. We believe that much of this work, for example green project categories, reporting standards, and the use of external expertise is also relevant to the development of the green finance market. We also feel that the quality of the dialogue that we have developed with the regulators can serve the interests of the wider financial industry.

With this in mind, ICMA has joined forces with the Global Financial Markets Association and other trade association forces to establish a Global Green Finance Committee (the GGFC) as a coordinated industry effort to promote green finance, facilitate cross-fertilization between related markets and asset classes, and with the ambition to act as a representative counterparty to the official sector on green policy matters. The agenda of the GGFC will range from responding to official sector green initiatives (for example, the Financial Stablity Board's work on disclosure), proposing possible green finance incentives, and promoting market refinancing of green lending.

If we can get the private sector to increasingly act as one, and to work with the official sector in a more collaborative way, we have every chance of changing the disparities that exist and create a more balanced self-regulated market that will then be a force for good. If we don't, it is to be expected that regulators will step in and, in a nonvoluntary way, enforce discipline that may well slow down what is still a nascent exercise.