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Labels, standards needed in green bond market to prevent 'greenwashing'

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Labels, standards needed in green bond market to prevent 'greenwashing'

Green bonds need clearer standards in order to prevent firms making investments sound more environmentally friendly than they actually are, according to industry figures.

The issuance of green bonds — used to finance projects aimed at reducing carbon emissions and meeting other environmental goals — is booming, with S&P Global Ratings predicting that the market will grow to $200 billion in 2018, up from just $13 billion in 2013. But investors are taking a harder look at companies' commitment to the Paris agreement on climate goals, and there are currently no universal standards to help them verify what they are putting their money into.

"The lack of clarity on what is really green creates uncertainty in the market and might therefore mislead investors," said Mario Mantrisi, general manager at LuxFLAG, a Luxembourg-based organization that promotes the use of labels for responsible investment.

He said labeling is one way to mitigate so-called greenwashing — when organizations mislead the public about their green credentials.

Issuers use voluntary guidelines for green bonds, including the Green Bonds Principles from the International Capital Markets Association and the Climate Bond Standards from the Climate Bonds Initiative. Rating agencies such as Moody's and S&P Global Ratings also have their own way of assessing green bonds.

But there is no universal framework, and different geographies use different taxonomies — for example, the Chinese central bank has included upgrades to coal-fired power stations in its guidelines.

Differing shades of green

"There are currently different shades of green bonds in the market," Mantrisi said. "A green bond should only be called as such if positive environmental impacts are created ... and reported in a clear way."

While issuers cannot be prevented from issuing a green bond, they can be encouraged to look more closely at whether the bond's end-target is in line with the Paris agreement, said Sean Kidney, CEO of the non-profit Climate Bonds Initiative, which promotes green investment and maintains a list of green bonds that can be added to green bond indices.

He said his organization does not list bonds that are "partially green," but does have some where there is debate about whether the underlying asset is green. One example could be a property bond whose underlying property is not energy efficient enough, he said.

The difficulty of defining green was illustrated with Spanish oil and gas company Repsol SA's controversial €500 million five-year green bond issue in 2017. The Climate Bonds Initiative did not include the bond in its green bond listings because it felt the company had not made a strong enough argument about its CO2 savings, Kidney said.

Standards at European level

Kidney, who is a member of the EU's High-Level Expert Group on Sustainable Finance, said the implementation of a sustainable finance taxonomy at a European level would help issuers avoid such issues.

The European Commission will announce an action plan on sustainable finance in March, taking into account recent recommendations from a Jan. 31 report by the High-Level Expert Group, made up of representatives of stock exchanges, asset managers and academics. The paper called for a clear classification system and an official EU green bond standard.

"The green bond standard … will be stronger and more powerful than the voluntary green bond principles now," he said, because issuing firms would need to have a mandatory review.

Julie Becker, head of international primary markets at the Luxembourg Stock Exchange, which has its own green exchange, and a High-Level Expert Group member, said the definition of green was "extremely complicated," and that the EU taxonomy would be molded on the European Investment Bank's green taxonomy.

"Every project which is compliant with this taxonomy should be considered as green," she said.

An EU taxonomy would bring greater clarity to the market, and Europe could lead the way in building a common classification that could be used internationally, Mantrisi said.

Banks need to be greener

But some say the EU recommendations do not go far enough to prevent greenwashing. Banks may be increasing green financing, but are not moving away from financing coal mining, for example.

"We are not dealing with specifics," said Yann Louvel, climate and energy campaign coordinator at BankTrack, an organization that tracks banks' financing of companies linked to fossil fuels, oil and coal mining.

"What we are asking for is the end of fossil fuel financing," he said.

Banks are part of the problem because many of them are not reducing their involvement in "black" or "brown" industries, said Heffa Schücking, director of German environmental organization Urgewald.

"The challenge for banks and investors is that, if you are serious about aligning your portfolios with the Paris climate agreement, and if you are serious about climate risks, the first step you need to take is to stop investing in and financing coal plant developments," she said.

Kidney said there have so far been few cases of greenwashing, but as more green bonds are issued the chances will increase. He cited the case of a U.S. property developer that received tax-exempt green bonds to finance a development that did not meet its stated green goals.

"There is always a danger of greenwashing but it is not particularly serious at this stage," he said.

"This market has started with larger scale issuers who have reputational risk ... as the market grows and we have more issuers entering the market ... the risks will grow."