Climate change is a defining issue and a growing concern to authorities, industries and individuals. With the rise in the incidence of heatwaves, destructive hurricanes and forest fires, the issuance of green bonds is reaching all-time highs. During the ‘2019 Green & Social Bond Principles Annual General Meeting and Conference’ that took place in Frankfurt last June, it was noted that the green bonds market reached a value of 99.7 billion USD. This is clear evidence that investors are becoming increasingly aware of environmental challenges and are striving to finance a more sustainable future.
What are green bonds?
Green bonds are any type of bond instruments the proceeds of which are fully or partly applied to financing environmental projects. They are regulated instruments and still subject to the same capital markets and financial instruments regulations. They are no different from conventional debt securities, and their only unique characteristic is to mobilise resources from the capital markets towards the effective financing of green projects.
The Green Bond Principles (GBP)
The GBP, published and updated yearly by the International Capital Market Association (ICMA), provide for a voluntary framework which aims at providing a foundation for new sustainable finance initiatives to build upon. The guidelines recommend transparency and disclosure for issuers to help investors, banks, underwriters and other stakeholders to understand the particular green bond being issued, with emphasis being made on the transparency, integrity and accuracy of information disclosed.
The four core components upon which these principles are based include:
- Use of Proceeds;
- Process for Project Evaluation and Selection;
- Management of Proceeds; and
The green bond market is expanding. But is it expanding fast enough to meet the demand for a sustainable future? It is no secret that building environmentally sustainable infrastructures entails heavy financing.
The key to attract more entrepreneurs and investors to green finance is to incentivize such stakeholders and provide them with recognition. This may include certification of standards recognition, tax incentives, flexible regulatory approaches, grants, subsidies and so forth.
Moreover, regulatory authorities should put further efforts on pushing forward standards to help guard investors against greenwashing. This is currently a challenge that investors face when trying to judge whether a bond is truly green or simply a marketing stunt. Therefore, whilst a voluntary regulatory approach sounds less imposing and friendlier, as the green market continues to grow, it may be wise to introduce mandatory yet flexible regulatory frameworks to ensure investor protection.
On the 14th of October 2019, the Minister for Finance, on behalf of the Government of Malta, presented the Budget for the year 2020 which is very much focused on the environment and sustainable development. In fact, it has been announced that Green Bonds are to be issued by the Government as of next year to incentivise investment in the environment and sustainable development.
Effort on an EU level has been seen through the ‘Report on EU Green Bond Standard’ published by the EU Technical Expert Group on Sustainable Finance in June 2019 which proposes the content of a draft EU-GBS (EU Green Bond Standard), the creation of a centralized accreditation scheme for external project verifiers, suggested incentives, policy measures, and reporting principles.
The current environmental realities clearly necessitate that projects aimed at building a sustainable future, including issuers of green bonds, should not only be on the same level-playing field with conventional projects and issuers. Rather they need to be assertively incentivised to further develop the green market and a sustainable future for our generation and the generations to come.
Dr. Jade Fenech
Jade joined E&S Group as a legal associate in 2018. Before joining E&S Group she practised with a litigation firm for two years. She holds a Bachelor of Laws Degree and a Masters of Advocacy from the University of Malta and was admitted to the bar in 2019. She is now reading for a Masters in Blockchain and Distributed Ledger Technologies at the University of Malta. Her primary areas of practice are corporate and commercial law, financial services and fintech.
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