ADB official : China should play bigger role in unifying global standards for green bonds

Problems that worry investors:

(1) A tracking system for issuers

Investors who don’t know much about green bond could well ask how to guarantee the money will flow into green projects. As for the issuers, an internal risk control system and disclose spending of bond proceeds are needed. Different ways are available, Jurgen named several categories: sub-accounts, sub-portfolio, information about temporary investment instruments. In a word, a tracing system would be a key condition.

Establishing green bonds is more about labeling bonds in a credible way. So information disclosure is essential. However, cost considerations have to be taken into account. Running business in an environmentally way already involves additional cost, disclosure adds it. Right balance needs to be found between effective labeling and cost consideration. The Basel-based Financial Stability Board currently works on an international disclosure standard to be released by September 2016. Chinese authorities closely involves in this work.

Jurgen warned that two things are crucial: For the issuer, the proceeds should be traceable. For the investors, the systems should be strong enough to instill confidence. Investors should be realistic enough to understand they can’t monitor everything, confidence in the management and systems of the issuer needs to fill the gap. Disclosure helps it.

(2) Independent green certification

Apart from the corporate credit rating and bond credit rating for normal bonds’ issuing, there still need a third-party of certification authority to give green certification.

CICERO, said Jurgen, has been very active for years in providing assurances that bonds are green, the consulting firm Ernst & Young has provided certificates for most green bonds issued in the PRC, and the rating agency Moody’s has recently made headlines by publishing a green bond assessment methodology.

(3) Issuers need do quantitative assessment of environmental benefits

Jurgen said that investors ultimately care about profitability. And it’s issuers’ responsibility to prove it’s environmentally accepted. That involves environmental impact assessments. Government should establish a regulatory framework and policy to enforce the rules. Internalizing externalities talked among economists need long way to go by reducing the cost-disadvantage enterprises have that behave in an environmentally friendly way.

(4) Focuses should be balanced

Though the scope of green projects has a great variety, while in reality, the issuers usually focus on some certain areas, like renewable energy sources and energy conservation are two areas that developmental financial institutions give priority to : they account for 80.6% and 17.4% respectively in European Investment Bank’s green projects; International Finance Corporation’s focuses on clean energy (54%) and recycling resources (40%); African Development Bank’s renewable energy sources projects account for 96%; Agriculture development and green Transport account for 70% in International Bank for Reconstruction and Development’s projects.

Jurgen said things are changing these days. Initially, international organizations were the main issuers of green bonds and focused on energy efficiency and renewable energy. But other areas are now gaining ground quickly, such as transport sector or climate change adaptations. By the way, IFI’s are not the main issuers any more, but private sector financial institutions.