EU green-bond plans face industry fears over constraints and project supply

9 April 2019 5:35pm

5 April 2019. By Jack Schickler.

Green bonds shouldn’t be shackled by too-tight standards, the financial industry has warned the European Commission, as the EU executive seeks to boost financial instruments that could help fight against climate change.

The market for companies to issue bonds to fund climate-friendly spending has risen, but some complain it has now plateaued.

Checking that revenues from bond sales really go into green business lines must often be done case-by-case, bankers say. The bureaucracy involved means, in practice, that the bonds rarely stray from the most obvious sectors, like funding to build wind farms.

In March, the EU asked if voluntary standards could make that task easier, and provide a new source of financing for all kinds of companies to invest in environmentally-friendly projects.

Industry has given a broad thumbs-up to the plans, but worries that over-constrained rules will choke the market before it is born.

Financiers want the product to stay narrowly focused on its goals: stopping global temperature rises or helping people adapt to them.

But lawmakers in the European Parliament have bigger plans, voting recently that green projects should not do wider environmental or social damage. It’s no good sourcing climate-friendly palm oil whose production endangers orangutan habitats, lawmakers reason. Even suspect investments such as nuclear should not qualify, they said.

— Diligence and oversight —

Those kind of caveats worry market players. Project-by-project due diligence, rather than according to the identity of the issuing company, is too burdensome, EU banking lobbyists said in a response to the commission consultation, which closes on Sunday.

Diverging from international practice could also make life harder for global investors, or companies with worldwide value chains.

Public oversight is a further hurdle. Even if the EU is not — yet — proposing to legislate, someone will have to maintain the standards’ environmental credibility. Financial stability could also be at stake, if possession or loss of a green stamp of approval proves market-moving.

The European Securities and Markets Authority could, for example, keep an eye on those who verify and validate green bonds, as it already does for credit-rating providers.

A green bond system could pay for itself, generating demand from both far-sighted investors seeing the long-term benefits of investing in an inevitable climate transition, and those such as church pension funds, which have non-economic investment criteria.

Others say issuers will have to be compensated, whether via support from public investment banks, or favorable treatment from the European Central Bank’s bond-buying program. Lenders want to enjoy lower requirements for regulatory capital against their green investments — something the commission believes could be justified only for more secure assets.

The EU is keenly aware that it cannot strangle this project with too much red tape. Green bonds won’t be deemed a success if no one is inclined to jump through the hoops needed to issue them, officials reason.

But this won’t be easy. Even once a standard is finalized, someone will have to test if it works — perhaps with more environmentally-minded institutions such as the EU’s own European Investment Bank being the guinea pig.

Others say the problem is not the dynamism of financial markets, but the lack of supply of eligible projects in need of cash.

“If bankable project pipelines of green and sustainable infrastructure emerge at the scale necessary, the bond markets are readily available to make their contribution,” the International Capital Markets Association told the commission.

In other words: the financial sector can only be part of the solution, alongside changes in the market driven by environment regulations and carbon pricing. EU green bonds will not make an impact on their own, nor overnight.

Fintech Regulation in 2018