TY - JOUR AU - Ramsay,, Ian AB - Key points The market for green bonds has grown rapidly in recent years. This has resulted in increased attention on legal and policy issues associated with green bonds. These issues are the focus of this article. The article first describes key aspects of the green bond market including the nature and role of green bonds. It then discusses the main features of green bonds and the green bond market, including their benefits, cost and the role of green bond standards. The final section of the article examines selected issues, including various aspects relating to ‘greenwashing’—the practice of falsely attributing environmentally positive credentials to a bond claimed to be ‘green’. Other issues discussed include pressures to relax green bond standards arising from demand for green bonds outstripping supply, and the position applying in cases of ‘green defaults’—where the green promises made in relation to a bond are not fulfilled. 1. Introduction Coordinated global government action alone, were it possible, would be insufficient to mitigate the significant potential economic and financial impacts of climate change and to transition to sustainable economies. Achievement of the goals of the Paris Agreement on climate change1 will require a major shift in investment patterns, necessitating trillions of dollars of investment in low-carbon and climate-resilient infrastructure.2 Ensuring that new infrastructure is low carbon increases its cost.3 Climate adaptation will require an additional $280–500 billion USD per annum in infrastructure spending by 2050, necessitating unprecedented levels of investment from the private sector.4 This is where green bonds become relevant: green bonds are considered a ‘key component’ of these efforts to fund environmentally sustainable infrastructure, offering a mechanism to assist in financing the costs of transitioning to a zero-emissions economy.5 Indeed, the former General Secretary of the United Nations, Ban Ki Moon, described the emergence of green bonds as ‘one of the most significant developments in the financing of low-carbon, climate resilient investment opportunities’.6 This article considers legal and policy issues associated with the growth of the green bond market. First, it describes aspects of the green bond market. It then describes key features of green bonds and the green bond market, including the role of green bond standards. The final section of the article discusses selected issues, including ‘greenwashing’, pressures to relax green bond standards and the position applying in cases of ‘green defaults’. The issues examined in the article are international given that green bonds have been issued in many countries as well as by some international organizations. Specific examples of green bonds are discussed throughout the article as they illustrate the issues being discussed. Some of the examples of green bonds are drawn from Australia—a country where green bonds have increased in number, have been issued by a wide variety of issuers (including the first green bond issued in the world by a supermarket), and with one of the greatest proportions of bonds certified under the Climate Bonds Standard. 2. The green band market What is a green bond? A normal or ‘vanilla’ bond is a form of debt security, a contract for money owed that can be bought and sold between parties. Investors in bonds become creditors of the issuing entity who are paid a fixed rate of interest (coupon). This interest is typically paid in periodic instalments, over the maturity period—the fixed period over which the bond issuer undertakes to pay interest. Once purchased, bonds can continue to be traded in the securities market. Upon maturity of the bond, the initial investment is returned to the bond holder. Traditionally, capital is raised on bond markets for general purposes. Bond investors base their investments on the risk profile of the issuer and the interest paid, rather than on how the proceeds of the bond issuance are to be used. Like a vanilla bond, a ‘green bond’ is a debt security—but one that is issued to raise capital specifically to support climate related or environmental projects such as renewable energy or clean transport.7 Green bonds therefore represent a development of the traditional bond market in which bonds are issued to raise capital for specific purposes and the bond is labelled and characterized accordingly.8 Green bonds are not the only type of bond labelled in this way. Other types of specific purpose bonds include ‘social bonds’ that are designed to raise funds to improve social welfare or help disadvantaged groups,9 ‘sustainability bonds’ that are intended to address both environmental and social issues,10 and ‘blue bonds’ that are addressed to ocean and water issues.11 Recently, proposals have been advanced for a form of bond described as ‘corona bonds’.12 There is even a subcategory of green bonds: ‘climate bonds’.13 It is the specific purpose of green bonds that distinguish them from other types of bond. As will be discussed, this specific-purpose characteristic is also the area of greatest controversy relating to green bonds: what makes a green bond green, and how can this ‘greenness’ be assured? Types of projects funded The proceeds of green bonds may be directed to new or existing projects intended to have beneficial environmental or climate effects. This covers a large field: energy efficiency including wind, solar, hydropower and geothermal energy projects; clean transportation including non-diesel rolling stock, fuel efficient vehicles and some rapid bus transit; waste management; energy efficient building construction; clean water and sustainable water management; land use including sustainable agriculture, fishery and forestry; pollution prevention; the protection of ecosystems; and even communications and information technology including fibre-optic cable investments and low carbon infrastructure.14 In 2019, globally, clean energy made up 31.5 per cent of the use of proceeds of green bonds, followed by low carbon buildings (29.3 per cent), low carbon transport (20.2 per cent) and water (9.3 per cent). Waste, land use, industry, information and communication technologies, and adaptation and resilience represented the remaining approximately 10 per cent share of the 2019 market.15 Some divergences from this global pattern are experienced in Australia. While buildings, transport and energy have similarly been popular categories for green bonds in Australia, low-carbon buildings dominated with a 43 per cent share. Lower than the international average, clean energy (25 per cent) was the next largest area of fund allocation, closely followed by low-carbon transport (24 per cent).16 Who issues green bonds? The first climate-focused structured financial product was issued by the European Investment Bank (EIB) in 2007.17 Then, in 2008, the World Bank (International Bank for Reconstruction and Development (IBRD)) launched the first labelled green bond. The World Bank was responding to specific demand from Scandinavian pension funds, which were seeking to support climate-focused projects through a simple fixed-income product. Issuing the bond formed part of the World Bank's strategy to introduce innovation in climate finance and helped raise awareness among investors and the financial community about how action on climate change could be taken by developing countries.18 This bond is claimed to have ‘created the blueprint for today’s green bond market’.19 Globally, the main issuers are located in Europe. Europe accounted for 45 per cent of global issuance in 2019, followed by the Asia-Pacific (25 per cent) and the North American (23 per cent) markets. By country, the leading locations of green bond issuers were the USA, China and France which collectively accounted for 44 per cent of global issuance in 2019. The top issuers were US government sponsored enterprise Fannie Mae, issuing $22.9 USD billion in mortgage backed securities (9 per cent of the total) which funded reductions in energy or water consumption in the property market, KfW, the German state-owned development bank ($9 USD billion of bonds to finance renewable energy and green building products) and the Dutch State Treasury ($6.7 USD billion for low-carbon buildings and transport, renewable marine energy, solar and water infrastructure).20 In 2019, non-financial corporates issued 23 per cent of green bonds,21 financial corporates issued 21 per cent22 and government-backed entities 15 per cent.23 Other issuers included supranational institutions,24 national governments and local governments.25 In Europe, the share of green bonds issued by government-backed entities is higher than most other regions and in the USA, the significant issuance by Fannie Mae leads to a high proportion of mortgage backed securities in that market.26 In 2019, the largest green bond underwriter in the global market was Credit Agricole ($10.6 USD billion), closely followed by BNP Paribas and HSBC, with these top three underwriters accounting for 17 per cent of the total amount underwritten.27 The growth of green bonds The global green bond market took 10 years to grow from $1.48 USD billion in 2007 to $173.61 USD billion in 2017. Since then, following a flat 2018, the rate of growth in 2019 vastly exceeded expectations,28 with total green bond issuance of $257.7 USD billion, 51 per cent higher than the $170.6 USD billion issued in 2018.29 This growth is predicted to continue.30 Sustainability and social bonds, which, like green bonds, are growing segments of the bond market, are not included in the calculations of issuance of green bonds. Adding these bonds to the CBI’s green bond tally for 2019 of $257 USD billion would result in a total of $322.9 USD billion.31 Every region experienced growth in 2019; however, Europe was the main driver of the substantial increase experienced in 2019 (up 74 per cent from 2018). Asia-Pacific grew 29 per cent in the year and North America grew 46 per cent. Nevertheless, green bonds are still a tiny fraction of the $100 trillion USD global bond market.32 In Europe where green bonds are most popular, they only comprised 6 per cent of the market in 2019.33 This observation raises a fundamental issue as to the efficacy of green bonds as a tool to address climate change which we discuss later. Who buys green bonds? ‘Green Bond purchasers are typically institutional investors, often with either an ESG (environment, social and governance) mandate or an environmental focus. Other buyers include governments and corporate investors.’34 Some bonds and exchange traded funds are available to individual investors,35 with the diversity of offering predicted to expand with the growth in renewable investments.36 Green bonds in Australia The value of all Australian green bonds issued up to and including 2019 was $15.6 AUD billion, which placed Australia tenth in global country rankings and third in Asia.37 By value of green bonds issued in 2019, Australia’s international ranking was 13th.38 The first green bond was not issued in Australia until December 2014, when a bond was issued by National Australia Bank (NAB). This bond was certified by the Climate Bond Initiative with its proceeds to be applied to wind and solar farms. Australian issuers now include all four of Australia’s big banks: NAB was followed by Australia and New Zealand Banking Group Limited (ANZ) in 2015, then Westpac Banking Corporation in 2016 and the Commonwealth Bank of Australia in 2017.39 Other Australian issuers include property funds, a university, corporates and governments.40 The State Government of Victoria was the first government in Australia to issue a green bond, raising $300 million in 2016. The bond was triple A rated and fully subscribed in a little over 24 hours. The bond was certified by the Climate Bonds Initiative under its Climate Bond Standard & Certification Scheme.41 The bond financed a range of new and existing environmentally beneficial projects including LED traffic lights, mini-hydroelectric power stations, low-carbon buildings, the Melbourne Metro Tunnel, new trains, an outer suburban rail extension and the development of a large-scale renewable energy power station.42 Other state governments have since begun to issue green bonds with Queensland Treasury Corporation issuing its first green bond in March 2017 and a second bond in June 2019. Treasury Corp New South Wales entered the market in late 2018. Monash University issued a green bond in 2016, raising $200 million to be applied to various projects including the construction of a new environmentally friendly educational facility. Australian companies that have issued green bonds include Stockland, Investa Office Fund and Flexigroup. These bonds were for the construction of green buildings and for the refinancing of roof top solar projects.43 The Australian market has one of the greatest proportions of bonds certified under the Climate Bonds Standard—83 per cent of issuance—with all Australian issued green bonds having at least one external review. One hundred per cent of issuers also provide at least one form of post-issuance reporting on deals closed prior to November 2017.44 Putting this in perspective, in contrast, the global rate of certified issuance in 2019 was only 17 per cent.45 In Australia, EY is the leading approved verifier for certified climate bonds (42 per cent), followed by DNV GL (40 per cent) and Moody’s. While the position in relation to every green bond issued in Australia is not known, green bonds issued in Australia are typically offered to institutional investors and not retail investors. The effect of this is that issuers do not need to comply with the disclosure requirements under Part 6 D.2 or Chapter 7 of the Corporations Act 2001 (Cth) that apply to offers of securities to retain investors.46 An example of an Australian green bond—the Woolworths Group Ltd green bond In April 2019, the supermarket retailer Woolworths Group Limited announced the issue of its first green bond, which was also the first green bond to be issued in Australia by a retailer and the first bond in the world issued by a supermarket.47 Projects that could be supported by the bonds included the installation of solar panels on the roofs of Woolworths Group stores and distribution centres, retrofitting Woolworths stores with energy efficient LED lighting, upgrading refrigeration systems and trialling a solar and TESLA battery system.48 The Woolworths bond was certified by the Climate Bonds Initiative.49 The uses of proceeds of the bond were to be tracked, a reporting regime was published, and provision made for external reviews.50 The issuer is obliged to notify noteholders of any non-compliance as soon as practicable, although, as appears standard in relation to green bonds, no remedy is provided in the event of non-compliance.51 The Woolworths bond issue raised $400 million from 90 institutional investors.52 The offer was made at a rate of 2.85 per cent and was more than five times oversubscribed.53 It was not available to retail investors.54 Ninety-four per cent of investors were asset managers and banks, with 75 per cent of investors located in Australasia.55 The bond traded strongly after issuance on the secondary market.56 Illustrating the capacity of green bonds to attract a new category of ESG conscious investors for issuers, 98 per cent of the deal was placed with green investors,57 including the investors Australian Ethical and the Clean Energy Finance Corporation, which secured $30 million of the $400 million issued.58 However, while these investors considered that the Woolworths bond was an appropriate investment, other ethically-minded investors including Perpetual Limited declined to invest in the bond. Their reasons for passing up the investment were concerns about Woolworths’ ownership of the ALH Group gambling business and the BWS and Dan Murphy liquor store chains: ‘Did people investing in a green or sustainable portfolio expect to assist in installing new light bulbs above the poker machines or in the cut-price whisky aisle?’59 3. Some features of green bonds and the green bond market Benefits of green bonds Two types of benefits for green bonds have been identified. The first type is the benefits that accrue to investors and issuers. The second type of benefit is broader policy benefits. In relation to benefits for investors and issuers, green bonds help provide funds for sustainability initiatives. In doing so, green bonds possess the advantage of allowing issuers to promote their environmental credentials. Green bonds also allow issuers to reach different investors. They attract investors from a growing segment—those who are interested in sustainable investments—who otherwise may not be interested in investing in a company’s bonds. This broader investment reach contributes to a greater over-subscription rate and spread compression than regular bonds.60 Green bonds have also ‘provided bond investors with an unprecedented degree of transparency as well as a capacity to become involved in corporate strategies in a manner which was previously largely reserved to equity investors’.61 Some studies also show that the stock market responds positively to issuances of green bonds by companies and a significant improvement in these companies’ environmental performance is observed, but only where the green bonds are certified by independent third parties.62 However, this effect is the subject of varying results in other studies.63 Nevertheless, green bonds are attractive to those seeking an investment vehicle consistent with their environmental responsibilities and, importantly, to non-environmental, social and governance (ESG) investors. Indeed, only 50 per cent of green bonds are purchased by green investors.64Non-ESG investors may be attracted to green bonds on the expectation that these investments will have stronger long-term financial performance and to balance their risk across green and non-green assets. That is, another benefit of green bonds is that they offer diversification benefits, improving risk-adjusted returns for investment portfolios that include both vanilla and green bonds.65 Green bonds are also considered to be less volatile than vanilla bonds because they are typically bought by more strategic, long-term institutional investors.66 Investors may also tend to retain sustainable debt when selling down a portfolio because of the scarcity of green bonds, and because big investors such as pension and wealth funds may allocate a certain amount of their portfolio to sustainable investments. Further, borrowing is typically linked to specific projects involving long-term commitments, for example a utility investing in the construction of a wind park.67 Consequently, green bonds are less likely to be traded and more likely to be held to maturity by the investor than vanilla bonds, again particularly where the bond is certified.68 Green bonds are also considered less risky than regular bonds, which is indicated by a tighter yield curve.69 Because of the nature of green bonds, there is typically less of a risk of unaccounted environmental risks. Industries like oil and gas, basic materials, discretionary consumer goods and automobiles that are most affected by the impact of the coronavirus and the recent slump in oil prices do not feature in the green bond market, which is highly concentrated in industries like utilities and banks.70 The broader, policy benefits of green bonds are summarized by the European Commission’s Technical Expert Group on Sustainable Finance. Green bonds: convert bond markets to green, fostering investment in green projects; enable corporate and institutional transition by creating visibility and scrutiny of issuers’ sustainable projects and leading to changes within issuers that promote environmental sustainability; make green and climate investible: the green bond standards that have been developed together with the ‘ecosystem’ of external reviewers have allowed markets to invest in green projects with more confidence; have progressed the policy debate on green finance by providing an example of a largely market driven, successful initiative that addresses sustainable development challenges with the effect of stimulating debate on how the initiative may be supported and what lessons can be learned for other initiatives; and expand the green loan market.71 The pricing of green bonds The vast majority of green bonds are investment grade and are priced similarly to conventional debt at issuance. ‘These bonds are typically asset-linked and backed by the issuing entity's balance sheet, so they usually carry the same credit rating as their issuers’ other debt obligations.’72 Accordingly, there is no significant pricing difference between green and non-green bonds, with the price of the bond being principally referable to the borrower’s creditworthiness, whether the borrower spends the borrowed amount on solar panels or oil drills.73 This is so notwithstanding that there are usually additional costs for issuers of green bonds in covering the costs of external opinions and of annual reporting on the use of proceeds. The additional costs of issuance of green bonds are considered marginal, although the disclosure and reporting obligations are more significant.74 In any event, such a small premium does not appear to constitute a disincentive for investors to prevent them from shifting towards green bonds: investor interest currently outstrips supply. Globally, the average offering is more than three times oversubscribed,75 with green bond issuances in Australia also appearing to attract a high level of interest.76 Further, ‘certification and also high credit ratings and CSR all have an impact on lowering the interest costs of issuers’.77 Some apparent lower returns for green bonds are explained by the lower risk profile of the issuers.78 Some also have an expectation that green bonds will attract a pricing differential in the future, with growing investor demand and relative scarcity potentially boosting secondary market prices.79 Research showing that green bonds have a pricing advantage is inconclusive.80 Qualifying as a green bond Their environmental purpose distinguishes green bonds from vanilla bonds. This purpose also produces the special characteristic of most green bonds: the external review of issuer and issuance.81 That is, the green credentials of a green bond are most commonly established by second-party opinions.82 The Climate Bonds Initiative reports that ‘69% of green bonds issued have had a second opinion with independent organisations reviewing issuance frameworks, green credentials, management of use of proceeds and reporting and disclosure’.83 Various companies and other bodies offer to independently assess, verify or certify the green bona fides of a bond.84 But this process begs the question: by what standard are bonds assessed to be green when the green bond industry is largely self-regulated with no single global standard for green bonds?85 Green bond standards Various standards to establish the green credentials of a bond have been developed, and these standards have been described as market responses to the absence of regulation.86 These standards are intended to provide a means for issuers to establish that their bonds are green and for investors to understand the environmental impact of the use of the proceeds of the bond.87 There are two main international standards: the Green Bond Principles produced by the International Capital Market Association and the Climate Bonds Standards produced by the Climate Bonds Initiative. Green Bond Principles The Green Bond Principles (GBP), endorsed by the International Capital Market Association (ICMA) in 2014, are the most common set of disclosure requirements by which the ‘greenness’ of a bond is judged.88 The GBP form the basis for the ASEAN Green Bond Standards and are intended to be aligned with the Green Bond Standard being developed by the EU.89 The GBP promote integrity in the green bond market through guidelines that recommend transparency, disclosure and reporting.90 The GBP assist investors by ensuring the availability of information required to assess the environmental impact of an investment and they assist underwriters by standardizing disclosure.91 The GBP have four core components: renewable energy; energy efficiency; pollution prevention and control; environmentally sustainable management of living natural resources and land use; terrestrial and aquatic biodiversity conservation; clean transportation; sustainable water and wastewater management; climate change adaptation; eco-efficient and/or circular economy adapted products, production technologies and processes; and green buildings. Process for Project Evaluation and Selection: Under this component, the issuer of a green bond is expected to clearly communicate to investors: the environmental sustainability objectives; the process by which the issuer determines how the projects fit within the eligible green projects categories identified above; and the related eligibility criteria. Management of Proceeds: The net proceeds of the green bond, or an amount equal to these net proceeds, are to be separately accounted for and tracked. The GBP encourage transparency and recommend the use of an auditor, or other third party, to verify the tracking method and the allocation of funds from the green bond proceeds. Reporting: Issuers are to make, and keep, readily available up to date information on the use of proceeds to be renewed annually until full allocation, and on a timely basis in case of material developments. The information should include a list and description of the projects to which green bond proceeds have been allocated, the amounts allocated, and their expected impact. Qualitative performance indicators and, where feasible, quantitative performance measures are recommended.92 The GBP also recommend that issuers have an external review to confirm the alignment of their bond or bond programme with the four core components of the GBP. The GBP do not prescribe the form of the review and note that the review may be by way of second-party opinion, verification, certification or green bond scoring/rating.93 Climate Bonds Standard Similar in purpose to the GBP, the Climate Bonds Initiative (CBI)94 created the first green bond standard in 2010, the Climate Bonds Standard (CBS).95 The CBS forms part of the CBI Climate Bond Standard and Certification Scheme, which is the only framework that specifically focuses on climate change, as compared with other frameworks that cover the broader ESG spectrum.96 The CBS incorporates the GBP and establishes the requirements for certification of a bond by the CBI. The CBS outlines requirements to be followed both pre-issuance and post-issuance.97 The CBS has two parts: (i) the parent standard detailing management and reporting processes; and (ii) a suite of sector criteria detailing the requirements assets must meet to be eligible for certification. The CBS is underpinned by the Climate Bonds Taxonomy which provides guidance about green assets to facilitate consistent climate classifications. The Certification Scheme requires issuers to obtain independent verification, pre- and post-issuance, to ensure the bond meets the requirements of the CBS. Approved Climate Bonds Verifiers independently assess whether a bond complies with the requirements of the CBS using a specified international standard.98 The CBS goes beyond the GBP by requiring the issuer to include physical assets associated with the green bond,99 disclose environmental and social aspects of the projects, and ensure that proceeds are not contaminated by environmentally inconsistent activities. Green bond issuers must direct 95 per cent of proceeds acquired explicitly to green assets if they want to issue labelled green bonds. The issuer is to self-report in the event of non-compliance. Others Other standards have been published.100 China,101 as well as India, Brazil and Morocco,102 and some European countries have published mostly voluntary and unenforceable guidelines and policies.103 The European Union has recently published a report recommending a voluntary, non-legislative EU green bond standard.104 4. Selected issues relating to green bonds Barriers to the development of the green bond market have been identified,105 albeit that the international green bond market is not considered to be facing any significant market disfunction.106 In this context, it is of interest to further consider several important issues in this developing area. Greenwashing The most common problem associated with the green bond market is ‘greenwashing’, which arises because investors face the problem of judging whether an investment is truly green. ‘Greenwashing usually refers to practices aimed to mislead investors or to give them a false impression about how well an investment is aligned with its sustainability goals.’107 It occurs where ‘market players label their product as green without any independent way for investors to check what this really means’.108 Greenwashing is a problem for the green bond market because ‘[c]onfidence in the green credentials of green bonds is essential to a sustainable market’.109 Lack of a universally accepted international standard An objective in the development of green bond standards has been to prevent greenwashing.110 ‘[T]o avoid greenwashing and assist this market to grow, standards and assurance for green bonds are essential. They ensure consistency, improve transparency and give investors confidence in the green credentials of the investments they are making.’111 While it is true that the principles for green bonds are more developed and aligned than the principles that apply more generally in the sustainability area,112 part of the problem is that green bonds lack a legal definition and both a universal standard and universal certification system. A multiplicity of jurisdictions is involved with different processes as to how activities are assessed as being sustainable.113 National standards may diverge from the Green Bonds Standard. For example, China allowed investment in ‘clean coal’, a form of investment that is not permitted under the international standard.114 ‘The multiplicity of voluntary frameworks, the risk of confusion for investors regarding existing terminologies and the lack of a uniform taxonomy for sustainable activities’ contribute to the greenwashing problem by allowing issuers/asset managers to ‘cherry-pick’ which initiatives to use where there is a lack of effective assurance processes to ensure investors are not misled about sustainability issues. This may undermine investors’ confidence in sustainable investing.115 A multiplicity of standards is not the only issue. The development of green bond standards does not inevitably encourage green bond issuance. For example, it is estimated that under the EU’s proposed taxonomy,116 potentially 70 per cent of current issuance outstanding would not be compliant, with the effect of this being to restrict issuance, rather than encouraging it by providing clear definitions.117 Voluntariness Another issue is that the standards that have been developed for green bonds are not binding on countries or other issuers. Most standards are voluntary.118 Problems with voluntary sustainability standards in the financial system more generally have been identified.119 Not all of these problems are applicable to all green bond standards. Nevertheless, the issue of voluntariness means that there is, for example, no requirement for either a second-party opinion or certification, which can create problems where bonds are claimed to be green without either.120 Conflicts of interestin the second-party opinon/verification process A potential conflict of interest has been identified in the green bond second opinion and certification process in that the verifier of a green bond may be influenced to determine a more favourable rating than warranted in order to retain the issuer as a client.121 International standards seek to limit the risk of conflicts of interest by requiring green bond verifiers to undertake a conflict of interest process.122 Notwithstanding these arrangements, as at 2019, none of four of the top bond certifiers had ever issued a negative recommendation for a green bond.123 Whether this indicates that the conflict of interest processes are effective or lax is not clear. Fungibility Associated with the problem of greenwashing is the problem that ‘money is fungible. You may think that you are financing the purchase of solar panels but, if the borrowing government or corporation already has the money to pay for those panels, you would be freeing its own resources to do something else.’124 The fungibility problem has been raised by the CBI in relation to a green bond issued by Poland in December 2016. The CBI’s position is that ‘green bonds are about green assets not green entities’125 and the Polish bond was green in that the assets associated with it were green. Nevertheless, the CBI expressed the need to exercise caution in relation to Poland’s bond. It noted that Poland had a coal-based economy, a poor record in relation to EU climate action, and a reputation as a climate science denier and of hampering climate negotiations: ‘highlighting small green projects while continuing to increase investment in much larger fossil fuel projects is something we will always call out, particularly if raising funds through a green bond releases funds for fossil fuel investments’.126 It is not clear that the problem of fungibility is capable of being resolved with any certainty by the application of green bond standards or otherwise, particularly in relation to governments and corporations of significant size. In those cases, where revenue and expenditure may be subject to policy determinations, matching and tracking revenue and expenditure becomes a fraught and arbitrary exercise. In the case of Poland’s bond, the CBI proposed to continue to press the Polish government on its future plans to increase its green investments to ensure that the ‘deal was not a one-off (or greenwashing)’.127 Efficacy A larger problem is the efficacy of green bonds as a tool to address climate change. As one observer has commented: ‘If we think 1% of green bonds issued every year will solve our problems, we might as well go home.’128 In fact, green bond issuances have comprised more than 2 per cent of global bond issuances in recent years, rising to 4.4 per cent in the last quarter of 2018.129 Regardless, the point being made remains pertinent and has been echoed by others: current levels of investment are not enough to achieve an environmentally sustainable economic system. ‘The sector gets really wrapped up in purity and then in the same breath talks about planetary-sized problems. This is not going to be solved by $10 million projects.’130 More private sustainable capital investment is required to meet targets under the Paris Agreement and more investment again will be needed to achieve climate neutrality by 2050.131 Whatever their merit, the current, relatively small proportion of bond investment in green bonds needs to be kept in perspective and will not operate as a panacea for the problem of climate change. Another issue relating to efficacy is that of additionality: have green bonds enabled anything that wouldn’t have happened without them? In relation to the Woolworths green bond discussed above, it is observed that low energy supermarkets lower costs for operators and that supermarkets in many regions are already reducing their energy intensity. Identifying assets that owe their existence to green bonds has been described as ‘challenging’.132 Relaxing green bond standards to meet the demand for green bonds? As noted above, there is currently no major market disfunction in the green bond market. However, there is an imbalance in the financial market for green bonds in that there is large demand for green bonds but scarcity of supply and low liquidity.133 This has led to a concern that the imbalanced market may produce distortions in incentives for issuance, and a particular concern about ‘greenwashing’.134 Because of the imbalance between demand and supply in the green bond market, a policy debate has ensued between those who support retaining strict criteria for the green investments and those who advocate greater flexibility in green bond standards, thereby enabling more bonds to be labelled as ‘green’ and going some way towards meeting the high levels of demand.135 For example, there is debate about whether an issuer’s overall environmental record should be considered—whether an issuer that produces a high level of emissions can issue a green bond, even if for a renewable energy project.136 Some advocate policies that would expand the pool of issuers by allowing companies that have non-green activities to issue green bonds against distinct green projects,137 also described as ‘transition bonds’.138 The CBI’s approach—that the green bond market is about the asset, not the issuer—would allow this.139 However, there are concerns.140 Examples include the investor who rejected a green bond issued by Unilever to increase energy efficiency because Unilever conducts animal testing.141 In Australia, an investor avoided the ANZ bank’s green bond ‘because the pool of green assets backing it was dwarfed by the bank’s ongoing fossil fuel lending’.142 Other examples of problematic bonds such as those of Southern Power and Poland’s sovereign green bonds have been noted.143 Southern Power as a coal burning power producer has successfully issued three tranches of green bonds unsupported by second-party opinion or certification. Despite the fact that its bond was issued by a government that relied heavily on coal power and which had obstructed the setting of emissions targets within the EU, Poland’s green bond was voted by investors as green bond of the year.144 The case of the Repsol bond in 2017 also illustrates the difficulty. Repsol is a Madrid-based oil company. The proceeds of its bond were to be used to finance energy efficiency investments in Repsol’s chemical and refinery facilities in Spain and Portugal. Repsol’s bond was reviewed by independent reviewer Vigeo Eiris, it met the GBP, and was accompanied by reporting, tracking and ongoing disclosure commitments. Despite this, while conceding that the bond would reduce emissions and that it was not an exercise in greenwashing, the Climate Bonds Initiative refused to endorse Repsol’s bond because it did not represent a fundamental change in the company’s business model. It considered that the bond involved only incremental improvements. Rather than investing in renewable, green energy, it would make the company’s fossil fuel refineries more efficient and probably extend their operating lifetimes, indirectly increasing emissions over time. Like ‘clean coal’ investments, the improvements to be funded by the bond would not be consistent with the type of fundamental changes necessary to meet the targets of the Paris Agreement: the bond did not involve a ‘brown to green’ transition.145 Consequently, Repsol’s bond was omitted from the major green bond indexes.146 A further example of difficulties arising from the application of green bonds standards is the controversy that exists around the issuing of green bonds to fund airport developments.147 Green bonds for airports are problematic because the aviation industry is responsible for up to 2.5 per cent of global CO2 emissions. That is, airport operators face ‘taxonomic limitations’: while an airport building in isolation may qualify as ‘green’, with the airport operator achieving zero emissions from its own operations and even contributing to other green initiatives, airports nevertheless support increased air travel and its associated emissions risks. For this reason, the Centre for International Climate and Environmental Research (CICERO) ranked Swedavia’s green bond framework ‘light green’, only one category better than ‘brown’.148 CICERO described Swedavia’s green bond as ‘transitional’ and as highlighting the need for context to be considered, rather than simply whether a project met a taxonomy threshold. Other airport projects demonstrate different ratings. The Portland airport bond was issued without a third-party verification. However, Royal Schiphol’s green bond was reviewed by Vigeo Eiris and S&P Global and certified by the CBI. The first airport green bond project, Mexico City Airport Trust’s $6 billion of green bonds in 2016 and 2017, has had a chequered history. The airport bond issuance was initially welcomed and supported by a second-party opinion from Sustainalytics and positive evaluations from ratings agencies Moody’s and S&P. However, construction of the airport was stopped by a newly elected Mexican national government in 2018. While the government appeased investors through a buyback program for the Mexico City airport bonds, the project that the green bonds originally supported no longer existed. Accordingly, Moody’s lowered its green bond assessment to its lowest level and S&P withdrew its green evaluation report. The Mexico City airport project is reported to have raised investors’ scepticism towards green issuances. Further, while the independent assurance regime has mitigated greenwashing risks for this bond, the Mexico City airport example highlights the problem of an initially green bond turning brown. There is the added issue of Mexico City Airport Trust’s residual bonds still being technically labelled as green and therefore still appearing in green bond indices—the risk of ‘fake green bonds’.149 Green bonds standards have also posed problems in the area of hydropower. While hydropower has benefited from green bond issuances, some issuers have excluded proceeds from green bonds being used to finance hydropower projects due to a lack of clarity over appropriate sustainability standards. The green credentials of hydropower projects have been questioned because of the increase in methane emissions, concerns over damage to local ecosystems, and the displacement of indigenous communities associated with some projects.150 These detrimental effects have mostly been associated with large hydropower projects, an approach that has been criticized as failing to take project specific issues into account.151 To address concerns about the use of green bonds to finance hydropower, the CBI is undertaking work on proposed green bond criteria for hydropower.152 In broad terms, projects being deemed green where those projects seek to reduce rather than remove carbon emissions is a central issue. Different views on this are reflected in the debate over whether the nuclear power generation and gas industries should be included in the EU green bonds standard.153 Another proposed option to facilitate the issuance of green bonds is for companies with good ESG ratings to issue bonds that are backed by the company’s overall corporate green credentials, rather than by specific projects. This is described as ‘pureplay issuance’.154 Bonds issued by green companies do not automatically qualify as green and need to undergo the same type of accreditation process applied to bonds issued by other types of company. Concerns with allowing ‘pureplay issuance’ relate to the need to ensure the integrity of green bonds. An example is the bond issued by Danish firm LM Group Holding, which generates over 95 per cent of its revenue from wind turbine manufacturing. Bond proceeds were for new and upgraded turbine manufacturing plants and other green purposes. Notwithstanding the green nature of the company, for the bond to be labelled green, a second opinion was obtained, the bond was assessed as aligning with the GBP and bond proceeds were to be tracked with periodic reporting. This was considered important by the CBI to ensure that funds could not be funnelled off into a new non-green asset base.155 ‘Green defaults’ Another issue that arises is the position where a green bond fails to deliver the promised green investment, either because the bond’s proceeds are not applied to the project as promised or the project that is the subject of the investment ceases to meet the green criteria originally set for the bond.156 The CBI’s CBS requires reporting of non-conformance, which, if not remedied, may result in the loss of certification.157 However, the requirements for reporting non-conformance and the consequences of defaults in non-certified green bonds is uncertain. Consequences would be dependent upon the terms and conditions of the green bonds. Even in the case of certified bonds, the principal consequence for non-conformance is loss of certification. Consequences beyond this are uncertain. Generally, it appears that the terms of many green bonds may be either silent or expressly exclude rights of investors in the event of a default. Typically, the contractual documentation associated with a green bond will not support any claims against an issuer in the case of a green default.158 ‘The historical market position is the inclusion, in the pricing supplement for an issuance programme, of an express statement that a loss of certification does not constitute an event of default and bondholders cannot exercise redemption rights or take any other action.’159 This creates a risk for those investors under an obligation to ensure that their investments are green. In these cases, it also raises a question as to the efficacy of certification: to what effect is certification if the issuer of a green bond can subsequently walk away from its green promises with no effective sanction? One question this raises is whether the process of certification should require the inclusion of measures to more effectively guard against default in bond documentation. Otherwise, isn’t even a certified green bond simply a ‘loose pledge’, therefore possessing a credibility problem?160 The most significant ‘remedy’ in the case of green defaults that appears to have been proposed to date is for bondholders to have the right to accelerate or redeem their bonds or to provide for an increased coupon to be paid by the issuer—a ‘margin ratchet’.161 However, this margin ratchet remedy appears to involve a paradoxical outcome for the green-minded investor who profits more in the event of the bond failing to meet its green objectives than if the bond achieved its environmental objectives. Nevertheless, margin ratchet clauses are reported to have been successfully applied and enforced in the green loan market, although this does not ensure ‘the “greenness” of green financial instruments’.162 One example of a green margin ratchet clause is the sustainability-linked bond issued by Enel in 2019, albeit that this bond was not strictly a green bond. In that bond, the issuer promised to pay investors an additional 25 basis points coupon if it failed to increase the renewable share of its power generation fleet from 45.9 per cent to 55 per cent by the end of 2021.163 5. Conclusion The development of the green bond market reflects several benefits of green bonds including, most importantly, the provision of funds for environmental and climate initiatives. The wide range of issuers of green bonds—including international organizations, national and local governments and many companies—together with the strong investor interest in these bonds, indicates that these benefits are recognized by both issuers and investors. Yet some key issues associated with green bonds are not fully resolved. Most notably, there are ongoing concerns with ‘greenwashing’ where positive environmental credentials are attributed to a bond that is claimed to be green. Standards for assurance have developed to deal with this issue but there is not a universal standard and the multiple standards that exist mean that a bond issue may qualify for certification under one standard but not another. Another unresolved issue is whether there should be consequences, beyond losing certification, for ‘green defaults’, where the green promises made in relation to a bond are not fulfilled. However, what is clear is that these issues have not stopped the rapid growth of green bonds, leading to the conclusion that the benefits of green bonds increasingly attract issuers and investors. Footnotes 1 United Nations, Adoption of the Paris Agreement (2015) Framework Convention on Climate Change, Paris. Available at: . 2 Anne Olhoff and others, ‘The Adaption Finance Gap Report’, United Nations Environment Programme, 2016 ; United Nations Environment Programme, ‘Adaptation Gap Report’, 6 December 2018, , 23; Organisation for Economic Cooperation & Development, ‘Follow-Up to COP21—Supporting the Implementation of the Paris Outcome’, 11 May 2016, , [4]; Organisation for Economic Cooperation & Development, ‘Green Bonds: Mobilising the Debt Capital Markets for a Low-Carbon Transition’ (2015), , 2. See also: Rochelle J March, ‘6 benefits to companies that issue green bonds’, GreenBiz, 5 May 2017; Stephen Kim Park, ‘Investors as Regulators: Green Bonds and the Governance Challenges of Sustainable Finance Revolution’ (2018) 54 Stanford J Int Law 1, 10; Lyubov Pronina and Tom Freke, ‘As Green Bonds Boom, So Do “Greenwashing” Worries’, Bloomberg (New York, 14 October 2019). 3 Raising annual investment costs by 3–4%: Climate Bonds Initiative, ‘Climate Bonds Standard & Certification Scheme’, March 2018, . 4 Ibid; Board of the International Organization of Securities Commissions, ‘Sustainable Finance and the Role of Securities Regulators and IOSCO: Final Report’, April 2020, , 2. See also Cristina M Banahan, ‘The Bond Villains of Green Investment: Why an Unregulated Securities Market Needs Government to Lay Down the Law’ (2019) 3 Vermont L Rev 841, 842. 5 Park (n 2) 4, describes green bonds as a ‘key component’. Others describe the role of green bonds in stronger terms: see for example Banahan (n 4) 842–3, who describes green bonds as ‘critical’. Others question the contribution of green bonds: see discussion below in section ‘Efficacy’. 6 Ban Ki Moon quoted in Climate Bonds Initiative, ‘Climate Bonds Standard & Certification Scheme’, March 2018, , 1. 7 World Bank Treasury, ‘What Are Green Bonds?’, 2015, . As a form of debt, bonds are different to stocks which are a form of ownership. Instead of the fixed interest return characteristic of bonds, the financial returns on stocks fluctuate in line with the dividends paid by and the underlying value of the issuing firm: Troy Segal, ‘Green Bond’ (Investopedia, 9 March 2020). See also: ‘What is a Bond?’, Wall Street Journal, ; John Chiang, ‘Growing the US Green Bond Market, Vol. 1: The Barriers and Challenges’, 23 January 2017, ; Luxemburg Stock Exchange, ‘Green Bonds’, ; Clare Corke, ‘Green Bonds Series: Part 1—Why are Green Bonds the hottest thing in debt capital markets right now?’, Corrs Chambers Westgarth, 20 February 2018. 8 European Commission Technical Expert Group on Sustainable Finance, ‘Report on EU Green Bond Standard’, 18 June 2019, , 18: Green bonds ‘represent a considerable innovation through their focus on green use of proceeds, tracking, impact reporting and external reviews’. 9 See: Ian Ramsay and Corinne Tan, ‘Social Impact Bonds in Australia’ (2018) 29 J Bank Finance Law Practice 248. Worldwide, issuances of social bonds grew in 2019 to $20 USD billion, although this was a lesser rate of growth than that experienced by green or sustainability related bonds. 10 An example of a sustainability bond is the $1 USD billion sustainability bond issued in May 2019 by Starbucks which financed two social categories and one green category: Climate Bonds Initiative, ‘2019 Green Bond Market Summary’, February 2020. 11 The Seychelles sold the world’s first sovereign blue bond: Pronina and Freke (n 2). 12 See Euronews, ‘What are “corona bonds” and how can they help revive Europe’s economy?’, 26 March 2020, ; Geoffrey Smith, ‘Eurozone misses a chance to cover its flaws with “corona bonds”’ (Politico, 25 March 2020), . 13 Craig Mackenzie and Francisco Ascui, ‘Investor leadership on climate change: an analysis of the investment community’s role on climate change, and snapshot of recent investor activity’, UNEP Finance Initiative and UNPRI, 2009: ‘The idea of a climate bond is an extension of the green bond concept. … Climate bonds would be issued by governments (or others) to raise finance for investments in emission reduction or climate change adaptation.’ There are also different types of green bond that differ in relation to the form of debt recourse attached to the bond: see note 72 below. 14 Pronina and Freke (n 2); Segal (n 7); Corke (n 7). 15 Climate Bonds Initiative, ‘2019 Green Bond Market Summary’, February 2020, . 16 Climate Bonds Initiative, ‘Australia: Green finance state of the market—2019’, August 2019, 1. Cf Louise McCoach, ‘Green bond market in Australia and overseas’, Gilbert + Tobin, 20 February 2019: ‘the vast majority of green bonds issued to date have been channelled towards funding renewable energy projects (such as large-scale solar farms)’. In Australia, most of the proceeds used for financing low-carbon transport were for state government projects, with financial corporates mostly financing renewables. 17 European Investment Bank, ‘EPOS II—The “Climate Awareness Bond”: EIB Promotes Climate Protection via Pan-EU Public Offering’, Press Release, 1 May 2007, . This instrument paid returns calculated by reference to an equity index (a structured bond) instead of fixed interest. 18 World Bank Treasury, ‘World Bank and SEB Partner with Scandinavian Institutional Investors to Finance “Green” Projects’, Press Release, 6 November 2008, ; World Bank Treasury, ‘World Bank “Green Bonds” Increased to SEK 2.7 Billion’, Press Release, 14 November 2008, . 19 The World Bank, ‘10 Years of Green Bonds: Creating the Blueprint for Sustainability across Capital Markets’, 2019, : ‘It defined the criteria for projects eligible for green bond support, included CICERO as a second opinion provider, and added impact reporting as an integral part of the process.’ 20 CBI, ‘2019 Green Bond Market Summary’ (n 15). 21 The top three non-financial corporates all operate in the energy sector: Engie, MidAmerican Energy and Energias de Portugal SA (EDP). 22 Chinese financial institutions ICBC and Industrial Bank are the top two financial corporates, followed by French banks Credit Agricole and BNP Paribas. 23 The top five government-backed entity issuers were SNCF, Societe du Grand Paris, Kommunivest, Ørsted and LBBW. 24 Such as the European Investment Bank, Asian Development Bank, European Bank for Reconstruction and Development, and the World Bank. 25 CBI, ‘2019 Green Bond Market Summary’ (n 15). National governments have been slow to embrace green bonds, with only 12 sovereign green bond issuers worldwide: Dhara Ranassinghe and Yoruk Bahceli, ‘As Europe fights coronavirus and climate, is “green stimulus” the way?’, Reuters (London, 25 March 2020), . 26 CBI, ‘2019 Green Bond Market Summary’ (n 15). 27 Ibid. 28 March (n 2). 29 CBI, ‘2019 Green Bond Market Summary’ (n 15). 30 Climate Bonds’ forecast for 2020 is $350–400 USD billion in global green bond issuance: Climate Bonds Initiative, ‘Green Bonds Reach Record $255bn for CY 2019—New Milestone $350–400bn Climate Bonds initial forecast for 2020—$1trillion in annual green investment in sight for early 2020s’, Media Release, 16 January 2020, ; Billy Nauman, ‘Green bonds on track for continued growth in 2020’, Financial Times (London, 12 February 2020); Anna Gross, ‘Germany arrives late to green bonds party’, Financial Times (London, 20 December 2019). 31 CBI, ‘2019 Green Bond Market Summary’ (n 15). 32 Pronina and Freke (n 2); Louise Bowman, ‘ESG: Green Bonds Have A Chicken and Egg Problem’, Euromoney, 19 June 2019, . 33 Bowman ibid. 34 GoGreen Bonds.org, ‘Frequently asked questions’, . See also Climate Bonds Initiative, ‘Investor appetite’, . ‘The vast bulk of climate bonds have been bought by institutional investors like pension funds and fund managers’: Climate Bonds Initiative, ‘Climate Bonds for Beginners’, . 35 Issuances for retail investors have been made by the World Bank through Merrill Lynch Wealth Managers and Morgan Stanley Wealth Managers and by IFC and SolarCity through Incapital: Climate Bonds Initiative, ‘Investor appetite’, . In the Netherlands and South Africa, banks have offered green bonds to individuals: Climate Bonds Initiative, ‘Climate Bonds for Beginners’, . See also Sustainable Investing, ‘Investing in Green Bonds’, . 36 Thomas Kenny, ‘How Green Bonds Are a Cornerstone of Responsible Investing’ (The Balance, 4 February 2020), ; Max Wagner, ‘What the Heck is A Woolworths (ASX:WOW) Green Bond?’, Raskmedia, 15 April 2019, 37 CBI, ‘Australia’ (n 16). 38 Or 14th if supranational institutions are also included: CBI, ‘2019 Green Bond Market Summary’ (n 15) 1. 39 McCoach, n 16; Clare Corke, ‘Green Bonds Series: Part 2—Green bond market: an Australian focus’, 5 April 2018. 40 For a list of green bonds issued in Australia to the end of 2018, see: Gilbert and Tobin, ‘Green, Climate and Sustainability Bond Issuances In Australia, . 41 See Green Bond Principles below. 42 Tim Pallas, MP, Treasurer, ‘Victorian Green Bonds an Australian and World First’, Press Release, 20 July 2016. 43 CBI, ‘Australia’ (n 16). 44 Ibid. A strong voluntary commitment to disclosure was evidenced by the fact that 80% by volume (eight of 14 deals) provide for both use-of-proceeds and impact reporting. 45 CBI, ‘2019 Green Bond Market Summary’ (n 15) 2. Making the Australian position even more remarkable is the fact that this global rate of 17% represented a significant 86% increase on the level of certified issuance recorded in 2018. 46 For example, the requirement to issue a prospectus. The disclosure requirements do not apply to sophisticated investors (s 708(8)(c)) (those with net assets of at least $2.5 million or gross income in the preceding two years of at least $250,000), professional investors (s 708(11); s 761G(7)(d); s 9 (as modified by reg 7.6.02AE)) (including financial service licensees, trustees of superannuation funds with net assets of at least $10 million and other investors who have or who control gross assets of at least $10 million) or to wholesale clients (s 761G(7)(c) and regs 7.1.28 and 7.6.02AF of the Corporations Regulations 2001 (Cth)). A financial product is offered to a wholesale client if the financial product is not provided for use in connection with a business and the person who acquires the product gives the provider a certificate from a qualified accountant stating that the person has net assets of at least $2.5 million or has gross income in the preceding two years of at least $250,000). 47 Woolworths Group, ‘Woolworths Group first globally to issue Certified Green Bonds for a supermarket’, 10 April 2019, . 48 For a list of possible eligible projects, see: Woolworths Group, ‘Green Bond Framework’, April 2019, , 2. 49 Sean Kidney, ‘Certification’, Climate Bonds Initiative, 1 April 2019, . 50 Ibid 3–4. 51 Woolworths Group Limited, ‘Pricing Supplement’, 17 April 2019, . 53 Wagner (n 36). 54 See Woolworths, ‘Pricing Supplement’ (n 51). 55 KangaNews, ‘Woolworths delivers next evolution of Australian green bond issuance’, . 56 Jonathan Shapiro, ‘Woolworths’ green bonds trade strongly in aftermarket’, Australian Financial Review (Sydney, 15 April 2019); KangaNews (n 55). 57 KangaNews (n 55). 58 Kelly (n 52); Clean Energy Finance Corporation, ‘World first green bond supports Woolworths sustainability strategy’, . 59 David Walker, ‘How green are green bonds?’, In The Black, 1 September 2019, . This issue of ‘greenwashing’ is discussed below: see the section 'Greenwashing' in Section 4. 60 Climate Bonds Initiative, ‘Green Bond Pricing in the Primary Market: H2 (Q3–Q4) 2019’, 31 March 2020, , 3; Bowman (n 32); McCoach (n 16); Corke (n 7). 61 EC TEG Report (n 8) 18. The EU’s TEG does not clarify how green bond investors become involved in corporate strategies. It may be that the TEG is referring to the point made by Park that social responsibility is built into the terms of the financial instrument and that ‘[b]ecause proceeds from the sale of green bonds are exclusively earmarked, investors have greater assurance that their investment will not be subject to the whims of corporate management’: Park (n 2) 13. 62 Caroline Flammer, ‘Green Bonds: Effectiveness and Implication for Public Policy’, NBER Working Paper No w259950, June 2019; Ilia Kuchin and others, ‘Does green bond placement create value for firms?’, National Research University Higher School of Economics, Basic Research Program Working Papers, Science, Technology and Innovation Series, WP BRP 101/STI/2019, 2019, , 17. See also Dragon Yongjun Tang and Yupu Zhang, ‘Do shareholders benefit from green bonds?’ (2020) 61 J Corporate Finance. 63 See studies referred to in: Kuchin and others, ibid 2–3. 64 Climate Bonds Initiative, ‘Green Bond Pricing in the Primary Market’ (n 60) 6, 12. 65 Ingo Fender and others, ‘Green bonds: the reserve management perspective’, BIS Quarterly Review, September 2019, 59–61. See also: Charlotte Grieve, ‘“Sustainability is the future”: ESG funds outperform index’, The Age, 22 April 2020, , citing the experience of Australian find manager Pengana and ‘the findings of a research project by investment specialist Fidelity that identified a “remarkably strong” correlation between stronger market performance in companies with higher environmental, social and governance ratings’. 66 Bowman (n 32), quoting Maxim Vydrine of Amundi. See also David Caleb Mutua, ‘UBS Says Investors Should Prefer Green Bonds Over Regular Debt’, Bloomberg (New York, 31 March 2020). 67 Mutua, ibid. 68 Malcolm Baker and others, ‘Financing the response to climate change: The pricing and ownership of U.S. green bonds’, October 2018, NBER Working Paper No 25194, . 69 March (n 2). See also Mutua (n 66): ‘A company’s sustainable bonds tend to have tighter bid–ask spreads compared to its non-green notes’. 70 Mutua (n 66); Christopher P Skroupa, ‘In ESG We Trust: The Risk and Rewards of ESG Investing’, Forbes, 8 August 2017; Grieve (n 65). 71 EC TEG Report (n 8) 19–21. 72 Segal (n 7). While standard green bonds offer recourse to the assets of the issuer, there are other types of green bond which have varying debt recourse options. These other types of green bond include ‘green revenue bonds’ where recourse may be directed against the revenues of a green project, ‘green project bonds’ where recourse may be limited to the assets of a particular project, and ‘green securitised bonds’ where the collateral is one or more specific green projects: see International Capital Market Association, ‘Green Bond Principles’, June 2018, , Appendix 1. These other types of green bond have not received significant separate attention in public discussions relating to green bonds. 73 Marcelo Giugale, ‘The Pros and Cons of Green Bonds’, OMFIF’s ‘The Bulletin’, World Bank, September 2018, ; Corke (n 7); CBI, ‘Green Bond Pricing’ (n 60): ‘There is no reason why a bond being green should impact its price, since green bonds rank pari-passu (on equal footing) with bonds of the same rank and issuer. There is no credit enhancement to explain pricing differences and issuers of green bonds incur costs such as third-party review and certification, although these are typically negligible. Green bonds and vanilla equivalents are subject to the same market dynamics such as supply, rate expectations, and geo-political issues’. Cf: Malcolm Baker and others, ‘Financing the response to climate change: The pricing and ownership of U.S. green bonds’, October 2018, NBER Working Paper No 25194, who found that green municipal bonds in the US are issued at a premium compared to vanilla bonds. This effect was found to be more pronounced where the bond was certified. 74 EC TEG Report (n 8) 21–2; Bowman (n 32). 75 Billy Nauman, ‘Green bonds on track for continued growth in 2020’, Financial Times (London, 12 February 2020); and Patrick Temple-West, ‘Apple raises €2bn in green bonds’, Financial Times (London, 8 November 2019), both citing a 23 October 2019 report from BNP Paribas. Verizon’s 2019 green bond offering was eight times oversubscribed: Billy Nauman, ‘Green bond issuance hits $66.6bn in second quarter’, Financial Times (London, 9 August 2019). See also: CBI, ‘Green Bonds Pricing’ (n 60), which cites the average over subscription for green bonds in Europe at 2.8 times (vanilla equivalents 2.0 times) and at 2.7 times in the USA (vanilla equivalents 1.9 times). 76 The Australian bond market is described as being ‘commonly oversubscribed’: McCoach (n 16). See also n 41 above and accompanying text regarding the bond issued by the Victorian Government. The Woolworths 2019 bond was more than five times oversubscribed: Sophie Vorrath, ‘Woolworths green bond flooded with orders as retailer looks to solar, efficiency’ Renew Economy, 15 April 2019, . The scale of investor demand for the $1.8 billion NSW Treasury Corporation 2019 bond ‘far surpassed other precedents’: Corporate and Institutional Banking, ‘Green bonds reaching the mainstream’, NAB Business Research and Insights, 16 April 2019, . 77 Kuchin and others (n 62) 4. 78 Bowman (n 32). 79 See for example: McCoach (n 16). 80 See EC TEG Report (n 8) 21 and studies cited. 81 Kuchin and others (n 62). 82 Park (n 2) 28, 32; Banahan (n 4) 852; Echo K Wang, ‘Financing green: Reforming green bond regulation in the United States’ (2018) 12 Brooklyn J Corporate Financial & Commercial Law 467, 477. See also: Paul Rose, ‘Certifying “Climate” in Climate Bonds’ (2019) 14 Capital Market Law J 59, 60–1. 83 Climate Bonds Initiative, ‘Climate Bonds Standard & Certification Scheme’, March 2018, , 1. 84 For example, Moody’s Investor Services, the Climate Bonds Initiative, CICERO, Det Norske Veritas, (DNV), Norway, Oekom, Sustainalytics, and Vigeo Eiris, among others. There are also several green bond indices which are benchmarks for green bond portfolios, supporting transparency in definitions and processes eg Barclays/Morgan Stanley Capital International [MSCI], Standard & Poor's, and Solactive. 85 Park (n 2). 86 Banahan (n 4) 848. 87 The Investor Network on Climate Risk (a North American non-profit organisation convened by Ceres that advocates for leadership in sustainability) has articulated its ‘expectations’ on behalf of investors in green bonds in a statement to guide issuers and other market participants: Ceres, 'A Statement of Investor Expectations for the Green Bond Market', Investor Network on Climate Risk, 2015, . 88 See: ICMA, ‘Green Bond Principles’ (n 72). 89 BIOSC, ‘Final Report’ (n 4). See: EC TEG Report (n 8) 23. 90 ICMA, ‘Green Bond Principles’ (n 72) Introduction. 91 BIOSC, ‘Final Report’ (n 4) 14–15. 92 ICMA, ‘Green Bond Principles’ (n 72). 93 Ibid. 94 The Climate Bonds Initiative is an international, investor-focused not-for-profit that is focused on mobilizing the $100 trillion bond market for climate change solutions: see Climate Bonds Initiative, . 95 The current version of the Climate Bonds Standard is version 3.0: Climate Bonds Initiative, ‘Climate Bonds Standard, Version 3.0’, December 2019, . 96 BIOSC, ‘Final Report’ (n 4) 10–14. Examples of broader frameworks include the International Integrated Reporting Council’s Integrated Reporting Framework, the Global Reporting Initiative Standards, and the Sustainability Accounting Standards Board Standards. 97 For reporting requirements pre-issuance, see CBI, ‘Climate Bonds Standard & Certification Scheme’ (n 83) 14–15. Part of the pre-issuance requirements is the preparation of a framework. The framework prepared in relation to the Woolworths bond is at note 48 above. Post issuance reporting requirements are at pages 18–20 of the CBS. The requirements include an annual update report. For an example of such reports, see Stockland, ‘Stockland Green Bond—Use of Proceeds Statement’, 9 July 2019, . Reports for each of the preceding four years since the bond was issued can be found here: . 98 ISAE3000 or equivalent standard: see CBI, ‘Climate Bonds Standard & Certification Scheme’ (n 83) 2. 99 The CBS requires issuers to document the specific assets to which the proceeds of the bonds are to be applied: see CBI, ‘Climate Bonds Standard & Certification Scheme’ (n 83) 12–13. As described above, the GBP requires issuers to describe a green project but not specific assets. 100 See for example: Multilateral Development Banks (MDBs) Climate Finance Tracking Working Group and the International Development Finance Club (IDFC) Climate Finance Working Group, ‘MDB-IDFC Common Principles for Climate Change Tracking’, 2015, . For a table comparing the ICMA Green Bonds Principles, the CBI Climate Bonds Standard, Chinese standards and the draft EU Green Bond Standard, see: Luxembourg Stock Exchange, ‘Sustainability standards and labels’, . 101 Green Finance Committee of China Society of Finance and Banking, ‘China Green Bond Endorsed Catalogue’, 22 December 2015, , translated by International Capital Market Association. 102 Banahan (n 4) 859; Ashurst, ‘Evolving disclosure standards in green bonds’, 12 May 2017, 103 Wang (n 82) 477. 104 A Technical Expert Group (‘TEG’) was established by the European Commission in July 2018 with the purpose of informing the Commission on its work in implementing the Commission’s March 2018 action plan to finance sustainable growth: see European Commission, ‘Commission action plan on financing sustainable growth’, 8 March 2018, . Part of that action plan was the preparation of a report on the development of a green bond standard for the EU. The TEG published a report on 18 June 2019: EC TEG Report (n 8). The report recommended ‘a voluntary, non-legislative EU Green Bond Standard to enhance the effectiveness, transparency, comparability and credibility of the green bond market and to encourage the market participants to issue and invest in EU green bonds’. On 9 March 2020, the EU TEG published its final report on its taxonomy: European Commission, ‘Technical Report’, . Also on 9 March 2020, the EU TEG published a usability guide for the EU green bond standard: European Commission, ‘Usability guide: EU green bond standard’, 9 March 2020, . For a comparison between Chinese and EU standards, see Climate Bonds Initiative, ‘Comparing China’s Green Bond Endorsed Project Catalogue and the Green Industry Guiding Catalogue with the EU Sustainable Finance Taxonomy (Part 1)’, 30 September 2019, . 105 The barriers identified by the European Commission are: lack of eligible green projects and assets; issuer concerns with reputational risks and green definitions; the absence of clear economic benefits for issuers; complex and potentially costly external review procedures; labour intensive reporting procedures; and uncertainty on the type of assets and expenses that can be financed: EC TEG Report (n 8) 21–3. 106 Ibid 21. At the time of writing, the effects of the COVID-19 crisis on the green bond market were not known. The comments of one observer indicate that the green bond market may be less affected by the crisis than other areas: see Mutua (n 66): ‘Most industries that have been overwhelmed by the impact of the coronavirus and a slump in crude oil prices … are “pretty much nonexistent” in the green bond market’, citing Thomas Wacker, UBS Global Wealth’s head of credit. 107 BIOSC, ‘Final Report’ (n 4) 33, note 10. 108 Mehreen Khan, ‘How will the EU’s system for classifying green investments work?’, Financial Times (London, 18 December 2019). 109 CBI, ‘Climate Bonds Standard and Certification’ (n 83). An assessment of more than 70 green bonds in 2019 by Insight Investment found that 15% failed minimum green criteria: David Robinson, ‘Worst examples of greenwashing are in green bonds’, Expert Investor, 27 September 2019. 110 See for example: Khan (n 108). 111 CBI, ‘Climate Bonds Standard and Certification’ (n 83) 1. The issue of ‘greenwashing’ is discussed above. 112 BIOSC, ‘Final Report’ (n 4) 14. 113 Ibid 15. 114 Shirley Tay, ‘Investors are pouring billions into bonds that aim to do good. That may not be for the best’, CNBC, 29 January 2019, ; Yen Nee Lee, ‘Trying to fight pollution, China is now the world's largest issuer of “green bonds”’, CNBC, 2017, ; Dmitri Sedov and Richard Mattison, ‘Green Finance: The Next Driver of Real Growth?’ Spglobal.Com, 28 March 2017, ; Pronina and Freke (n 2); CBI, ‘2019 Green Bond Market Summary’ (n 15): In 2019, $24.2 USD billion of green-labelled bonds issued in China were not consistent with international definitions of green bonds; Banahan (n 4) 857–8. In response to criticism of this, China announced that it would disqualify ‘clean coal’ from its green bond guidelines: ‘China disqualifies “clean coal” technology from green bond funding’, Institute for Energy Economics and Financial Analysis, 14 December 2018, . 115 BIOSC, ‘Final Report’ (n 4) 25. See also: WWF, ‘Green bonds must keep the green promise’, 2016, . 116 See note 104 above. 117 Bowman (n 32). 118 An exception is the Chinese ‘Green Bond Endorsed Project Catalogue’, which is mandatory for some transactions: BIOSC, ‘Final Report’ (n 4) 14. 119 BIOSC, ‘Final Report’ (n 4) 12–14, 23–4. These problems include differences in formats, reporting templates, and reporting indicators, a lack of effective means for monitoring implementation of a relevant framework, and the absence of external evaluation of implementation and compliance. Governance, supervision and controls are not clear and governance structures that enable public interest oversight and mitigation of conflicts of interest are absent. Little or no information is publicly available regarding due processes and methodologies followed in setting the standards. 120 See for example the bonds issued by US power company Southern Power. The bonds were asserted by the company to be used for renewable energy projects. There was no second party opinion or certification. However, this did not deter interest from major institutions and there was intense investor interest. Southern Power has issued $3.1 billion in ‘green bonds’ in three issuances: ‘Southern Power green Bonds’, Southern Company, . See also: Graham Cooper, ‘US power company issues second benchmark-sized green bond’, Environmental Finance, 14 June 2018, . Regulation in the US is limited to disclosure: Park (n 2) 18; Banahan (n 4) 860; Rose (n 82) 76. See also the example of the EDF Group which issued a €11.4 billion green bond while operating nuclear power plants in France and Britain: cited by Dan Moskowitz, ‘Opportunities and Risks of Green Bond Investing’, Investopedia, 25 June 2019. 121 Banahan (n 4) 852–3. 122 See for example: CBI, ‘Climate Bonds Standard and Certification Scheme’ above (n 83) 23–4. Approved verifiers are required to comply with international standards that include conflict of interest processes (ISAE 3000: Assurance Engagements other than Audits or Reviews of Historical Financial information, or ISRS 4400: Engagements to Perform Agreed Upon Procedures Regarding Financial Information). Examples of conflicts of interest are specified, including a verifier receiving fees from an issuer for another engagement at the same time, and a verifier receiving a material portion of its revenue from an issuer. 123 Banahan (n 4) 867. 124 Giugale (n 73). 125 Andrew Whiley, ‘Poland wins race to issue first green sovereign bond. A new era for Polish climate policy?’, Climate Bonds Initiative, 15 December 2016, . 126 Ibid. 127 Ibid. Poland went on to issue a second green bond in 2018: see Kate Allen, ‘Poland’s second green bond is a first for markets’, Financial Times (London, 1 February 2018), . 128 Michael Boardman, the group chief financial officer of clean energy developer Sindicatum, quoted by Tay, (n 114). 129 Moody’s Investor Services, ‘2019 Global Green Bond Outlook’, 31 January 2019, , exhibit 5 on page 5. 130 David Chen, chairman and head of product development and research at Equilibrium Capital Group quoted by Bowman (n 32). 131 EC TEG Report (n 8) 16, 19. 132 Walker (n 59). 133 EC TEG Report (n 8) 21; ‘Environment bonds: how green is my tally’, Financial Times (London, 21 January 2020); Lyn Graham-Taylor of Rabobank quoted by Gross (n 30); Gillian Tett, Patrick Temple-West and Billy Nauman, ‘Green bonds hit $1tn amid growing pains’, Financial Times (London, 23 October 2019): ‘the market is so fragmented that liquidity is thin’. See also Ingo Fender and others, ‘Green bonds: the reserve management perspective’, BIS Quarterly Review, Basel, September 2019. 134 Bowman (n 32). 135 See: Bowman ibid; Jessica Shankleman, ‘How to invest in green bonds’, GreenBiz, 28 October 2015, . 136 Pronina and Freke (n 2). 137 See Bowman (n 32) citing Phillip Brown of Citi, Alban de Fay of Amundi, Suzanne Buchta at Bank of America Merrill Lynch, Orith Azoulay of Natixis and Jim Caron of Morgan Stanley Investment Management. See also Anna Gross and Tommy Stubbington, ‘The “transition” bonds bridging the gap between green and brown’, Financial Times (London, 4 January 2020), who cite the example of Yo Takatsuki of AXA Investment Managers. 138 Gross and Stubbington, ibid. 139 Accordingly, the CBI has ‘supported green bonds financing renewables from banks with balance sheets dominated by fossil fuel loans and “brown to green” bonds from companies like the giant Indian energy utility NTPC, because the assets are material to addressing climate change’: Andrew Whiley, ‘An oil & gas bond we knew would come eventually: Repsol: Good on GBPs, not so sure on green credentials’, 23 May 2017, . 140 ‘There are some brown issuers where you have to ask whether you would be confident buying a green bond from them’: Alban de Fay of Amundi quoted by Bowman (n 32). 141 David Robinson, ‘Seeing past the greenwash’, Expert Investor, 17 September 2018, . 142 Kelly (n 52), describing the approach of investor ‘Australian Ethical’. 143 See notes 120 and 126 above and accompanying text. 144 It was Environmental Finance’s Sovereigns, Supranational and Agencies bond of the year: Phil Brown, ‘Green bond comment, June—of Repsol and reputation’, Environmental Finance, 7 June 2017, . 145 Whiley (n 139). 146 Peter Cripps, ‘Green bond comment, June—of Repsol and reputation’, Environmental Finance, 7 June 2017, . 147 See for example: In 2016, the Mexico City New International Airport became the first airport in the world to be partly financed by green bonds: Tsvetomira Tsanova, ‘Green bonds issued to back Mexico City’s new green airport’, Renewables Now, 28 September 2016; Dr Arthur Krebbers, ‘Mexico City Airport: “The green bond that was no longer”’, NatWest Markets On Point, January 2019. This was followed in 2017 by the Orlando International Airport: Eva Grey, ‘Should green bonds be used to finance airport projects?’ , 6 November 2017. See also: Kate Allen, ‘Schiphol becomes first European airport to sell green bond’, Financial Times (London, 23 October 2018), regarding Amsterdam’s Schiphol Airport 2018 green bond; Aaron Weitzman, ‘Portland, Maine, to issue its first airport green bond deal’, , 15 November 2019, regarding the Portland Jetport 2019 green bond; Filipe Wallin Albuquerque, ‘How Green are Airport Green Bonds?’, , 19 December 2019, regarding Swedavia’s 2019 green bond. 148 Wallin, ibid. Swedavia is a Swedish, state-owned company that owns and operates ten airports across Sweden, including the country’s main international airport outside Stockholm. 149 Krebbers (n 148). 150 See: Nick Troja, ‘Green bonds for hydropower financing’, International Hydropower Association, 22 May 2017; Esther Whieldon, ‘Hydropower largely excluded from burgeoning green bond market’, S&P Global Market Intelligence, 10 October 2018; ‘Green bonds’, International Hydropower Association, . 151 Troja, ibid. Perhaps perversely, large-scale hydropower projects are excluded from Poland’s sovereign green bonds. 152 A Draft Hydropower Criteria was released for public consultation by CBI on 30 July 2019: Mariana Caminha, ‘Last chance to comment on Draft Hydropower Criteria: Public consultation closes Friday. Final call for submissions’, Climate Bonds Initiative, 30 July 2019. 153 Reuters, ‘Can nuclear energy be green? Draft EU classifications don’t rule it out’, Thomson Reuters Foundation News, 24 September 2019; Mehreen Kahn, ‘How will the EU’s system for classifying green investments work?’, Financial Times (London, 18 December 2019). These industries could, in the future, be judged on a yet to be developed ‘do no harm’ principle and be classified as technologies that help a transition towards a carbon neutral world, without being green industries themselves. 154 See Suzanne Buchta and Tangy Claquin, ‘The big debate: Pureplay green bonds’, Environmental Finance, 6 October 2015, ; Bowman (n 32). 155 Andrew Whiley, ‘Huge pipeline of green bonds’, Climate Bonds Initiative, 9 October 2015, . 156 For an example of a green bond that failed to deliver its promised benefits, see: Motoko Aizawa, ‘Green Bonds: a reflection by Climate Bonds Senior Fellow Motoko Aizawa from our NYC legal workshop’, 3 May 2015, describing a bond issued by Syracuse Industrial Development Agency that promised to fund a sustainable power plant, solar panels and fuel cells as part of a shopping centre development, but delivered none of its green promises. 157 Climate Bonds Initiative, ‘Climate Bonds Standard Version 3.0’, December 2019, 29. 158 See Karsten Wockener and others, ‘Green bonds—building optionality for issuers into programme documentation’, White & Case LLP, 9 January 2018, : ‘“Green” provisions are not typically included in contractual documents … Issuers are reluctant to include “green” undertakings as a breach may trigger an event of default under bond documentation, which could result in cross-defaults under other agreements’; Latham & Watkins LLP, ‘New Green Loan Principles Apply Bond-Like Approach to Nascent Green Loan Market’, 29 March 2018, : ‘Bond investors generally benefit from securities law disclosure obligations and stock exchange listing rules and, accordingly, the vast majority of green bonds do not include contract provisions related to their green nature.’ See also ‘Environment bonds: how green is my tally’, Financial Times (21 January 2020): ‘Issuers reserve plenty of wriggle room on disbursing proceeds. Apple, the biggest corporate issuer, gave itself “significant flexibility”, adding “there can be no assurance” that funded projects meet “investor criteria or expectations regarding sustainability performance”’. On Apple’s green bond issue, see Patrick Temple-West, ‘Apple raises €2bn in green bonds’, Financial Times (London, 8 November 2019). 159 Clare Corke, Julie Myers and Cameron Busch, ‘Green Bonds Series: Part 4—When “green” bonds go brown’, Corrs Chambers Westgarth, 17 October 2019. See for example Woolworths, ‘Pricing Supplement’ (n 51) 10: ‘Although, as at the date of this Pricing Supplement, the Issuer expects to do so, the Issuer does not covenant to ensure that the Notes continue to comply with the Green Bond Framework’. 160 ‘Environment bonds: how green is my tally’, Financial Times (London, 21 January 2020). 161 Corke, Myers and Busch, ‘Green Bonds Series: Part 4’ (n 151). See also Jon Hay and Silas Brown, ‘ESG price ratchet enters Schuldschein: bonds next?’, Capital Markets, 13 June 2019, . 162 Corke, Myers and Busch (n 151). 163 This example is cited in ‘Environment bonds: how green is my tally’, Financial Times (London, 21 January 2020); and Gross and Stubbington (n 137). See also John Hay, ‘Green price ratchet bonds will soon be everywhere’, Global Capital, 10 September 2019, . Enel’s bond was alleged by a representative of green bond investor Nuveen to amount to greenwashing: see Stan Dupre, ‘In response to accusations that Enel’s SDG bond was greenwashing’, Environmental Finance, London, 31 October 2019. © The Author(s) (2020). Published by Oxford University Press. All rights reserved. For permissions, please email: journals.permissions@oup.com This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model) TI - Green bonds: legal and policy issues JO - Capital Markets Law Journal DO - 10.1093/cmlj/kmaa018 DA - 2020-12-03 UR - https://www.deepdyve.com/lp/oxford-university-press/green-bonds-legal-and-policy-issues-3RpJHWJoMq SP - 418 EP - 442 VL - 15 IS - 4 DP - DeepDyve ER -