Comments on “A Multidisciplinary Literature Review of Academic Research on the Green Bond Market”

Kalyani Inampudi, ACSI, MBA
Imperial College Business School and ESADE Business School

Introduction

It was a great discussion on various research methodologies for green bonds. However, an in-depth discussion involving an anthropological perspective might have given additional flavor to this setting. Merely mentioning sociological and anthropological theories is not enough on its own. The exploration of its applicability and what key contributions anthropology has been bringing to the study of climate change are critical. To deepen the understanding from an anthropological perspective, the analysis of longitudinal studies of brown and green finance would have benefitted from additional clarity and further follow-up explanations.

A Comment on the Section “Defining Climate, Green, and Environmental Finance”

While climate finance is generally understood as the financing of assets and activities supporting climate change mitigation, the term climate finance in its current context is mostly aimed at financing or funding those technologies or activities that aim at reducing harmful emissions of greenhouse gases, and the atmospheric warming caused by the latter. It also indirectly aims at increasing the resilience of human and ecological systems to rapidly change negative climate change impacts.

Albeit the authors indicate that climate finance can be considered as a subset of environmental finance, in the current context the term environmental finance is mostly aimed toward financing and investing in the preservation of ecological systems and the environment, such as the management of solid waste, biodiversity issues (for example, landfills and hazardous waste, land remediation, and so on). Climate finance has mostly been distinguished from both ecology and ecological economics.

The authors did specify green and sustainable finance as important tools, as well as their importance, given the persisting urgency to fully transition to a sustainable economic model. However, in the upcoming EU policy and regulatory definitions, sustainable finance is referred to as any form of financial service integrating ESG (Environmental, Social, and Governance) criteria into business or investment-making decisions. Generally, this includes economic activities that ensure and improve economic efficiency and sustainability in the long term. Current activities that fall under green and sustainable finance include, among others, microfinance, funding for green bonds, sustainable projects (mainly those that overlap with project finance activities and follow the equator principles). In summary, it aims at gearing the whole financial system in a more sustainable direction.

A Comment on “Defining Green Bonds”

Climate bonds are fixed-income financial instruments that can be linked to climate change solutions, although not exclusively. They are most commonly issued by governments, investment banks, municipalities, or corporations.

While there is a need for $36 trillion of clean energy investments, the authors could have provided additional details such as the ratio of green bond capital to be raised in both developed and developing nations. According to recent scenarios, emissions and energy demand are both likely to double; hence it is crucial to calculate the break-even thresholds to estimate the minimum capital to raise and indicate the country-level or continental variances.

While it was quite interesting to know that private equity and venture capital can be sources of finance, it is also imperative to recognize other stakeholders in this value chain for the purpose of meeting the UNFCCC’s annual $100 billion investment target. I would have stated that insurance companies, investment managers, pension funds, non-pension fund assets, foundations, and endowments all share equal responsibility to achieve these targets.

A Comment on “The Market for Green Bonds”

As of 2019, the United States, China, and France are leading national issuance rankings. According to the Climate Bonds Initiative, the 2019 volume was primarily driven by the wider European market, which accounted for 45% of global issuance. Asia-Pacific and North American markets followed at 25% and 23%, respectively. In 2019, the total amount of green bonds issued in Europe increased by 74% (or USD49.5 billion) year-on-year, reaching a total of USD116.7 billion.

It is evident that the overall market share for green bonds is increasing on a year-on-year basis. It might have been more helpful if the authors could have elucidated on the different stakeholders’ contributions in this value chain through, for example, financial intermediaries, blended finance, and institutional investor-level fundraising. Additional insights regarding those classifications would have been quite helpful.

A Comment on “Anthropological and Sociological Theory on Green Bonds”

The review might have benefited from a few more lines on social theory and what level of input is required to help mitigate the challenges posed by climate change. Since the authors have referenced how anthropological studies have influenced green bonds, it would have been even more important to expand further on the different disciplinary methodologies and to what extent timescales have been involved. For example: What went right and wrong so far? On what timescales were those anthropological studies conducted?—meaning, were they shorter or greater than a decade ago, or did they cover much more extended periods?

Is it important to know if the data are quantitative, qualitative, or both? And what geographical locations have been of greater importance so far in helping the green bonds market mature? While it is great to know that the study of anthropology provides valuable insights for the scientific community, it is of higher relevance to establish metrics more directly linked to contemporary climate issues. These include the success rates of past adaption and mitigation measures, and also what lessons can be drawn from these so far. Explaining anthropological theories in this context would have generated substantial additionality.

A Comment on “The Translation of Climate Science into Finance”

Adhering to stricter legal frameworks, as well as business codes of conduct, is a key element in scaling climate finance. While the authors outlined the benefits of complying with existing industry product standards such as the Green Loan Principles of the Loan Market Association (LMA) and the sustainability bond guidelines of the International Capital Markets Association (ICMA), it would have been useful to also illustrate the role of external assurances where required, using appropriate benchmarks and adequate sustainable product definitions. These usually help to minimize greenwashing or reduce the risk of translating climate science into finance. However, the importance of extra due diligence and the participation of third-party verifiers for identification and evaluation purposes are also key aspects to be considered.

A Comment on “The Policy Significance of Green Bonds”

The authors have pointed out that having solid policies in place is seldom a barrier to the development and scaling of the green bonds market. However, additional coverage of the conflicting policies and practices in developing countries would have strengthened the paper, including how these policies have acted as a barrier so far, and what until now could have been done to improve this situation.

Readers might also have been interested to know that there are a variety of different climate-change-related risks which can cause asset stranding, including falling clean technology costs or new government regulations, such as carbon pricing (for example, carbon taxes). Policy frameworks are playing a vital role in decreasing these risks. Proper coordination between the ministries of finance and the ministries of environment during bond issuance can act as a catalyst to issuance growth.

The central role of the TCFD is valid, but it would have been nice to have more supporting studies on how this framework has positively impacted developing countries. This could be another topic for further green bond markets research.

A Comment on “Green Bond Market Governance in the Legal Literature”

In the discussion, while it is evident from Banahan (2019) that Green Bond Verifiers (GBVs) share many features with credit rating agencies (CRAs), it is imperative to understand how this situation could lead to conflicts of interest. Hence, this potential issue could be explored in more depth. Reputation across issuers is not equally distributed, with some studies highlighting the crucial role of issuers, who pay for the certifications (Becker and Milbourn 2011).

One of the main differences that has been highlighted was that CRAs are required to disclose methodologies’ data assumptions to a certain extent and consistency in the application of ratings. In contrast, GBVs are not subject to such requirements, which could facilitate underlying potential conflicts of interest. The listed regulations made it imperative for CRAs to disclose their credit rating methodologies in response to the 2008–2009 financial crisis.

Green bonds are enjoying heavy growth and are now available in more than 20 countries. China, Brazil, and India have all released their respective policies and guidelines in this space. It is critical to evaluate how the standard-setting regimes, legal structures, and governance standards differ between jurisdictions, including those of the United States, European Union, and China, as these are leading in green bonds issuance.

Most of the countries have been developing or have developed their own regulatory structures for their respective green bond markets. However, for the sake of consistency, it would be preferable to have a certain degree of consistency between all of them. It is important to implement prominent guidelines such as the Green Bond Principles (GBP), established by ICMA, to help guide issuers in setting up credible green bonds. The GBP’s suggested process guidelines seem to be, in my opinion, especially applicable to both GBVs and CRAs. The guidelines include the following steps:

• “Define criteria for a green project”;
• “Define processes for evaluation and selection of the green project”;
• “Have systems to trace the green bond proceeds”; and
•  “Report, at least annually, on the use of the proceeds.”

The authors should have elaborated more on transparency instruments, such as establishing a Green Standards Committee (GSC), as described by Banahan (2019), which could offer a great level of critical assurances to environment-focused investors by providing clarity, oversight, and accountability in the accreditation process. Moreover, it could have proven helpful to have a more in-depth look at how a GSC would oversee the market and provide assurances about verifiers not engaging in risky behavior, and how that could have helped prevent the 2008–2009 financial crisis.

In this context, I would like to mention the emergence of blockchain technologies, which could constitute an important tool in enabling green bonds to grow and increase their credibility and transparency. The authors’ message of using blockchain in fostering these positive trends is not fully clear. More evidence and examples are needed to obtain a better understanding of how these novel technologies help enforce green bond regulations and enhance trust in green financial markets. These technologies are at an early stage of development, and it might prove hard to predict their future trajectories. Hence authors could have provided recommendations to help policymakers identify and recognize the potential behind these technologies.

A Comment on “Pricing Research on Green Bonds”

On average, the market for green bonds is still reasonably small in size compared to the one for vanilla bonds. This could make green bonds less liquid than other bonds with similar or identical credit ratings. A few additional lines from an issuer’s perspective in relation to the potentially higher issuance costs would have proven useful, since these are primarily caused by labor-intensive reporting requirements that involve third-party verifiers. The additional procedural steps in the green bond issuance process can actually render them more expensive than conventional vanilla ones. For example, investment banks generally charge more to issue green bonds. New regulatory initiatives on the horizon, most notably in the EU, which is planning the introduction of green-bond-related issuance and reporting requirements, could lead to additional cost increases. At a global level, there is still a lack of clear guidance on what activities or projects increase the need for clear definitional frameworks for green bonds, similar to the EU’s planned green taxonomy and green bond standards.

A Comment on “The Legal Consequences of a Greenium”

The authors have clearly stated the risk of greenwashing, especially via financial product offerings such as green bonds and green loans, which in some cases can lead to litigation. However, the other potential key risks of interest that were missing are “reputation risk” and “compliance risk.” These represent material risks, notably if the issuer or borrower has failed to identify that the raised funds have been misallocated. Possible scenarios include, for example, insufficient evidence about how funded projects contributed toward positive environmental impacts or improperly tracked and inefficiently disclosed green bond proceeds. These shortcomings can damage the issuer’s reputation and entail further legal proceedings with regard to the misrepresentation of risks and impacts.

It would have been interesting to see a more extensive exploration of whether green bonds can be considered as a separate asset class. There are a number of different approaches and standards being used to establish eligibility in the global labeled green bond market. At the moment, there are no mandatory green bond standards, and market actors are free to choose what and how these different approaches are applied, which can potentially turn into a systemic risk. This aspect could be explored in any further academic research on green bond markets.

A Comment on “Future Research Avenues and Anthropology”

While anthropology, law, and policy should remain key research areas on green bonds, another promising area would be archaeology. In my opinion, archaeologists help to understand the dynamics of how the earth and communities evolve or adapt after natural calamities, which often lead to material or structural post-disaster changes. The authors should consider this angle in their future research.

A Comment on “Policy”

The authors could have put additional emphasis on the importance for policymakers to clearly understand how to mobilize sufficient debt and equity capital to catalyze the transition toward low-carbon and climate-resilient economies.

A Comment on “Law”

While the authors’ views expressed in this section are quite interesting, I am suggesting a further investigation into the following questions in any follow-up academic research:

• As there is currently only a limited scope on the legal enforcement of green integrity, especially in developing regions, what practices are in place to overcome this barrier?
• To what extent does the law facilitate or impede the avoidance of greenwashing?

Conclusion

Overall, the original article might have benefited from a more detailed explanation on how green bond principles support the identification of more granular criteria. Specifically, those criteria concerning the use of the bond proceeds as a way of helping to identify truly green projects and setting out these as a requirement rather than just as a voluntary principle.

Readers might also have benefited by understanding whether a global standard is possible or applicable. Or if more regionalized standards tailored for specific geographies will be more beneficial to countries. Will the upcoming EU standards have a ‘first mover advantage’ and transform into the de facto new global standard? For example, China has adopted its own approach, which could potentially pave the way for other countries, too, to implement their own standards. These green bond policy aspects require further research.

Finally, I would have loved to see the authors put more emphasis on the inherent weaknesses of green bonds, including the perceived lack of actual cost of capital advantages for the issuer, and whether these activities would have been financed anyway in the absence of the green bond label.

In conclusion, I recommend further discussions on the alternatives to green bonds and how to use green bonds’ proceeds more effectively, for example in the form of Green Asset Backed Securities (ABS) or Green Infrastructure Bonds, since both of these categories appear to be more narrowly defined and thus overall less susceptible to greenwashing.

Biography

Kalyani Inampudi has a background in asset management and data analysis. Her experience includes deep data research and writing investment proposals. She has certifications from UNPRI, the CDSB via the TCFD Knowledge Hub, and the Associate Chartered Securities Investments (ACSI) for wealth and investment management. During her MBA studies at Imperial College, London, she focused on ESG and sustainability investing, paying particular attention to clean technology and renewable energy issues for her thesis. Kalyani recently co-authored the chapter “The Impact of AI on Environmental, Social and Governance (ESG) Investing: Implications for The Investment Value Chain” in The AI Book: The Artificial Intelligence Handbook for Investors, Entrepreneurs and FinTech Visionaries (Wiley, 2020). She is currently working as an ESG and sustainability consultant and is a leadership team member of the Energy Finance Special Interest Group at the CFA Society of the United Kingdom (CFA UK).

References

Becker, B., and T. Milbourn. 2011. “How Did Increased Competition Affect Credit Ratings?” Journal of Financial Economics 101(3): 493–514. Available from https://doi.org/10.1016/j.jfineco.2011.03.012.

Banahan, C. M. 2019. “The Bond Villains of Green Investment: Why an Unregulated Securities Market Needs Government to Lay Down the Law.” Vermont Law Review 43(4): 841–869. Retrieved from https://lawreview.vermontlaw.edu/wp-content/uploads/2019/06/vlaw_43n4_Banahan.pdf.