Bank of England’s Carney outlines building blocks to catalyse green bond market

Bank of England Governor Mark Carney has outlined the building blocks he thinks are needed to move the green bond market into the mainstream.

These include greater harmonisation, liquidity, indices, a dispute resolution mechanism and credit ratings that factor in environmental risk, he said during a surprise speech in London yesterday. “To catalyse the market we need building blocks,” he told the Future of Green Finance conference.

Carney, who also chairs the Financial Stability Board, was addressing the event organised by the China-led B20, the business coalition of G20 nations, the City of London and the United Nations Environment Programme (UNEP).

His audience included Nikhil Rathi, CEO of the London Stock Exchange, Ma Jun, Chief Economist at China’s central bank, the People’s Bank of China, Harriet Baldwin, Economic Secretary to the Treasury and Achim Steiner, Executive Director of UNEP.

The meeting was also live-streamed to all UK Treasury and Bank of England civil servants.

Carney told the audience that the Bank of England was dedicating serious resources to greening the bond market, along with its counterpart in China.

“The green bond market needs to move from niche to mainstream,” Carney said. “We are aware of the scale of investment required to make meaningful progress to stabilising the climate. We need extraordinary investment that cannot be filled in a niche way. The challenge is to move to mainstream.”

Globally, Carney said that funding requirements for green infrastructure were around $4trn a year for the next 15 years.“Contrast that with green bond issuances of $40bn last year. It’s up 10% on the previous year. But it’s 1% of bond issuances overall.” The said: “There is a focus bilaterally with the People’s Bank of China and the G20 Study Group on mainstreaming green bonds.”

Carney said there was a macro-economic imperative for green expansion that offered yield and duration to match the liabilities of institutional investors. “I do see green bonds have the unique potential to align interests of issues and investors,” he said.

“The search for duration is massive. It requires reaching across borders and to emerging markets. For issuers there is access to deep pools of capital.”

To move the green bond market forward, Carney said a number of things were needed including a term sheet to improve the efficiency of issuance and access, with standardised terms and conditions.

He continued that a definitional framework for certification and validation was needed to certify that projects financed were indeed green.

He said indices needed to be developed, but added that passive flows needed “confidence in a stable equilibrium,” saying factoring environmental risk into credit ratings was “desirable”.

Finally, he warned that issues could eventually arise as the green bond market matures, and said there had to be a mechanism for dispute resolution.

Carney concluded: “We are looking to make this mainstream. We will determine whether it’s viable to mainstream green bonds in the G20 this year. It will be complemented by the work of Mike Bloomberg with the Task Force on Climate-related Financial Disclosures. The work is progressing well. There will be a consultation paper out next week.”