Investment banks call for coalition to drive growth and oversee quality of green bonds

Framework would look after project quality and reporting, say Citi and BoAML.

Citigroup and Bank of America Merrill Lynch (BoAML) have called for the formation of a coalition of issuers, dealers and investors to drive the evolution of the nascent green bonds market and ensure bonds are being used for loans for green projects rather than green-washing. In a report titled a “Framework for Green Bonds” published in EuroWeek, Citi and BoAML issued an open invitation to banks, investors and fund managers to join the Steering Committee for a Green Bonds Working Group. JP Morgan and Morgan Stanley are the first banks to have joined. Ratings agencies, NGOs, regulators and organisations such as the UN-supported Principles for Responsible Investment have also been invited to participate in producing definitions for green bonds to ensure that money is being invested in projects that contribute to environmental improvements. The banks propose a voluntary “framework” for green bond issuance where issuers and banks commit to both transparency on the actual use of funds and reporting on that use. The framework also proposes that issuers should refer to an authoritative, third party list of criteria for assets that can be included in a green bond. The Climate Bonds Initiative (CBI), an investor-focused NGO working to mobilize capital markets to finance climate change solutions, said the main point about the framework is to ensure that green bonds are about the“green” qualities of the underlying asset, not whether a company is relatively green or not. Sean Kidney, CEO of the Climate Bonds Initiative said: “Bonds have to be linked to actual wind farms or green buildings, or projects to build them. This means that a company does not have to score well in ESG or green rating systems to be able to issue green bonds – they have to be building green kit.” The Citi/BoAML paper references five possible taxonomies for issuers to use: OECD, World Bank (BRD), IFC, EIB and the Climate Bonds Taxonomy, created by the CBI. Kidney said: “There’s not a lot of difference between these taxonomies; they are all coming from the same position and are all about climate investments. But there are differences in the level of practical detail provided and underlying regimes, such as reporting requirements.” The Citi/BoAML paper doesn’t call for certification or verification of the Green Bonds market, although it says this may be a further market development. Last week, Ontario in Canada became the country’s first provincial government to issue green bonds, which will be used to finance “environmentally-friendly” infrastructure projects. The bonds are slated to meet “meet international certification and disclosure standards”.