"Dubious or murky” green benchmarks are leaving “the door wide open to greenwashing”, said UN secretary-general António Guterres at this year’s World Economic Forum.
As the transition progresses and the demand for dedicated capital strengthens, the waters of green financing are as murky as ever.
Green bonds have grown in prevalence in recent years, leading to the emergence of oversight structures that attempt to prevent funds from being used to brand 'brown' activities as 'green'.
The Climate Bonds Initiative (CBI) and the International Capital Markets Association (ICMA) are among the industry bodies grasping for control of the market.
But while guidelines and suggested vetting systems for bonds are widespread, the effectiveness of each remains in question.
In February 2023, the EU threw its hat in the regulatory ring, reaching a provisional agreement on an EU green bond (EUGB designation).
The proposed rules aim to tackle inconsistency and a lack of transparency within the debt class, offering new structures for the supervision of green bond issuance.
While the EUGB promises to be the new gold standard for the regulation of green finance, early signs suggest it may trip on the same stumbling blocks as the regulations that came before it.
Definitions and methods for oversight still need to be pinned down to reach consensus and credibility and ultimately fend off claims of greenwashing in the market.
Familiar pitfalls
If the EUGB is confirmed by the EU Council and Parliament, it will utilise external reviewers, similar to the CBI’s climate bond standard.
The external parties assess information provided by the bond’s issuer and deliver a rating for each bond, in a process that aims to make the green bond label more credible. Not all bonds pass the vetting process.
By way of example, the CBI rejected 25 per cent of the green bond applications it received in 2022.
As green bonds become more widespread, the use of third-party validators is rising, however the efficacy of these reviews is debated.
The high volume of reviewers in the market has raised concerns about the consistency of ratings and many have been criticised for a lack of transparency.
Actions such as HM Treasury’s consultation into environmental, social and governance ratings providers (published in March) speak to this concern.
The system the consultation proposes is far from being in play in the green bonds market at present, highlighting how there is some way to go before external reviewers act as the effective filtering mechanism they are hailed as.
Blurred lines
To review and approve a green bond, regulators rely on a definition of 'green', but there is no central definition between bodies and the categories used by each have been known to change over time.
