CICERO: A second opinion on green bonds

“It’s about peoples’ and investors’ confidence in green bonds”, says Asbjørn Torvanger, Senior Researcher at the Center for International Climate and Environmental Research Oslo (CICERO). Photo: CICERO

The growing market for green bonds is creating demand for independent reviews of the actual “greenness” of the projects they finance.

The total amount of outstanding bonds labelled as “green” grew to USD 65.9 billion as of 10 June 2015, according to the non-profit Climate Bonds Initiative. This global market is being driven by investors’ confidence that green bond proceeds actually can support a low-carbon future. For now, there is no lack of green bond investors whereas the limiting factor is on the issuer side.

The Center for International Climate and Environmental Research Oslo (CICERO), an independent climate research foundation in Norway, has developed second opinions for 44 per cent of all the 474 labelled green bonds issued globally since June 2007, data from the Climate Bonds Initiative shows.

“I believe that the role of second opinions is to illuminate and secure the best possible information for investors. It is about building confidence and what investors want”, says CICERO’s Senior Researcher Asbjørn Torvanger.

“Green bond issuances generally sell out in a very short time. As long as the issuers see that issuing green bonds adds value, such as adding new investors, we will see growth continue.”

Still, some 36 per cent of all labelled green bonds come with no second opinion.

Important to avoid carbon lock-in
“Second opinions are seen as important in Europe and somewhat unimportant in the U.S. Overall, there is a deepening understanding in the market that second opinions can play a useful role. My impression is that an increasing share of green bond issuances now comes with a second opinion”, Mr Torvanger says.

CICERO develops a second opinion by analysing whether the issuer’s green bond framework is well aligned with a low-carbon and climate change resilient future, and how well this is supported by the issuer’s policies and strategies. Based on this analysis, CICERO commences a dialogue with the issuer regarding possible inconsistencies and potential pitfalls in the long-term consequences of the projects that will receive funds from the green bonds.

“While some types of project are obviously green, such as wind power, it is harder to evaluate projects involving for instance carbon capture and storage, improved energy efficiency in buildings, or reducing methane emissions in fossil fuel production.”

At the end of the process, CICERO gives a scientifically based second opinion on the soundness of the green bond framework in promoting climate-friendly investments, as well as the transparency of the process.

“Since the main objective of green bonds is to support a low-carbon future, it is really important for us to avoid carbon lock-in, meaning people should not invest in infrastructure and energy projects that are counterproductive to long-term climate and energy targets, such as the EU’s long-term goal of reducing greenhouse gas emissions by 80 per cent –95 per cent compared to 1990 levels by 2050.”

Worries about “greenwashing”
Evaluating the environmental claims made by issuers of green bonds has been a key issue of debate since the market for green bonds started to show real signs of growth in 2013. Market participants currently regulate themselves by developing and adhering to the Green Bond Principles. CICERO’s concern is that the market needs a much more standardised approach than today regarding transparency and what really is green and what is not.

What causes the most concern for Torvanger and his colleagues is the assurance part. The concern is that issuers of green bonds could make the mistake of financing something which turns out not to improve the environment.

“That would certainly backfire and undermine confidence in the whole green bond concept. If there is any doubt, my best advice would be not to use green bond proceeds for projects with more uncertainty in terms of long-term alignment with a climate-friendly future.”

“So far, the green bond market has promised investors that they will get something green for their money. I think investors will soon start asking for verification that the issuer really has achieved what it said it would achieve.”

Mr Torvanger reminds us that green bonds are a valuable instrument for making it easier for investors to identify investments that are likely to help in achieving a 2050 climate-friendly solution.

“It’s about peoples’ and investors’ confidence in green bonds. Therefore, it is important to select projects and technologies that have a sufficient probability of contributing to a greener future.”

NIB Environmental Bonds
NIB also issues Environmental Bonds (NEB) to attract investors who particularly want to help finance a more sustainable future.

The use of the proceeds is governed by NIB’s Environmental Bond Framework. CICERO’s second opinion is that NIB’s environmental bond framework provides “a clear and robust framework for climate-friendly investments.”