Tuesday

19th Mar 2019

Opinion

The risks behind the 'green bond' boom

  • Will Green bonds make the economy grow while safeguarding the environment - or are they at risk of a 'bubble'? (Photo: Bioeffect)

The EU is currently making significant efforts to play a pioneering role in green financing.

The aim is to adapt the financial system to its ambitions for climate, sustainability and clean energy.

Read and decide

Join EUobserver today

Support quality EU news

Get instant access to all articles — and 18 year's of archives. 30 days free trial.

... or join as a group

Key impulses here were the Climate Agreement of Paris, the Green Finance Study Group of the G20 and the Hamburg Climate and Energy Action Plan of the G19.

Including financial markets in a climate strategy is a logical step with insufficient public funds to finance the necessary investments in green technologies.

At the same time, the financial sector is showing interest in financing green technologies.

Green Bonds are regarded as a key green financial product.

Since the first issuances by the European Development Bank and the World Bank a decade ago, the issuance volume of green bonds has grown enormously.

While a global volume of $3bn was issued in 2012, the issuance volume increased to $157bn in 2017.

The heightened demand for green bonds can be attributed either to greater awareness of sustainability and to the downsides of climate change, but also to the fact that green bonds are more transparent than traditional bonds.

Investors in a traditional bond have limited information on how proceeds are invested, while green bond issuers are allowed to use the funds raised only for green investments. They also document this for the investors.

Definitions needed

However, for such a market to thrive, investors need a definition of green investments and a definition of what a green bond is. In addition, disclosure standards are required so that investors can easily access and compare information about these bonds.

The EU's main effort to strengthen the green bond market is to legislate for a common taxonomy on green bonds and to increase the demand for green bonds through a green supporting factor in bank equity capital regulation, i.e. lower capital requirements for green bonds.

While the taxonomy is relevant to all investors, it was specifically intended to encourage banks to lend money for green investments.

However, this effort must be viewed critically.

Since a bank's equity capital is a limiting factor for lending, the design of capital requirements for banks directly impact demand for specific types of assets of banks.

Since a bank's equity is a buffer against unexpected losses, bank regulation should ensure that banks hold sufficient equity capital relative to their risk.

However, a green supporting factor means that banks will have less equity capital against the unexpected losses of a green bond.

The only rationale for lower capital requirements for green bonds is a lower probability of default compared to traditional bonds.

As long as this is not the case, the green supporting factor would only result in banks being undercapitalised against losses on green bonds.

Political project

As the green bond market is a political project, there is a risk of favouring green bonds in financial market regulation in order to achieve policy goals.

From our calculations, we derive a risk of political intervention to stimulate the demand for green bonds.

The annual green bond emissions would then have to increase by a factor of 45 to finance the potentially required annual green investments of up to $7trn.

To meet the additional investment necessary to achieve the Paris climate target, the annual green bond emissions would have to increase by a factor of 4.5.

In the past, the US made the mistake of using the Community Reinvesting Act to increase housing investment through policy instruments aimed at banks expanding lending to households.

The EU should not make the same mistake and overuse the financial system in order to achieve environmental goals.

The emergence of a green bond bubble and the bursting of that bubble would be detrimental to the financial sector and hinder the achievement of climate targets as investors refrain from investing in which they have previously lost money.

In order to promote green investments, the EU should therefore prefer to rely on existing environmental policy instruments.

Instead of pushing for a rapid growth of the green bond market, the EU should strive for its organic growth.

This should be driven by the market.

To this end, the proposed harmonisation of taxonomy within the EU is a necessary step, as different national taxonomies would hamper the emergence of cross-border green bond markets.

The EU should ensure consistency in the regulatory framework for green bonds with other rules for financial institutions and ensure consistency in the future.

Dr Adriana Neligan and Dr Markus Demary are senior economists at the German Economic Institute, a private research institute in Cologne, which is an advocate of a liberal economic and social order.

Interview

Ex-MEP pushes CCS projects, despite 'wasted money'

Chris Davies admitted that the amendment he wrote to set up a fund to finance carbon capture and storage projects failed because it had design flaws and no one expected the carbon price to plummet.

EU climate diplomacy can make the difference

At this critical time, with climate change increasingly urgent and with reactionary, anti-science forces threatening processes of cooperation, the EU climate mission can reassert the common values and aspirations which Europeans share.

Catalan independence trial is widening Spain's divides

What is really needed is not the theatre of a rebellion trial, but a forensic examination of whether public funds were misused, and a process of dialogue and negotiation on how the Catalan peoples' right to self-determination can be satisfied.

My plan for defending rule of law in EU

EPP leader and prospective next EU Commission president Manfred Weber spells out his plan for dealing with recalcitrant EU member states - ahead of Wednesday's EPP meeting on the vexed issue of Hungary's Viktor Orban and Fidesz.

News in Brief

  1. Violent 'yellow vest' protesters ban in Paris
  2. Russia celebrates fifth anniversary of Crimea annexation
  3. Blow for May as third vote on Brexit deal ruled out
  4. Three killed in possible 'terror' gun attack in Utrecht
  5. Third Brexit vote this week only if DUP will support it
  6. Germany's two largest banks confirm merger talks
  7. Serbian pro-democracy protests reach 15th week
  8. 'Yellow Vest' riots leave Paris shops vandalised

Italy should capitalise on Brexit

Now that the UK is leaving, Italy can, and should, step up. It is the third largest country and economy in the EU. Spain and Poland follow, but they are significantly smaller economically and population-wise.

The Magnitsky Act - and its name

It is disappointing that so many MEPs in the Socialist and Green group caved in to Russian interests, in fear of challenging a plutocratic regime, by saying 'no' to naming the Magnitsky legislation by its rightful name: Magnitsky.

Stakeholders' Highlights

  1. Nordic Council of MinistersNew Secretary General: Nordic co-operation must benefit everybody
  2. Platform for Peace and JusticeMEP Kati Piri: “Our red line on Turkey has been crossed”
  3. UNICEF2018 deadliest year yet for children in Syria as war enters 9th year
  4. Nordic Council of MinistersNordic commitment to driving global gender equality
  5. International Partnership for Human RightsMeet your defender: Rasul Jafarov leading human rights defender from Azerbaijan
  6. UNICEFUNICEF Hosts MEPs in Jordan Ahead of Brussels Conference on the Future of Syria
  7. Nordic Council of MinistersNordic talks on parental leave at the UN
  8. International Partnership for Human RightsTrial of Chechen prisoner of conscience and human rights activist Oyub Titiev continues.
  9. Nordic Council of MinistersNordic food policy inspires India to be a sustainable superpower
  10. Nordic Council of MinistersMilestone for Nordic-Baltic e-ID
  11. Counter BalanceEU bank urged to free itself from fossil fuels and take climate leadership
  12. Intercultural Dialogue PlatformRoundtable: Muslim Heresy and the Politics of Human Rights, Dr. Matthew J. Nelson

Latest News

  1. May to seek Brexit extension amid UK 'constitutional crisis'
  2. Catalan independence trial is widening Spain's divides
  3. My plan for defending rule of law in EU
  4. Anti-corruption lawyer wins first round of Slovak elections
  5. The changing of the guards in the EU in 2019
  6. It is high time to exclude Fidesz from the EPP
  7. Brexit delay and Orban decision This WEEK
  8. EU must get real on Russia

Stakeholders' Highlights

  1. Platform for Peace and JusticeTurkey suffering from the lack of the rule of law
  2. UNESDASoft Drinks Europe welcomes Tim Brett as its new president
  3. Nordic Council of MinistersNordic ministers take the lead in combatting climate change
  4. Counter BalanceEuropean Parliament takes incoherent steps on climate in future EU investments
  5. International Partnership For Human RightsKyrgyz authorities have to immediately release human rights defender Azimjon Askarov
  6. Nordic Council of MinistersSeminar on disability and user involvement
  7. Nordic Council of MinistersInternational appetite for Nordic food policies
  8. Nordic Council of MinistersNew Nordic Innovation House in Hong Kong
  9. Nordic Council of MinistersNordic Region has chance to become world leader when it comes to start-ups
  10. Nordic Council of MinistersTheresa May: “We will not be turning our backs on the Nordic region”
  11. International Partnership for Human RightsOpen letter to Emmanuel Macron ahead of Uzbek president's visit
  12. International Partnership for Human RightsRaising key human rights concerns during visit of Turkmenistan's foreign minister

Join EUobserver

Support quality EU news

Join us