Indeed, ICMA recently amended its parameters to include asset-backed securities and covered bonds as “secured green bonds” and the EUGB allows 15 per cent of funds to be used for activities that are currently outside of its definition of green, recognising that the classification will evolve.
This raises the age-old debate over the extent to which regulation protects investors or straightjackets innovation.
In lieu of standardised parameters that may be limiting, ill-fitting or too vague to be helpful, there is an argument to be made that the market should be left to reach its own definitions.
More deal activity will naturally bring with it agreement on terms. And, unlike those imposed from above, these will be adapted to market conditions.
What is needed is not necessarily more regulation, but more maturation – and this will come with time as green bonds inevitably continue to grow.
Misplaced benefits?
Undoubtedly, some green projects have benefited from existing regulations and, if implemented, the EU’s more comprehensive standards will go some way towards raising the bar for the green label.
The designation does build on previous regulators’ approaches to categorising and supervising green bonds, such as by requiring issuers to contextualise the investment in their broader transition plans.
But with greater regulation will come higher issuance costs, creating a difficult balancing act between more stringent standards and the bonds’ viability.
While the 'greenium' suggests investors are willing to pay more for green bonds, piling on additional administration fees risks pushing the debt class into the red zone and channelling those seeking green project financing back to standard capital sources.
The EUGB may be well-meant, but rather than benefitting green initiatives it could ultimately best serve investors seeking to ratify their own greenwashing-free status.
One step forward
At present, a majority of green bonds fail to meet the standard’s requirement that at least 85 per cent of returns should go towards green projects, holding promise that the designation could drive a genuine phase out of polluting activities in the long run.
But like the green financing regulations before them, the EU’s standards are both optional and far from airtight, falling short of eliminating the threat of greenwashing from the green bond market.
The EU may succeed in defining new best practice in sustainable financing regulation, but standardised structures will struggle to pin down the evolving green economy.
Even if the EUGB skirts the pitfalls of its predecessors, allowing definitions to spring from market activity could well be the best safeguard against greenwashing.
The wisdom of crowds could again be proven.
Victoria Judd is counsel at Pillsbury Winthrop Shaw Pittman
