The green bond market’s explosive growth over the past decade has coincided with increased rigor and transparency. As the market matures, standards continue to tighten as recognition grows that increased ambition is needed along with greater green investment, in order to meet global climate goals. Through July 31, 2022 green bond issuance totaled approximately $260 billion, down from $328 billion over the same period in 2021. However, global debt issuance is generally down this year as issuers and investors grapple with higher rates and volatility, and we believe this slowdown is temporary.
Global Green Bond Issuance
Source: Climate Bonds Initiative as of 7/31/2022.
The Climate Bonds Initiative (CBI), an international organization working to mobilize global capital for climate action, recently updated its green bond screening methodology, raising ambitions and reflecting the evolving nature of the market. The CBI screens all self-labelled debt to confirm the green credentials of the bond’s use of proceeds and ensure alignment with the CBI’s green bond definitions in terms of the types of assets financed and the project category. These definitions are based on the CBI’s green bond taxonomy, which is designed to identify projects and activities that are consistent with the climate goals of the Paris Agreement—namely to achieve rapid de-carbonization to limit global warming to well below two degrees above pre-industrial levels. The methodology is consistent with the EU Sustainable Finance Taxonomy, and the CBI aims to be at least as stringent.
Not all self-labelled green bonds will receive the CBI green bond designation. If a bond is not aligned with their definitions or there is not enough information to make a determination, a bond is not considered “green” regardless of the bond’s label or the disclosures provided. The S&P Green Bond U.S. Dollar Select Index only includes bonds designated as green by the CBI.
Some highlights from the CBI’s latest updates to their methodology are described below.
- Energy: New screening criteria have been added to hydrogen related projects, given the potential for zero emissions energy generation from this source but with a carbon footprint that can vary greatly depending on production method. The criteria for bioenergy and hydroelectric projects have been expanded, while additional details on the criteria for energy infrastructure have been added.
- Buildings: Building criteria have been tightened, reflecting an increased need to decarbonize the sector by 2050. Only higher rated, well-established international and local certification schemes and energy performance rating schemes are eligible. Retrofits of existing buildings now require at least a 30% improvement in energy efficiency (versus the previous “significant improvement”). New airport buildings are now specifically excluded from being eligible projects, recognizing that the aviation industry has no viable plan to decarbonize in the near to medium term, and is expanding the life of existing assets, which is therefore inconsistent with international climate action.
- Transport: Recent updates reflect a tightening of criteria that is consistent with the EU Taxonomy as it relates to requiring passenger vehicles to be zero-emission by 2025 and the allowance of public transport projects only if they are zero-emission. There is also new detailed criteria on shipping.
- Disclosure: In addition to sector specific changes, some of which are described above, the updated methodology provides additional guidance on disclosure requirements. Given the tighter technical thresholds, the granularity of disclosure is dictated by the nature of the green investment. There must be sufficient information in terms of the projects financed and technical details to confirm alignment. Lack of sufficient information results in exclusion by the CBI.
- Research & Development: The updated methodology provides additional guidance on R&D investments, recognizing that such spending is a key component of combatting climate change. However, such investments are harder to assess, compared to, for example, a solar or wind project. Outcomes are more uncertain and harder to quantify, particularly for early stage R&D. The updated guidance provides that a clear plan or strategy must be provided to understand the aims of the R&D and the climate related goals, in order for a bond that finances R&D spending to receive a green designation. The CBI cites green bonds issued by NXP, a global semiconductor company, as an example of the types of disclosure and green R&D investment that align with CBI definitions. NXP clearly set out a strategy for its R&D in its green bond framework with an overall climate-related goal of improving energy efficiency. Detailed descriptions of the opportunities were outlined with reference to given products and processes. These details were embedded in a broader process which explained how NXP planned to manage, monitor and report on the proceeds raised.
The criteria used by the CBI to screen green bonds continues to evolve over time as science, technologies, regulations, policy, and climate thinking also evolve. This includes providing additional guidance on new technologies, expanding eligible sectors or tightening existing standards as the need to decarbonize becomes more pressing.
The transparency of the CBI’s methodology and criteria provide issuers with confidence to issue green bonds that meet rigorous standards, reducing risk and helping to grow the size of the global green bond market. At the same time, the CBI’s green designation provides investors with confidence that the green bonds they are investing in are truly green and aligned with meeting ambitious global climate objectives.
Originally published by VanEck on August 18, 2022.
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