Green bonds. Blue bonds. Brown bonds. Environmentally-conscious investors may soon be able to buy a different color of asset every day of the week.
Record demand for sustainable finance is spurring this rainbow of debt types by governments and companies, to fund increasingly specific ways of mitigating climate change. While green bonds—which pledge their proceeds to finance wind farms or solar parks—are the dominant species, some of these labels have so far remained relatively niche.
That’s set to change as a market now worth over $2 trillion develops rapidly, and as financial engineers create new ways to brand such debt. The greater choice is a boon for the growing cohort of specialist funds with ethical mandates, yet also creates more due diligence in an asset class already lacking clarity thanks to a lack of uniform standards.
“It is confusing,” said Taimur Hyat, chief operating officer for PGIM, adding more universal rules and less fragmentation would be “extremely helpful” for PGIM to use its $1.5 trillion in assets to support the transition to a greener planet. “Clear guidelines will also avoid the risk for the perception for any greenwashing in the industry.”
It’s only five years since the world’s first green sovereign debt was issued by coal-reliant Poland, to help transition to a lower-carbon economy. Now the emerging spin-offs include blue bonds to fund marine projects, brown or transition bonds for industries too dirty to do green, nature bonds for biodiversity and carbon neutral to achieve net-zero emissions. Then there’s also social bonds to help society and sustainability-linked bonds to set organization-wide targets.
Chinese banks issued their first blue and carbon-neutral bonds in recent months. Junk-rated companies in Latin America are joining a European boom in SLBs given signs they can get lower borrowing costs, as well as boost their image. Pakistan is seeking debt relief by offering nature-performance bonds to rewild land this year, while the World Bank may debut wildlife conservation bonds to protect rhinos in Africa.
The European Union has already broken market demand records with its social bonds. Government stimulus to recover from the pandemic, together with a raft of net-zero ambitions, could “turbo-charge this trend and contribute to a sharp rise in sustainability-linked loans and thematic bonds in 2021 and 2022,” said Gabriel Wilson-Otto, global head of sustainability research at BNP Paribas Asset Management.
Competing Rules
The increasing fragmentation is at odds with calls by regulators for comprehensive rules to shed light on the credentials of borrowers and their offerings. The world’s largest industry body for sustainable finance said Thursday the industry needs global standards and urged world leaders to act this year.
There are signs international policy makers are rising to the challenge. Joe Biden’s government is planning a U.S. green finance framework that should start to take shape by June, according to people familar with the matter. The U.S. and Europe could have an identical set of rules that determine what counts as green investment, French Finance Minister Bruno Le Maire said this month.
And China is also working with its European counterparts to announce a common green taxonomy this year, to define and classify green projects. That issue will be discussed at October’s Group of 20 meetings in Rome.