Background

A “green bond” functions like any other bond issued by governments, financial institutions or companies. However, green bonds are distinct in that their purpose is to acquire funds for environmentally beneficial purposes only. “Climate bonds” are a type of green bond that specifically are supposed to address climate change problems, though the two terms are often used interchangeably. The World Bank issued the first green bonds in 2008. Since then, other development banks, corporations, governments and municipalities have issued similar products.1 London-based nonprofit Climate Bonds Initiative (CBI) estimates that issuance will rise to $100 billion in 2015, up from $40 billion in 2014.2

Evolving Green Bonds Standards

There is no standard for what kinds of activities can be funded by green bonds. Absent common standards or criteria, the vast majority of green bonds are self-labeled by the issuer. For example, the World Bank decides what projects can be eligible for green bond proceeds based on its own selection criteria, but used a third party to review their criteria (the International Climate and Environmental Research University of Oslo, or CICERO).3

There are currently several approaches being developed to either standardize or set parameters

as to what may be considered to be a green bond.

The Climate Bonds Initiative is attempting to standardize eligibility criteria with the creation of the “Certified Climate Bond.” Their aim is to add value to climate bonds by creating a certification that represents high standards and regulation and therefore trust and transparency, laying the groundwork for a robust climate bond market and binding regulations in the future.4

The Green Bonds Principles has similar aims of adding value to green bonds in the form of standards and regulation. Similar to CBI, their express purpose is also to add value to this type of bond by increasing its standards and regulation, but in addition has the express goal of providing a framework for binding regulations put forth by government agencies in the future.5

Environmental harm and green bonds

Though many have financed environmentally sound projects, due to the lack of standards a number of projects have fallen into a gray area, whereby their implementation has resulted in negative environmental effects. For example, green bonds have been linked to hydropower projects (like the Rampur Hydropower Project), waste incineration projects (like the waste incineration plant in Talinn, Estonia), and forestry/timber projects (like a teak plantation in Brazil), all of which have had negative environmental effects, often undermining the goal of green bonds.6

Future of Green Bond Regulation

It is possible agencies like the Green Bonds Principles are attempting to catalyze formal green bond regulation themselves, or are aiding the organization of a formal movement toward official standards. At the time of this writing, this possibility has not been confirmed.

Changing Climate of Green Bonds Basics: Currently no binding regulation of green bonds exist other than that which governs all bonds. No formal sanctions or investigations of green bonds have been conducted by regulatory/watch dog

agencies.

It’s also possible the formal regulation of green bonds will first come about with the establishment of Green Banks. In May of 2014 Connecticut Senators Chris Murphy (D) and Richard Blumenthal (D), introduced the Green Bank Act of 2014, S.2271. The bill would create a national green bank modeled after a green bank founded in Connecticut in 2011, the Clean Energy Finance and Investment Authority. Rep. Chris Van Hollen (D-Md.) introduced the companion bill in the House (H.R. 4522).

This bank would create permanent, reliable, low-cost financing for clean energy and energy efficiency projects across the U.S., would provide seed funding for state Green Banks, and would regulate bonds issued using “spending safeguards and public disclosure requirements to ensure the highest levels of efficacy, accountability and transparency.”

Internationally there has been some movement for Green Banks, such as the UK’s national Green Investment Bank, but there has also been some movement on Green Banks in the U.S. recently. In the absence of federal legislation, four U.S. states have launched Green Banks, and in 2009 a similar bill to H.R. 4522 passed the House.7

It’s possible formal regulations could result from within the government or through stakeholder action, but either way it appears it is only a matter of time before interest reaches a tipping point.

1 Climate Bonds Initiative. “Bonds & Climate Change - The State of the Market in 2014.” Climate Bonds Initiative. July 2014. Accessed 15 February 2015. http://www.climatebonds.net/bonds-climate-change-2014.

2 Wong, Lisa and Justin Eeles. “Green Bonds Go Mainstream.” Nikko Asset Management. 04 December 2014. Accessed 15 February 2015. http://en.nikkoam.com/insights/fixed-income/green-bonds-go-mainstream.3 World Bank Treasury. “Green Bond Process Implementation Guidelines.” The World Bank. Last updated 2014. Accessed 16 February 2015. http://treasury.worldbank.org/cmd/pdf/ ImplementationGuidelines.pdf. 4 Climate Bonds Initiative. “Best Practice Guidelines.” Climate Bonds Initiative. Last updated 2014. Accessed 15 February 2015. http://www.climatebonds.net/market/best-practice-guidelines.

5 ICMA. “Green Bond Principles.” International Capital Market Association. Last updated 2015. Accessed 16 February 2015. http://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/green-bonds/green-bond-principles/. 6 Friends of the Earth. “Issue Brief: Green Bonds.” Friends of the Earth. 2014. Accessed 16 February 2015. http://libcloud.s3.amazonaws.com/93/3b/c/4880/Green_Bonds_Fact_Sheet.pdf. 7 International District Energy Association. “’Green Bank’ legislation reintroduced into Congress.” IDEA. 8 May 2014. Accessed 17

February 2015. http://www.districtenergy.org/blog/2014/05/08/green-bank-legislation-re-introduced-into-congress/.