When it was published The Fable of the Bees caused a scandal. The poem, released in 1714 and subtitled Private Vices, Publick Benefits, argued that individual viciousness could work towards the general good; commerce and industry depend on avarice and pride, take them away and mass unemployment would result.
It is a similar reasoning that lies behind the nascent green bond market, which looks to harness companies’ self-interest as a way of persuading them to clean up their acts.
The market is swelling as the push by governments to lower global carbon emissions, underlined by December’s Paris climate change accord, provides fresh impetus for trillions of dollars of investment into cleaner energy. Green bond issuance is on course for a fifth straight record year, according to Bank of America Merrill Lynch, with the bank forecasting up to $90bn to be sold in 2016.
“If you step back, what those instruments are there to do is to finance the transition to a low carbon economy,” says Tanguy Claquin, head of sustainable banking at Crédit Agricole. Energy, transport and real estate, he argues, are key to the shift, as well as banks.
However, the rapidly growing market remains self-regulated. While the International Capital Market Association has a set of guidelines for issuers that requires companies to make more disclosures if they are followed, anyone can issue a bond and claim it is green. The market relies on the expectation that no company would want to incur the shame of issuing a “green” bond and not using the proceeds for environmentally friendly ends.
That leaves the vexed question of trying to work out a commonly held definition of “green”, with the struggle to do so throwing up some uncomfortable ramifications for a market intended to accelerate the spread of a low carbon economy.
“Sometimes we have highly polluting companies issuing green bonds,” says Frederic Samama, deputy global head of institutional sales at Amundi, Europe’s largest listed asset manager. “And at the opposite end we had green issuers that were refusing to issue green bonds because of the extra cost.”
Companies and banks have accounted for 58 per cent of green bonds sold in 2016 to date, according to BAML, alongside supranational agencies, like the European Investment Bank, and governments.
The vast majority of the corporate issuance comes from banks, which are now the dominant issuer responsible for $25bn of the $121bn of bonds labelled green ever sold.