From hot air to cold hard facts: how financial markets are
finally getting a grip on how to price climate risk and return -
and what needs to happen next
Speech given by
Andrew Hauser, Executive Director, Markets
Investment Association, London
16 October 2020
I am grateful to Benjamin Bowry for his help in writing this speech, and to Andrew Bailey, Imane
Bakkar, Bethany Blowers, Sarah Breeden, Mark Cornelius, Eleanor Eden, Amber Evans, Sarah Hall,
Andrew Harley, Ronan Hodge, Sarah Kemmitt, Zane Jamal, Theresa Lober, Arjun Mahalingam,
Tom McLaren, Jenny Owladi, Dave Ramsden, Andrea Rosen, Tom Silvester and Mathieu Vital for
their comments and guidance.
1
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Introduction
2020 is not the likeliest of years for the green revolution to have started paying off in financial markets. With
a global pandemic raging, and economic uncertainty at historic highs, issuers, investors and intermediaries
might have been forgiven for having their minds elsewhere.
But, in fact, after many years of rhetoric from market practitioners, the temperature has changed noticeably.
Hot air is turning into cold hard fact:
- Climate oriented equity indices have outperformed the broader market by 2-5% in 2020, as
economic activity has shifted away from travel and other fossil fuel-intensive sectors, and towards
online commerce and technology (Chart 1);
- Green bonds also outperformed their conventional counterparts over that same period (Chart 2), and
made up a fifth of total European investment grade issuance in September alone. And companies
such as VW and Daimler secured material reductions in financing costs (or 'greeniums') when
issuing their first green bonds, linked to the development of low-emission technologies;
- Governments have been increasingly persuaded of the powerful direct and indirect effects of issuing
their own 'sovereign green bonds' too, with a raft of countries coming to market for the first time this
year: Germany's innovative dual-bond issuance was five times oversubscribed and commanded a
clear greenium; and the European Commission announced that it will fund 30% of its €750bn 'Next
Generation' budget in the same way;1
- More and more investment money is massing on the sidelines. Funds with above-average
sustainability ratings have seen big inflows this year, and now hold $4.6 trillion in assets globally. In
response, fund managers are overhauling their investment strategies to put sustainability centre
stage.2 To take just one example, more than 500 global investors, accounting for over $47 trillion of
assets, have committed to support the Climate Action 100+ initiative, aimed at ensuring the world's
largest corporate greenhouse gas emitters take action on climate change.3
For the many organisations, including the Bank of England, that have pushed so hard for climate economics
to be taken seriously, these are welcome developments, especially in the runup to next year's UN Climate
Change Conference, 'COP26'. But, on a moment's reflection, the fact that this is happening now is less
surprising. Covid-19 reminds us all that we cannot ignore the daunting forces of the natural world. And it is
accelerating economic trends that had previously been slow to reveal themselves. Those trends bring many
challenges - but they also bring opportunity, amongst them the chance to advance the pace of climate
transition.
1
https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1657
2
See eg https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter
3
http://www.climateaction100.org/
2
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The need to do so is pressing. The UN Environment Programme estimates that global greenhouse gas
emissions must be cut by 7.6% in each and every year from now until 2030 to meet a 1.5°C temperature
goal.4 To put that number in context, it's roughly the decrease the International Energy Agency expects to
see this year as a result of Covid-19.5 Repeating that reduction every year for a decade is hard to
comprehend. It will certainly require huge investment, estimated to be at least $3.5 trillion per annum, for the
foreseeable future.6 That's a doubling in capital spending in the power sector alone.
Chart 1: Excess returns of green equity indices Chart 2: Excess returns of green bond indices
vs relevant market-wide benchmark vs relevant market-wide benchmark
Source: MSCI, Bloomberg Finance L.P. and Bank calculations.
Source: FTSE Russell, MSCI, S&P Dow Jones Indices and Bank
calculations.
Funding those massive sums will fall, in part, to governments around the world, and in part to the banking
system. A lot has been said about the challenges that will pose. But increasingly the task will also fall to the
capital markets - and that's where I want to focus my remarks today.
Well-functioning capital markets are amongst the most powerful tools we have for turning the vision of a
resilient carbon neutral economy into reality.7 Cold hard price incentives that reward investments aligned
with that goal, and penalise those which aren't, are worth a thousand entreaties on the dangers of inaction.
Establishing those incentives requires three key building blocks. First, credible public metrics of the
climate impact of specific investment projects and corporate activities, and the financial risk and return
involved. Second, effective capital market instruments to package that risk and return and match it with
4
https://www.unenvironment.org/news-and-stories/press-release/cut-global-emissions-76-percent-every-year-next-decade-meet-15degc
5
https://www.iea.org/reports/global-energy-review-2020/global-energy-and-co2-emissions-in-2020
6
See eg https://www.irena.org/financeinvestment/Investment-Needs,
https://www.fca.org.uk/publication/corporate/climate-financial-riskforum-guide-2020-innovation-chapter.pdf and
https://www.iea.org/news/deep-energy-transformation-needed-by-2050-to-limit-rise-inglobal-temperature
7
Indeed, a recent paper by Ralph De Haas and Alexander Popov
(https://www.ecb.europa.eu/pub/economicresearch/resbull/2019/html/ecb.rb191127~79fa1d3b70.en.html) argues that capital markets (and in particular equity markets) may be
superior to banks in incentivising climate-supporting investment.
3
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growing investor demand. And third, asset allocation strategies allowing those investors to construct
portfolios aligned with, and facilitating, the transition to a carbon neutral economy.
For much of the past decade, those three building blocks have been slow to develop, or vulnerable to
charges of 'greenwashing' (projects, vehicles or investment strategies that are 'green' in name only). I want
first to review why that historical performance has been so sluggish, before turning to look at how things are
changing, and fast, under the influences of shifting public policy and consumer behaviour, and the physical
realities of a changing planet. I will focus mainly on developments in private financial markets, but will also
touch on some of the ways that we in the UK public sector can contribute, as market participants in our own
right.
Why markets have struggled to price climate risk: externalities, horizons and opacity
Given the sheer scale of the climate challenge, it is at first glance surprising that financial markets have
struggled to reflect it in asset pricing. The reasons for that failure are threefold.
First, it is in the nature of climate change that many of the costs of failing to address it, and the opportunities
for positive change, fall to society as a whole, rather than specific individuals or companies. The freedom to
emit unlimited amounts of carbon is one example. Markets are notoriously poor at pricing such
'externalities'.
Not all climate risks are externalities, of course. Investor activism can bring consequences to bear on firms
viewed to be responsible for climate harm.8 And climate-related natural disasters - already three times more
frequent than 40 years ago - fall on real individuals and real companies. Financial markets and institutions
can help provide insurance against those risks, but great care is needed to ensure such cover is provided
appropriately: too little, and households, companies and lenders will go under-covered; too much, and
insurers may be unable to follow through on their commitments.9
But the most important force for internalising these externalities will be public policy - on climate regulation,
carbon pricing and taxing, and legal liability. Such policy 'privatises' the social cost on specific companies
and sectors of the economy, and creates powerful opportunities for those first to innovate climate-positive
technologies. I will not have more to say on the priorities for future policy in this area today,10 but it is safe to
say that these steps will only intensify as governments follow through on the sort of mid-century net-zero
commitments legislated in law by the UK last year, and recently by China.
The second factor impeding financial market pricing of climate risk has been the long horizon over which that
risk has historically been thought likely to crystallise. Financial markets do not have a great track record
pricing such longer-term phenomena, particularly when their scale and incidence is also uncertain - a failing
8
To take just one example amongst many, 'Make My Money Matter' was formed by Richard Curtis and Jo Corlett to drive change in
pension fund investment: https://makemymoneymatter.co.uk/.
9
For a recent discussion of these issues, see
https://www.bankofengland.co.uk/speech/2020/anna-sweeney-moodys-the-resilience-ofinsurers-in-a-changing-climate
10
For a recent central banker's perspective on these points, including the case for establishing a global price for carbon, see the speech
by Isabel Schnabel of the ECB at https://www.ecb.europa.eu/press/key/date/2020/html/ecb.sp200928_1~268b0b672f.en.html
4
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that Mark Carney has called the 'tragedy of the horizon'.11 But here, too, things are changing. Climate risk
doesn't seem so hypothetical or far off to those gazing at red skies over San Francisco, fleeing their burning
homes in the Australian outback, baling out flooded villages in the UK, or contemplating big writedowns in
the value of their businesses (as the boards of Ford, VW, BP and Shell, to name but a few, have done).
Here, a combination of consumer action, government policy, and financial market pricing are bringing the
future into the present.
The final issue is the most prosaic, but perhaps also the most important from a financial markets perspective
- and that is the historic absence of robust measurement. Measurement of how much pollution specific
companies, their supply chains and consumer markets, produce. And measurement of the extent, and
efficacy, of remedial action. While financial performance and risk is measured, and audited, to the nth
degree, climate risk has historically been a void. What isn't measured can't be priced, traded or risk
managed. This is perhaps where change has been most profound, as I will discuss shortly.
The consequences of the historic failure of financial markets to price climate risk have been two fold. Much
of the focus has been on the under-pricing of downside risk - to polluters, or polluted - and the potential for
a 'climate Minsky moment': a sudden sharp downwards adjustment when that risk crystallises. But
opportunities to improve climate outcomes have been under-priced too: making it harder to get the finance
needed to drive positive change. Both sides of this equation need to change - and they are.
The building blocks of change
In what follows I want to cover those three key building blocks for an effective capital markets infrastructure
that I mentioned at the start: climate disclosure; climate-linked capital instruments; and climate-focused
asset allocation strategies.
But before doing so I will note an irony - which is that the very need to have climate-specific tools reveals the
immaturity of financial markets' relationship with climate risk. In a world where climate risks were fully
internalised, measured, priced and traded, there would be little need for dedicated climate financial
infrastructure: climate risk would be factored into each and every risk and reward decision. Green bonds
would just be bonds. And 'impact investors' could focus their efforts on other challenges, as market pricing
would align the private and societal costs associated with greenhouse gas emissions. That 'integrated
approach' is a worthy goal: the Holy Grail of market maturity. But we are some way from that today.
Building block 1: climate disclosure
The field of climate disclosure is as good an example of that gap as any. No-one needs to convince public
companies of the merits of regular disclosure of their financial risks and returns: their economic health
depends on it; and, just in case that's not enough, it's compulsory.
11
https://www.bankofengland.co.uk/speech/2015/breaking-the-tragedy-of-the-horizon-climate-change-and-financial-stability
5
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The incentives to disclose climate risks and returns may seem somewhat less hard-edged. Much of the
early discourse on disclosure has certainly been aimed at encouraging firms to adopt such disclosures
voluntarily. But that is changing rapidly.
Companies at the sharp end have increasingly strong business incentives to disclose, some of which I've
tried to summarise in Table 1. Robust climate metrics not only help with managing your own investment
programme, they also signal clearly to your retail and business customers, and your employees, that you 'get
it' and have coherent plans to address the risks over time. Doing so buys customer commitment and brand
image, and helps your supply chain; failing to do so risks customer boycotts, lost contracts and poor
investment planning.
Something similar is afoot in capital markets too. Disclosing your plans can improve your credit rating,
broaden your investor base, reduce your cost of finance, and economise on the fixed costs of meeting
increasingly vocal investor requests for information. A recent large-scale study of some 6,000 corporate
disclosures found that firms that published data on their Environmental, Social, and Governance (ESG)
performance received cheaper debt funding, with environmental disclosures having the largest effect.12 And
increasingly that message is getting across: three-quarters of UK board members believe structured
disclosure along the lines of that recommended by the Task Force on Climate-Related Financial Disclosures
(TCFD) will increase brand value, nearly half expect improved alignment with shareholder priorities, and a
third already see tangible financial benefits.13
Table 1: Potential economic benefits of disclosing climate metrics (and costs of not)
Potential issuer benefits Potential issuer costs from
from disclosing not disclosing
Credit rating Improved rating Worse rating
Lower uncertainty
risk premium Higher asset valuations Lower asset valuations
Financing
Size of investor Access to more investors Shrinking investor base
terms and
base
asset
More expensive finance as
valuations
Financing rate Cheaper finance raters/investors apply a risk
premium
Fixed cost of Lower cost of engaging Confusion drives increasing
investor with investors costs of investor engagement
engagement
12
https://www.researchgate.net/publication/335016621_ESG_practices_and_the_cost_of_debt_Evidence_from_EU_countries
13
https://www.carbontrust.com/news-and-events/news/two-thirds-of-major-uk-companies-to-incorporate-climate-change-risks-and
6
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Management of Improved understanding Weaker awareness internally
own risks and ability to manage risks and externally
Retail consumer Improved brand image and Customer boycotts harm firms'
Business expectations / hence demand / revenues positions in contested markets
management demand
Supply chain Awarded more contracts Cut out of contracts from firms
expectations / from firms seeking lower seeking lower 'Scope 3' scores
demand 'Scope 3' scores14
Human resources Attracting, motivating, and Challenges in hiring and
retaining staff retaining key staff
Regulation Regulatory Clean regulatory record Fines and infractions
compliance
That's all very well for firms with a good story to tell - but doesn't it still pay laggards to stay silent?
Increasingly not. Where firms fail to provide their own authoritative disclosures, customers, investors and
rating agencies will attempt to construct their own. And that's not good for your financial health: because
disagreement between different measures of a firm's climate performance, whether driven by poor data or
otherwise, increases equity risk premia, and hence the cost of raising investment finance.15 It increases the
overhead from dealing with investor queries or resolutions on ESG issues, which have risen this year despite
the Covid-19 pandemic.16 And it will leave you scrambling when disclosure becomes mandatory. The FCA
is already consulting on proposals that firms listed in the UK will be expected to make a TCFD disclosure.17
And the EU Taxonomy Regulation will make green revenue and expenditure disclosures obligatory for those
falling within its jurisdiction. Setting out pathways to mandatory TCFD disclosures should be a priority for
public authorities; in the UK this is being explored by the Government-led taskforce on climate disclosure.18
If that gives the case for disclosure in principle, what makes a good disclosure from the perspective of
effective capital markets functioning? According to the TCFD, disclosures should be: consistent (complete,
and comparable across time and issuers); 'decision useful' (relevant to investment decisions, specific,
reliable, verifiable); and forward looking (showing not just where you have been, but where you are going,
and how).19
14
The Greenhouse Gas Protocol Corporate Standard classifies a company's emissions into: Scope 1 (direct emissions from owned or
controlled sources); Scope 2 (indirect emissions from generation of purchased energy); and Scope 3 (all other indirect emissions in the
upstream and downstream value chain of the reporting company).
15
https://www.inrate.com/cm_data/ESG_Rating_Disagreement_and_Stock_Returns.pdf
16
According to https://citigatedewerogerson.com/wp-content/uploads/2020/10/IR-SURVEY-2020.pdf, 79% of firms report a rise in ESG
investor queries in 2020; and https://shareaction.org/fossil-fuels/resolutions-tracker/ suggests a pickup in shareholder resolutions on
climate change.
17
https://www.fca.org.uk/news/press-releases/fca-announces-proposals-improve-climate-related-disclosures-listed-companies
18
https://www.bankofengland.co.uk/-/media/boe/files/speech/2020/leading-the-change-climate-action-in-the-financial-sector-speech-bysarah-breeden.pdf?la=en&hash=A76529EC3930769B0D6FA8FECBFF0507BE6DBBA3
19
https://www.tcfdhub.org/recommendations/
7
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Consistency - the first of those criteria - has been a challenge. The TCFD is widely recognised as the right
overarching framework: nearly half of large companies globally were already disclosing TCFD-aligned
metrics at the time of the last comprehensive survey in 2019 (Chart 3), and support for the TCFD had grown
to over 1,440 organisations by September this year, with a market capitalisation of over $12.6 trillion. But at
the next level of detail - the standards giving specific guidance on what should be disclosed and how - there
are at least five approaches to choose from: the Carbon Disclosure Project (CDP), the Climate Disclosure
Standards Board (CDRB), the Global Reporting Initiative (GRI), the International Integrated Reporting
Council (IIRC) and the Sustainability Accounting Standards Board (SASB). And the raw data disclosed
under these approaches are being packaged by third-party providers into a daunting variety of summary
statistics, the correlation between which can be low or zero, even when they purport to measure identical
concepts (Chart 4).
Such diversity can be helpful in driving innovation. But fragmentation of standards is no basis for a viable
global capital market for climate risk. In recognition of that fact, the 'group of five' framework producers,20 the
'big four' accounting firms21 and the International Financial Reporting Standards Foundation22 have all
recently announced initiatives to deliver a single harmonised set of metrics that could be commonly adopted
and reported alongside other core financial information. These are positive developments - but given the
importance of consistent climate disclosures, further definitive convergence is needed, and soon.
20
https://impactmanagementproject.com/structured-network/statement-of-intent-to-work-together-towards-comprehensive-corporatereporting/
21
http://www3.weforum.org/docs/WEF_IBC_Measuring_Stakeholder_Capitalism_Report_2020.pdf
22
https://www.ifrs.org/news-and-events/2020/09/ifrs-foundation-trustees-consult-on-global-approach-to-sustainability-reporting/
8
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Chart 3: TCFD-aligned disclosures23
The second TCFD criterion is that good metrics should be 'decision useful'. From a business management
perspective, this point is obvious: to be useful in shaping strategy, a metric has to be something with a direct
influence on investment decisions. And from a financial markets perspective, it has to be relevant to
understanding risk and return. A lack of meaningful, consistent metrics makes it hard, or impossible, for
investors to construct viable portfolios by comparing climate performance across firms. And that, in turn,
dampens the incentive of those firms to improve and disclose their climate performance in the first place.
23
https://www.fsb-tcfd.org/wp-content/uploads/2019/06/2019-TCFD-Status-Report-FINAL-053119.pdf
9
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Chart 4: Correlations between environmental scores from different rating providers24
Key
Each matrix displays correlation coefficients between
Environmental ratings given by five rating providers
(labelled P1 - P5 in the charts) on a sample of 924 firms
(2017 data).
Right: Correlation coefficients between aggregate
Environmental ratings.
Below: Correlation coefficients between ratings of a
selection of more granular environmental categories.
Energy
Greenhouse Gas Emissions Green Buildings
P1 P1
P1
P2 0.40 P2 n/a
P2 0.25
P3 n/a n/a P3 0.22 0.19 P3 0.22 n/a
P4 0.28 0.47 n/a P4 0.26 0.33 0.02 P4 0.19 n/a 0.18
P5 0.37 0.05 0.17 0.36
P5 n/a n/a n/a n/a P5 0.55 n/a 0.34 0.34
P1 P2 P3 P4 P5 P1 P2 P3 P4 P5
P1 P2 P3 P4 P5
A key decision for investors is whether to make use of the raw climate data disclosed by firms, or packaged
summary measures from ratings providers, such as those illustrated in Chart 4. Summary measures have
obvious attractions, since they delegate to specialists the daunting task of data gathering, analysis,
gap-filling and aggregation. But in so doing they also risk injecting further inconsistencies: fully half of the
variation in the aggregate ratings shown at the top of Chart 4 reflects decisions on the composition or
weighting of those aggregate measures, as opposed to variations in how firms' raw disclosures are
measured. A recent paper from the Bank of Italy suggests that investors can construct better-performing
portfolios by combining the raw data themselves.25
The final TCFD criterion is that disclosures should be forward looking. This is particularly important for
capital markets, because a climate asset's value will be determined far more by where it is going, than by
where it has been. Faced with the choice between assets from two companies, one with relatively low
current emissions but no investment plans, and another with relatively higher current emissions but
aggressive and credible future plans to lower them, an asset allocation strategy based exclusively on current
24
Results drawn from https://mitsloan.mit.edu/ideas-made-to-matter/why-esg-ratings-vary-so-widely-and-what-you-can-do-about-it
25
https://www.researchgate.net/publication/342550204_Mind_the_gap_Machine_learning_ESG_metrics_and_sustainable_investment
10
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metrics would not only underperform an alternative strategy that takes account of forward looking
information, it would also risk failing to fund the very investments needed to tackle climate change. The
biggest rewards will fall to those who are first to spot a heavy polluting company on its way to becoming
credibly green.
Forward looking disclosures can take many forms. At the highest level, they may set out issuers' climate
targets, and their chosen strategies for meeting them. They may give specific descriptions of investment
projects. Or they may involve model-based projections of future performance. We at the Bank of England
showed one such measure, of 'portfolio warming potential', when we published the first full disclosure of the
climate risks on our own balance sheet earlier this year.26 The measure, based on the provider's emissions
projections for each issuer with corporate bonds held in the Bank's Asset Purchase Facility (APF), suggested
that if those projections were representative of the emissions performance of corporates globally, the world
would experience 3.5 degrees of warming by end-century (Chart 5).
So far, so dramatic. But similar measures based on alternative forecast assumptions for the same portfolio
suggested a much wider range of possible outcomes, from <1.75 to 4 degrees: a huge variation given the
consequences of missing a 2 degree warming target (Chart 6). The problem stems in part from different
assumptions about how the world will evolve and how different industries will need to react. For a given
temperature goal, investors need to know how much carbon can be emitted, over what timeframe, and by
whom, in order to assess where companies sit relative to their required trajectory. Detailed and standardised
reference scenarios are needed for this kind of assessment, such as those being developed by the Network
of Central Banks and Supervisors for Greening the Financial system.27
26
https://www.bankofengland.co.uk/-/media/boe/files/annual-report/2020/climate-related-financial-disclosure-report-2019-20.pdf
27
https://www.ngfs.net/sites/default/files/medias/documents/820184_ngfs_scenarios_final_version_v6.pdf
11
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Chart 5: Estimate of APF corporate Chart 6: Alternative warming potential metrics for same
holdings 'portfolio warming potential' portfolio
Source: see footnote 26.
Source: see footnote 26.
Building block 2: capital instruments
The second key building block for an effective capital markets infrastructure for trading climate risk is a set of
viable capital instruments. As I mentioned earlier, it is not clear a separate climate asset class is needed in
steady state: dedicated 'IT investment bonds' or 'physical buildings equity' are for example pretty rare! But
climate-linked instruments can be very helpful on the transition path, to give focus to the need for change,
help meet specific investor needs, and provide a credible 'put your money where your mouth is' commitment
from issuers to deliver on specific projects until more robust and consistent decision useful metrics can be
developed.
A wide variety of new climate-linked markets have begun or are under discussion, including for example
Voluntary Carbon Offsets,28 derivatives products to manage risks in renewable energy29 or green
mortgage-backed securities.30 But I want to focus my remarks today on the most prominent example: that of
climate-linked, or 'green' bonds.
28
See in particular the recently launched Task Force on Scaling Voluntary Carbon Markets:
https://www.iif.com/tsvcm/MainPage/Publications/ID/4061/Private-Sector-Voluntary-Carbon-Markets-Taskforce-Established-to-Help-Meet-Climate-Goals
29
See discussion in the CFTC's report on Managing Climate Risks in the U.S. Financial System:
https://www.cftc.gov/PressRoom/PressReleases/8234-20
30
Fannie Mae is currently the world's largest issuer of green MBS: https://multifamily.fanniemae.com/media/8616/display
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Green bonds come in different flavours, illustrated in Chart 7. The dominant model is the 'use of proceeds'
bond, designed to raise funds for specific earmarked investment projects that the issuer sees as
climate-positive. This earmarking, coupled with regular reporting on project progress, provides debt
investors with targeted transparency on the credentials of the projects their funds are supporting. The first
such bond, issued in 2007 by the European Investment Bank, coupled the use of proceeds structure with a
number of other innovative features, and other supranationals and government agencies helped develop the
market further in subsequent years. But the concept only really took off after the agreement of the Green
Bond Principles in 2014, which established market-wide standards of transparency, disclosure and
reporting.31 There are now approaching $1 trillion of such bonds across a wide range of issuers (Chart 8) -
and, while that stock is so far just a tiny fraction of the $120 trillion global corporate bond market,32 green
issuance is growing several times more rapidly than conventional bonds. UK companies currently lie well
down the issuance league table (Chart 9), and have primarily issued in euros (Chart 10).
Chart 7: A selection of 'green bond' structures
One concern sometimes expressed with this first generation of green bonds is that there are no binding
requirements as to what constitutes a green project, and hence bonds may sometimes be labelled green on
spurious grounds.33 There have been various attempts to address this issue, for instance the
Climate Bonds Initiative's Taxonomy and Certification Scheme34 and the European Union's Green Bond
Standard35, which set out more robust scientific criteria for identifying projects which genuinely help with
climate change. The model also requires an issuer to have fairly sizeable green capital expenditures in order
to issue a bond liquid enough to appeal to mainstream investors.
31
https://www.icmagroup.org/assets/documents/Regulatory/Green-Bonds/Green-Bonds-Principles-June-2018-270520.pdf
32
BIS Quarterly Review, September 2020
33
Consistent with this, researchers have so far failed to identify a near-term relationship between green bond issuance and subsequent
reductions in carbon emissions (https://www.bis.org/publ/qtrpdf/r_qt2009c.htm) - though there clearly are many possible reasons for this
result, not all of which suggest greenwashing.
34
https://www.climatebonds.net/standard/taxonomy
35
https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/eu-green-bond-standard_en
13
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An alternative approach is to link some element of the financial return on the bond to the achievement by the
issuer of a particular climate sustainability outcome, without linking the bond to specific green expenditures.
The first such 'sustainability-linked bond' was issued by Enel, an Italian electricity producer, and offered a
'step up' coupon penalising the issuer if it failed to meet a specific target for the share of renewable energy
in its installed capacity. Such bonds are not a complete answer to the concern of greenwashing: the degree
of challenge in the target remains the choice of the issuer, for example, and the use of funds cannot be
traced to specific projects in the same way as use of proceeds bonds. But they do illustrate the type of
innovation now underway in capital markets.
Chart 8: Total green bond issuance Chart 9: Corporate green bonds outstanding by
nationality of issuer
Source: Climate Bonds Initiative (CBI) data (including all self-
labelled green bonds aligned with CBI's Climate Bonds
Taxonomy and with at least 95% us