Inside this Topic Guide
There is strong international political and regulatory will and desire to develop climate smart, environmentally friendly financing. This is driven in part by the commitment in the Paris Agreement to hold global average temperature increases well below 2 degrees celsius above pre-industrial levels and by the need for highly significant investment to support a low carbon future economy, e.g. the EU estimates a funding gap of EUR 177 billion to deliver its decarbonisation goals. The United Nations Sustainable Development Goals adopted in September 2015, also provide an international framework and we increasingly see financial products being aligned to these SDGs and broader ESG metrics.
There are consequently a large number of global and national initiatives and developments in this area for example see Major Initiatives below.
Key issues identified by many of the green and sustainable finance initiatives are the need to develop both standard definitions and taxonomy of what constitutes 'green' and consistent and comparable metrics and methodology for measuring the climate impacts of green projects.
Green bonds are the most developed form of green finance, issued first by multi-lateral investment institutions in 2007, followed by corporates in 2013 and the first sovereign green bond in 2016. The green bond market has grown quickly and now well exceeds USD 100 billion.
The Green Bond Principles (GBP) designed by GBP members (being green bonds issuers, underwriters and investors) are a voluntary, relatively non-prescriptive, set of principles designed to encourage the growth of the market without imposing unduly high barriers to entry. They were first published in April 2014 and are updated regularly following yearly consultation with members and observers. Although there are other green bonds "standards", such as those published by the Climate Bond Initiative, these are less frequently used than the GBP. The EU is currently considering developing its own Green Bond Standard (EU GBS) as part of the EU Sustainable Finance Action Plan (see Major Initiatives below).
In 2017 the GBP launched its Social Bond Principles (SBP). The SBP replicate the framework and technology of the GBP but with application to social projects. Social projects are defined as projects which "directly aim to help address or mitigate a specific social issue and/or seek to achieve positive social outcomes especially, but not exclusively, for target populations", for example clean drinking water and affordable housing. The GBP also published its Sustainability Bond Guidelines (SBG) in 2017 to be followed where the use of proceeds will be applied to both green and social projects. These are also updated regularly. In June 2020 the Sustainability Linked Bond Principles (SLBP) were launched. Sustainability Linked Bonds (SLBs) are bonds where the financial or structural characteristics vary depending on whether the issuer achieves predefined sustainability/ESG objectives. In December 2020 ICMA published its Climate Transition Finance Handbook for voluntary guidance in relation to transition bonds.
In March 2018 the Loan Market Association (LMA) and the Asia Pacific Loan Market Association (APLMA) published their Green Lending Principles which follow the same structure as the GBP. The LMA published in March 2019 the Sustainability Loan Principles and in May 2020 the Sustainability Linked Loan Principles.
For an overview of green and sustainable finance, please see our publication Greening the Financial System. This is a collection of articles looking at different green financing initiatives including green loans and green securitisation. Please see also our Thought Leadership page on climate change, green finance and renewables.
Bart Denys (Brussels)
Patrick Jackson (São Paulo)
Leng-Fong Lai (Tokyo)
Lilly Alamir (Dubai)
Clare Burgess (London) | Michael Coxall (London) | Caroline Dawson (London) | David Dunnigan (London) | Matt Fairclough (London) | Emma Folds (London) | Eric Green (London) | Nigel Howorth (London) | Jacqueline Jones (London) | Julia Machin (London) | Poppy Mitchell (London) | Puja Patel (London) | James Pay (London) | Peter Pears (London) | Gerard Crowley Saviola (London) | James Shepherd (London) | Jessica Walker (London) | Amy Watt (London) | Deborah Zandstra (London)