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 2015 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. Many governments and nations have also committed to ambitious net zero targets which aim to achieve the goals of the Paris Agreement. These commitments and goals are likely to be re-examined and re-affirmed at COP26 being held in late 2021. Complementary to the net carbon reduction aims the United Nations Sustainable Development Goals adopted in 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.
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 issuance in 2020 exceeded USD 290 billion. Green bonds are usually issued in compliance with the voluntary ICMA Green Bond Principles (GBP) although other standards (such as those published by the Climate Bond Initiative) are available. The GBP were first published in 2014, they were designed by market participants and are updated regularly. In July 2021 the EU published its own legislative proposal for regulation of green bonds, known as the EU Green Bond Standard (EU GBS) (see EU Green Bond Standard below).
Over the past few years the GBP has published a number of other principles and guidance reflecting developments in different types of sustainable bond financing. In 2017 the GBP lunched its Social Bond Principles (SBP), these replicate the framework and technology of the GBP but with application to social projects, and its Sustainability Bond Guidelines (SBG), which can be adopted 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. The principles and guidance are reviewed and published regularly.
Mirroring developments in the capital markets, the Loan Market Association (LMA) and the Asia Pacific Loan Market Association (APLMA) published their own Green Lending Principles in 2018 which follow the same structure as the GBP. Subsequently the LMA published its Sustainability Loan Principles (in 2019), its Sustainability Linked Loan Principles (in 2020) and its Social Loan Principles (in 2021). These principles are reviewed and updated regularly. The LMA also publishes supporting materials and guidance, for example an ESG due diligence questionnaire. See Green and Sustainability-linked Loan Resources section.
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) | Gerard Crowley Saviola (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) | James Pay (London) | Peter Pears (London) | Amy Rose (London) | James Shepherd (London) | Jessica Walker (London) | Amy Watt (London) | Deborah Zandstra (London)