Green Bonds Proliferate but Lack of Standardization Will Hinder Growth

(Credit: JPMorgan Chase)

This week, JPMorgan Chase & Co. announced it has completed its second green bond issuance of $1.25 billion aggregate principal amount of Fixed-to-Floating Rate Notes. This issuance is part of the firm’s commitment to “help advance climate action and accelerate the transition to a low-carbon economy,” and builds on the firm’s inaugural green bond issuance in 2020, the company says.

The investment bank and financial services holding company says it intends to allocate an amount equal to the net proceeds of this issuance to fund eligible green projects, which may include the financing or refinancing of projects related to green buildings and renewable energy as well as lending to clients for eligible green projects.

Growth in sustainability bonds has been soaring in recent years. By the end of 2021, sustainability bonds will likely reach $1 trillion for the first time ever.

But it’s difficult to tell how the proceeds of all these green bonds are being used, “because there’s no mandatory requirement to do so and no standardized manner to do it,” says Maia Godemer, a London-based sustainable finance associate at BloombergNEF (via Bloomberg Green). This lack of standardization is a key obstacle to even greater growth of the green bond market, as it represents a challenge to issuers, investors, and financial institutions alike, according to a 2020 article in the Journal of Risk and Financial Management.

On the other hand, however, the green bond market appears to be “doing a good job of regulating itself,” says Peter Ellsworth, senior director of the Ceres Investor Network. If so-called green bonds fail to meet expectations, the issuer will face “additional scrutiny” if it tries to issue another, he told Bloomberg Green.

At least one financial services group is attempting to accurately measure how green bond funds are used. Nomura is engaging in a new research project that uses natural language processing (NLP) to assess how bond funds are used to achieve the UN’s Sustainable Development Goals; the organization will use NLP to analyze issuers’ publicly available information, such as prospectuses and sustainability reports.

The move is significant because it signals a step change in the way that sustainability bonds are determined, which historically have been through more manual methods and often leveraging ESG data from third-party ESG ratings firms, Environment + Energy Leader reported earlier this week.

Still, the absence of standardization will continue to hinder the development of the green bond market if a commonly agreed definition and a unique reference framework are not developed, the Journal of Risk and Financial Management article explains. While green bond players tend to develop their own methodologies and frameworks — and while there are significant commonalities between these frameworks — the lack of a single definition and framework could put all players at risk, the article concludes.

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