Finance changes paradigm: green bonds and sustainable investments

In the variegated and complex world of sustainable investments, an instrument that is experiencing a consistent diffusion is that of “green bonds”, in effect issuing debt securities with the specific objective of financing projects with an environmental impact

Incorporate ESG factors into financial assessments and investment processes. Easy to say, a little less to do, at least apparently.

Sustainability that takes on variegated and complex nuances starting from the foundations: what can or cannot be considered ESG. The acronym Environmental Social and Governance encompasses within it a really wide world and is often exposed to the risk of very subjective interpretations, which pose a problem of defining what can or cannot be considered ESG.

The issue is addressed directly by the European Union itself through the Action Plan to finance sustainable growth, through which it places, among its priority objectives, precisely that of providing the system with a more defined taxonomy on the subject. Hand in hand with the great attention paid to sustainability, as often happens when a phenomenon grows so rapidly, initiatives that are disguised as sustainable but which are not sustainable (are spreading at the same time.

The eighth edition of the SRI Week, promoted by the Forum for Sustainable Finance, again this year, was an opportunity to open discussion and fuel the growth of the entire supply chain of the system which involves numerous subjects, from European authorities and national regulators to institutional and non-institutional investors, passing through management companies that offer investment financial products. Therefore, not only attention to the environment (E), but a further stimulus to look at the implementation of efficient governance (G) as equally important as in directing, through ad hoc investment products and strategies, private capital towards impact activities social (S). And the numbers on the subject are beginning to show how specific investments in the environment are becoming increasingly popular.

Green bond: a sustainable investment tool

The manual on EU initiatives to support sustainable finance “The European Union and sustainable finance. Impacts and perspectives for the Italian market ” examines some of the main objectives of the European agenda to bring the continent towards all-round sustainability. Among the various issues addressed, that of green bonds will certainly have an important role in the coming years. The “green bonds” are a bond issue but with certain characteristics that distinguish their nature. They are debt securities issued to finance projects aimed at generating positive effects in terms of environmental impact intervening in sectors such as renewable energy, biodiversity protection, or, again, energy efficiency.

The “green” bond market has experienced constant expansion, so much so that it has reached the record number of issues globally of 521 billion dollars from 2007 to 2018 (over 167 billion in 2018 alone). 

Thus, to support a market that seems to have a great space for growth within a few years, the European Commission, to carry out action 2 of the Action Plan , has commissioned the TEG ( Technical Expert Group on Sustainable Finance ) to elaborate some recommendations to support the development of a “Green Bond Standard” (GBS) based on four principles: 1) alignment with the taxonomy on eco-friendly activities to identify projects and activities that can be financed; 2) publication of a document ( Green Bond Framework – GBF)in which the issuer explicitly declares the alignment of the issue with the environmental objectives of the European Union, how the proceeds collected will be used and the will to align the green bond with GBS itself; 3) drafting of an ad hoc report to explain the use of the proceeds and the environmental impact generated by them; 4 ) control by an external auditor (accredited according to the ESMA procedure) of the allocation of proceeds towards the stated objectives and compliance of the GBF.

Figure 1 – Issue scheme of a GBS compliant green bond

Source: “The European Union and sustainable finance: impacts and prospects for the Italian market”, Forum for Sustainable Finance

In addition to these recommendations, which will be examined by the Commission, the TEG directly addresses the governments of the individual Member States, all market operators, and the Commission itself so that all the players in the system contribute to the dissemination of the GBS for the issuance and purchase of green bonds. Important recommendations that reflect, once again, as green tools available to investors are certainly not lacking and also need to be disclosed as much as possible.

Green bonds are therefore an instrument that can well represent the synthesis between finance and sustainability, combining the need to diversify the sources of investor returns with the need to finance green projects for the sustainability of the planet. Even the companies themselves are increasingly acquiring the awareness of having to change their approach to production, innovating internal processes, and limiting polluting emissions as much as possible. Doing business tomorrow means interpreting a new industrial vision in which the pursuit of business objectives does not necessarily conflict with the interests of stakeholders and with the environment.

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