In 2017, the global value of green bond issuances soared
above $100 billion to finally settle at $157 billion, double
the figure for 2016.
Reaching its own milestone, the Oslo-based Center for
International Climate Research (CICERO), which provides second
opinions on the green frameworks that underpin green bonds,
assessed its first green bond (issued by the World Bank) in
2008, marking 2018 as the organisation's tenth anniversary.
Green bonds remain a fast-developing and fast-growing
market, driven as they are by the urgency of climate concerns.
The instruments have evolved to become complex and nuanced.
They do not simply provide financing for renewable energy
projects but are now used to fund projects across the energy
and infrastructure sectors, as well as in less likely areas
such shipping and house building. They can also fund projects
that are not green as a whole but which endeavour to diminish
environmentally damaging impacts. CICERO's own Light Green
rating applies for bonds programmes that might fund efficiency
projects in fossil-fuel based processes, for example.
Since 2012, green bonds have also moved away from
development finance institutions and are now issued by
corporates, commercial financial institutions and sovereigns.
One landmark in this progression was the October 2017 green
bond issuance by Industrial and Commercial Bank of China,
Asia's first to receive a second opinion from CICERO.
Here, CICERO's head of research discusses some of the
challenges and developments in green bond programmes.
What are the challenges that you face when reviewing green
As a reviewer, CICERO takes its role in environmental due
diligence seriously. This means it is our job to find the
weaknesses in a green bond framework, where projects with
negative climate and environmental impacts could slip through.
It requires walking through the language in a framework and
stress-testing it to see how a range of projects, with both
positive and negative impacts, could fit into it. In some
cases, the issuer intends the framework to encompass only green
projects, but unclear project category definitions or selection
and monitoring criteria can leave room for improvement. So, our
challenge is to play detective and spot the weak areas in a
Where do you see typical weaknesses in issuers' green
frameworks and monitoring arrangements?
Looking for potential negative climate impacts is broadly a
challenge for energy efficiency projects. Efficiency
improvements can be made in a variety of sectors, many of which
have fossil fuel components, such as district heating. It is
our job to understand what the potential fossil fuel links are,
and if they could lead to locking in old infrastructure when
there are opportunities to shift to cleaner structures.
Is there something that issuers can do to strengthen their
green frameworks? Have you seen particularly interesting
frameworks being developed?
Many of the frameworks we see are broad and cross many
project categories. But sometimes simple can be better
– some of the strongest frameworks we have reviewed
focus on just a few project categories and very clearly
describe the projects that are eligible.
Some of the most sophisticated issuers when it comes to
climate include considerations for climate resiliency in
mitigation projects. A good example is looking at flood
resiliency for new buildings, in addition to energy efficiency
requirements. We have highlighted some best practice examples
in our recent CICERO Milestones 2018 report (available on our
website), which reflects on our 10 years of experience
reviewing green bonds.
What are some of the differences you come across between
sovereign and corporate issuers?
For a sovereign issuer, one of the most important aspects is
a clearly defined responsibility chain for selecting,
implementing and monitoring projects. Inevitably, ministries
need to coordinate and cooperate for cross-cutting projects. We
look for defined responsibilities and procedures that guard
against negative climate and environmental impacts.
For corporates, the governance procedures and environmental
expertise can vary widely depending on the sector and scope of
the company. Commercial banks, for example, may outsource some
of the environmental assessment for green loans. In these
cases, we need to follow the chain of responsibility and
understand what procedures are in place to adapt the loan book
based on the environmental expert's input. On the other hand,
pure play corporates focused on renewable energy may not have
extensive procedures for monitoring the environmental impacts
of their projects. In those cases, we need to understand the
full context of how their projects fit with a low carbon
climate resilient solution, and take a lighter approach on
reporting greenhouse gas emissions.
Are there new sectors which you have seen exploring the
green bonds market and what sorts of challenges do they
To solve the massive climate challenge, all sectors need to
be part of the solution. We need a transformation of the energy
sector, as well as of traditional industries. This is the
underlying philosophy of the Shades of Green methodology, which
is able recognise Light Green shorter-term gains in reducing
emissions as an important first step as well as Dark Green
projects. Ultimately, we need to shift to Dark Green climate
solutions that are based on fossil-free infrastructure. Most of
the bonds we have reviewed to date are Medium or Dark
But we do need Light Green. Sectors such as shipping have
the potential to issue more green bonds. In the short term,
efficiency improvements could make a big difference. But any
short-term improvements for greenhouse gas emissions in
fossil-based infrastructure need to be carefully reviewed to
avoid the locking-in of old, dirty technology as new solutions
evolve. In the long run, technological developments could move
towards electrification for large ships – we are
starting to see small electric ferry boats already.
Do you think the market could benefit from a unified
framework? Are we moving in that direction?
A common language could improve transparency and support
market growth. But there is no one-size-fits-all solution.
CICERO has been reviewing green bonds for 10 years, and with
each green bond we review, we see new approaches and
innovations – issuers in some cases are striving to be
greener than their competitors, at the same time that
technological development evolves at a rapid pace. A unified
framework needs to be flexible enough to capture this dynamism,
which is a strength of the green bond market, while still
providing a common foundation.
As the European Commission moves forward to implement the
Sustainable Action Plan, the hope is that it will be
encouraging to new issuers, as well as flexible in design to
capture the good green innovation that is happening in the
market now. But regional differences will continue to drive the
market – a green bond regulatory approach such as
China's will not work in more bottom-up innovative markets such
To what extent do green bonds dovetail with the features of
sustainable and social bonds?
Climate change is the common denominator of many of the UN
Sustainable Development Goals (SDGs). We need to have a solid
grounding in understanding climate risk as a potential
immediate financial risk – this is recommended by the
Financial Stability Board's Task Force on Climate Related
Financial Disclosure. With climate change solutions as the
foundation of the green bond market, other aspects of
sustainability can be layered in. We see this in some green
bonds already that map their use of proceeds to the SDGs. It is
my hope that we don't get distracted by new labels from
building on the momentum of the green bond market and
incorporating sustainability into what we are already
What will be the next big developments in green bond
More unified impact reporting is probably the next step in
the market. We would love to see impact reporting that is less
onerous for green bonds that focus on Dark Green projects, such
as wind and solar energy, but more rigorous reporting for bonds
that finance projects with potentially ambiguous climate
impacts, such as biofuels.
Currently, the burden of proof is on those actors that are
generally in the green spectrum – at some point in the
future, ideally, we would shift that burden to those that are
responsible for the most negative climate and environmental
Research director for climate finance,
T: +47 22 00 47 28
Christa Clapp leads the climate finance work at
CICERO, including the work stream on climate risk for
investors and the award winning green bond second
opinions. Since 2013, Christa has led the scaling-up of
CICERO's work with financial decision-makers, including
the development of the green rating approach Shades of
Green. She also manages CICERO's collaborative work on
climate risk with institutional investors including the
Norwegian Sovereign Wealth Fund manager, BlackRock, and
the World Bank Treasury. She has 20 years of experience
in climate policy and economic analysis, holding
previous positions at the OECD and the US Environmental
Protection Agency, where she received a National Honor
Award Gold Medal. She holds a master's degree in
international relations and economics from the Paul H
Nitze School of Advanced International Studies (SAIS),
Johns Hopkins University, and is a lead author for the
IPCC 6th assessment report on finance and