All material subject to strictly enforced copyright laws. © 2022 IFLR is part of the Euromoney Institutional Investor PLC group.

Fifty shades of green

Diverse people doing a fist bump in the park

Christa Clapp, director of research at CICERO, discusses green bond frameworks, the reviewing process and what the market looks like 10 years after it reviewed its first green issuance

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 bonds?

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 framework.

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 face?

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 Green.

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 as California.

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 doing.

What will be the next big developments in green bond financing?

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 impacts.

About the author



Christa Clapp

Research director for climate finance, CICERO

Oslo, Norway

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 investment.