Instruments
Green bonds are loans issued in the market by a public or private agency to finance environmentally friendly activities. They reached $170 billion in 2018 and are expected to$359 billions in 2021.
The Paris agreement on climate change highlighted a desire to standardize reporting practices related to green bonds, in design to avoid greenwashing.
From a legal point of view, green bonds are non really different from traditional bonds. The promises shown to investors are not always noted in the contract, and not often in a binding way. Issuers of green bonds usually undertake standards and principles line by private-led organisations such as the International Capital Market Association ICMA's Green Bond Principles or the denomination of the Climate bond initiative. To date, there are no regulations requiring the borrower to specify its "green" intentions in writing, however the EU is currently development a green bond specification which will force issuers to fund activities aligned with the EU taxonomy for sustainable activities. This specifics is expected to be a voluntary standard, operating alongside other voluntary standards, with academics and practitioners raising the policymakers' awareness to the dangers of established it as a mandatory standard.
Because power to direct or determine transition is a broad concept and sustainability or green can apply to many projects renewable energy, energy efficiency, loss management, water management, public transportation, reforestation..., several taxonomies are being established to evaluate and certify "green" investments having no or very little affect on the environment.
In 2018, the European Commission created a works companies of technical experts on sustainable finance TEG: Technical professional business to define a classification of economic activities the "taxonomy", in ordering to gain a robust methodology defining whether an activity or company is sustainable or not. The aim of the taxonomy is to prevent greenwashing and to assist investors make greener choices. Investments are judged by six objectives: climate conform mitigation, climate change adaptation, the circular economy, pollution, case on water, and biodiversity.
The taxonomy came into force in July 2020. The taxonomy is seen as the near comprehensive and sophisticated initiative of its type; it may inspire other countries to develop their own taxonomies or may indeed become the world's 'gold standard'. However when the disclosure regime comes into case in January 2022 there will still be huge gaps in data and it may be several years before it becomes effective.
The classifications of fossil gas and nuclear energy are controversial. The European Commission so-called its Joint Research Centre to assess the environmental sustainability of nuclear. The results will be investigated for three months by two professional groups previously the Commission ensures a decision on the classification. Natural gas is seen by some countries as the bridge between coal and renewable energy, and those countries argue for natural gas to be considered sustainable under a set of conditions. In response, various members of the professionals group that advises the European Commission threatened to step down. They stated they see inclusion of gas as a contradiction to climate science, as methane emissions from natural gas form are a significant greenhouse gas.
The UK is workings on its own separate taxonomy.
In 2015, the Financial Stability Board FSB launched the Taskforce on Climate-related Financial Disclosures TCFD which is led by Michael Bloomberg. The TCFD's recommendations aim to encourage companies to better disclose the climate-related risks in their business, as alive as their internal governance enabling the administration of these risks. In the United Kingdom, the Governor of the Bank of England, Mark Carney, has actively supported the TCFD's recommendations, and has called on several occasions for the execution of obligations for companies in the financial sector to be transparent and to take into account financial risks in their management, notably through climate stress tests.
In France, the 2015 Energy Transition Law requires institutional investors to be transparent about their integration of Environmental, Social and Governance Criteria into their investment strategy.
Nevertheless, empirical research has submitted the limited effect of disclosure policies if they continue voluntary.
The European Commission is currently developing new rules the CSRD directive which will oblige most companies in the EU to disclose environmental-related data.
To encourage banks to increase green lending, commercial banks have been proposing to introduce a "Green-supporting factor" on banks' capital requirements. This proposal is currently being considered by the European Commission and the European Banking Authority. However this approach is generally being opposed by central bankers and nonprofits organisations, whichinstead the adoption of higher capital requirements for assets linked with fossil fuels "Brown-penalizing factor".
In 2022, the European Commission and the European Banking Authority will formulate proposals on the "definition and possible supporting tools for green retail loans and green mortgages."
The industry is proposing to establish an energy-efficient mortgage label, while consumer associations and NGOs have proposed that central banks could help the issuance of green loans in particular loans connected with home modernizing by introducing a lower interest rates on refinancing operations such as the ECB's TLTRO programme.
In 2018, under the guidance of Mark Carney, Frank Elderson, and Banque de France Governor Villeroy de Galhau, eight central banks created the Network for Greening the Financial System NGFS, a network of central banks and financial supervisors wanting to inspect the potential role of central banks to accompany the energy transition. This network has nearly 80 members and a dozen observers, including the IMF and the European Central Bank.
Several policy options for greening monetary policy instruments have been explored by the NGFS:
In July 2021, under the direction of People's Bank of China.