Is the European Commission’s bid to become the world’s biggest issuer of green bonds an elaborate exercise in “green-washing”?
Commission president Ursula von der Leyen last month announced that Brussels would use its substantial new borrowing powers to issue €225bn of its €750bn recovery debt in the form of sustainable bonds. It’s a promise that would elevate Brussels to the world’s single biggest issuer in this nascent but fast-growing portion of the sovereign debt market.
Green bonds, as the name suggests, are debt instruments whose proceeds go towards funding sustainable and environmentally friendly spending. They give investors who want to help save the planet an extra degree of legal certainty that their cash will be used to those ends.
But in a new paper from the Hertie School/Delors Centre published on Monday, authors Lucas Guttenberg and Sebastian Mack warn against taking the commission’s ambitions at face value without digging into what they really mean. The pair think there’s a risk that green bonds could prove to be a ruse to smuggle in some not-very-green recovery spending if the bonds are not done right.
As it stands, the commission wants 37 per cent of the €750bn recovery fund’s loans and grants go towards environmentally-friendly investment in its member states. The green bonds are part of this goal. However, as the paper rightly points out, the true assessment of whether or not that goal will be reached has nothing to do with whether the commission raises “conventional” or “green” debt on the markets.
The first step for the recovery fund will be the submission of national plans from EU governments, which need to lay out how they want to spend the money by next April. Brussels then has the crucial task of assessing whether the plans are up to scratch — including measuring them against environmental targets. The investments will have already been approved and money earmarked before the bonds are even issued. “It is very unlikely that issuing EU bonds as green bonds will make the expenditure under the Recovery Instrument any greener”, say the authors.
But that’s not to say that the commission's green bonds can’t be a significant moment for Brussels and debt investors. It’s just that it won’t be easy to define in law what is green or not.
EU officials say the commission will most likely rely on Brussels’ so-called “taxonomy” for green investment as the legal underpinning to define what a green bond can or can’t be used for. A proposal from a commission-hired expert group for an EU green bond standard based on the taxonomy suggests that it will be much tougher and more exclusionary that the current definition the commission is likely to rely on when approving the recovery fund plans. Right now, Brussels is working with loosely-defined metrics that state certain percentages of an investment as being green. Critics have said it is hardly robust.
This gap between methodologies is cause for concern, say Mr Guttenberg and Mr Mack, who warn that a failure to use the taxonomy would result in a markedly lower standard for EU green bonds. “Projects that will be financed under the Recovery Instrument will significantly contribute to defining which measures qualify for green bond financing in the EU. This will not only foreshadow future EU legislation on the matter; it will also likely set a global standard.”
All in all, it is likely to mean that the already highly sensitive process of policing national recovery plans (see: Frugals) has even more riding on it than just politics. Investors are watching too.
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