Green bonds need standards to build trust

New European Union proposals for imposing clear standards on the rapidly growing green bonds market have been welcomed by insurers.

Insurance Europe, the pan-European trade body representing insurers, says the standards are needed to mitigate reputational and greenwashing risks for investors as well as for issuers, writes David Worsfold. Investors need to be assured, at the time they make investment decisions, that green bonds will be green through to maturity. Once in place, the standards should aid the development of a more credible and coherent green bond market, it says.

They would help facilitate investors’ trust in the green bond market by ensuring that regulated assets are aligned with the EU Taxonomy on Sustainable Investment through to their maturity.

A key challenge is going to be ensuring the standards align with that taxonomy. This is currently in the final stages of an exhaustive consultative process. It was turned into a Taxonomy Regulation in June this year, ready for formal adoption by the EU. However, it is still awaiting the outcome of a four-week stakeholder consultation which is currently underway. The European Commission says it should be approved by the end of this year, in order to ensure its full application by end of 2021, with the first company reports and investor disclosures using the taxonomy due at the start of 2022.

The prospect of the Green Bond Standards being imposed before the taxonomy is finalised is causing concern among insurers. They argue it would leave too much open to interpretation and, from an investor’s perspective, relying on the interpretation of issuers and external reviewers is a risk.

“In order to maximise investment in the transition towards sustainability, investors must be able to invest in the green bond market with confidence. As Europe’s largest institutional investors, the insurance industry therefore welcomes an EU GBS, agrees with its proposed components and appreciates that it seeks alignment with the EU taxonomy for sustainable investments”, says the trade body.

Looking further ahead, Insurance Europe says the establishment of an EU Green Bond Standard has the potential to become a global standard for green bonds. This would put the EU in a leadership position in the sustainability agenda, while creating a level playing field for European investors.

Insurance Europe’s full response is available here

The technical document on the Taxonomy Regulation can be viewed here.

Green finance will feature in the final two Insurance Investment Exchange events of the year.

  • Financing the Real Economy, a roundtable on Wednesday 4 November, will examine the possibility of a Green New Deal in Europe and the growing debate around ambitious renewables infrastructure programmes as one answer to alleviate the economic fallout from Covid-19 while also tackling climate change. Full details and registration
  • The final seminar on 25 November will include speakers from the Bank of England and the Institute of Fiscal Studies. They will explore the state of the industry and the world we inhabit. Topics will include the evolving regulatory framework around climate change, the state of the UK’s public finances, sustainable credit, rethinking fixed income strategies for a negative yielding world, and emerging distressed opportunities for insurers. Full details and registration.