Can regulators avoid a green bubble after the pandemic?

Global concerns have increased under the COVID-19 pandemic’s impact on the environmental, social, economic, technological and political relationship between energy systems, growth patterns, the climate and the environment. As a result, many countries are now planning to focus on a green or climate-friendly recovery. Indeed, huge amounts of investments are still needed in energy efficiency and low-carbon technologies up to 2030 to meet the goals of the Paris Agreement.

The case for climate action has never been stronger. Many relevant issues are at stake, including which is the global governance of climate finance and whether it is possible to regulate climate finance in a transnational way. The predicted decrease in CO2 emissions by 8 percent in 2020, according to the International Energy Agency (IEA), is the product of both supply and demand shocks. The future climate finance scenario depends mainly on the outcomes of the global health and economic crisis means, and the creation of just transition financial models within wider “green recovery” policy frameworks.

So far, according to the United Nations Framework Convention on Climate Change (UNFCC) data, global total climate finance has been increasing in the last decade and private actors and institutions have been the main driver for mobilizing climate finance. As matter of fact, the access to climate finance can be hindered by a wide range of issues, such as: lack of technological ability to implement projects; difficulties in meeting the investors´ requirements; political and legal instability, among others. Moreover, most of public resources refer to Development Finance Institutions and the public sector still plays a relevant role as a key driver in covering risks. In this scenario, the role of Climate Funds is still low.

Globally, green bond and loan issuance rose by 49 percent last year to $249.5 billion, according to the Climate Bonds Initiative. Of this amount, green loans were 2.6 percent. With $50.6 billion, the US is at the top of national rankings, followed by China with $30.1 billion and France with $29.5 billion.  In terms of currency, largest foreign market for green bonds with $106.7 billion in annual issuance has been the European Union.

What is a green bond? A kind of financial asset issued by private or public institutions that is expected to be instrumental in reaching the objectives of the European Green Deal while playing a large role in unlocking the private sector’s potential to address climate change and foster green projects. The European Parliament has been committed to the Green Deal, with proposals to invest in renewables, clean transport, organic food, and global supply chains that are shortened and diversified.

Green projects should contribute to climate change mitigation and adaptation; sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; protection and restoration of biodiversity and ecosystems. Green finance can include green assets and expenditures in green projects.  Some examples include   1) physical assets, like a windfarm, where a company is looking to diversify its financing sources and plans to issue green bonds, 2) financial assets, such as mortgage loans, when a bank is looking to finance a portfolio of green real estate mortgages and do this by issuing green bonds, 3) expenditures related to Research and Development, like those related to the generation of more efficient wind farm technology financed by green bonds.

However, a core component of sustainable investment would remain investors´ demand for green assets. The general problem of balancing standards across the sub-sectors of green, from infrastructure to real estate to sustainable forestry to corporate bonds, remains a challenge. Establishing such a standard was therefore a recommendation in the final report of the Commission’s High-Level Expert Group on Sustainable Finance that provided detailed input on what an EU Green Bond Standard could be. From June to October 2020 there was an EU Green Bond Standard public consultation as part of the development of an official EU Green Bond Standard that could help to consolidate the EU as a global hub for green finance. Among the regulators´ key-targets, we can highlight the adoption of 1) the use-of proceeds approach with focus on transparency, reporting, reviewing and verification, and 2) the EU taxonomy as an “unified classification system” to define project eligibility and to ensure consistency between the project financed and the EU’s long-term environmental objectives.

Scaling up climate finance is key to promote a green recovery in a post-pandemic world. Nevertheless, one of the current issues at stake is to prevent a green bonds´ bubble. Indeed, in the context of the health and economic crisis, there are many challenges for current regulators to enhance clear green strategies, eligibility of green projects and transparent practices of reporting, review and verification of green financial assets.

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