Anniversary of first green bond seals growing synergy of policy and markets in support of sustainable finance

Fifteen years ago, the European Investment Bank (EIB) issued the world’s first green bond. From that initial seed has grown a trillion euro market, spanning different financing formats, currencies, countries and issuers across the globe. But integrity is just as important as size. Concerted effort from the bank of the EU has helped the market evolve to prioritise impact over intent, turning use-of-proceeds bonds specifically into one of the most effective tools for promoting clarity in sustainability.

In 2007, the EIB approached investors with a novel structure, a “Climate Awareness Bond” (CAB) that would allow bondholders to monitor the allocation of the proceeds to disbursements to a well-defined set of meaningful climate projects.

The deal was a €600m demonstration exercise, showing how a use-of-proceeds financial instrument could enhance transparency and accountability of climate action.

Fast-forward to 2022, and an ever-expanding range of countries, companies and multilaterals have turned to use-of-proceeds bonds, taking cumulative issuance of green, social, and sustainability (GSS) bonds close to the €3 trillion mark this year.

The clarity that GSS bonds provide on their allocations is ever more important in a world where society is demanding more rigorous proof of sustainability and outcomes based on objective criteria

Aldo Romani, head of sustainable finance in EIB’s capital market and treasury department

“The gradual convergence between public policy aims and the use-of-proceeds bond market is a major achievement,” says Aldo Romani, head of sustainable finance in EIB’s capital market and treasury department, who shaped the first CAB 15 years ago. “There’s meanwhile a general recognition that capital markets can be a powerful instrument to synthesise information on sustainability in a way that hasn’t been possible before.”

Success is in no small measure down to the EIB’s and other international financial institutions' continued commitment to fostering this market’s sustainable growth.

Indeed, the EIB alone has brought deals in 22 currencies and started issuing larger sized benchmarks to support market liquidity. From just 1% of funding in 2007, sustainability funding (CABs and Sustainability Awareness Bonds, or SABs, which extend the same approach to environmental and social objectives beyond climate) is on track to make up over 40% of EIB borrowing in 2022.

Clarity is crucial

While important, issuance size is not enough for sustainable investment to increase - efficacy is essential. Just as the EIB has supported the GSS bond market with issues of growing size over time, the bank has also worked tirelessly to help build the governance and best practice necessary to ensure real impact.

In 2007, the inaugural CAB used the EIB’s own definitions and metrics for green financing. The core idea was to allow investors to generate a return with a higher confidence that they were helping identify and deliver projects beneficial to climate change mitigation. This approach has meanwhile been extended to other sustainability objectives and is now being re-framed by evolving EU legislation on sustainable finance.

Against this backdrop, Romani views GSS bonds as an “instrument of clarification”. As official criteria give rise to new requirements, the rigorous impact reporting and external verification inherent to GSS bonds encourage issuers and investors to accelerate the assessment of their alignment with the new regulatory framework.

Streamlining EIB’s criteria and making them coherent with the logic of the EU law is a crucial exercise

Alexander Krauss, an associate in sustainable finance, EIB

“The clarity that GSS bonds provide on their allocations is ever more important in a world where society is demanding more rigorous proof of sustainability and outcomes based on objective criteria,” says Romani. “It helps investors as well as issuers to report on the activities for which reliable information is available in a constructive dialogue with internal and external stakeholders. This permits to build a credible path towards a higher degree of transparency and accountability also for the broader spectrum of their activities over time.”

Thanks to the timely recognition of the strategic impact of EU legislation, the EIB's CAB and SAB Frameworks (see below for links to the documents) offer an early example of how issuers can adapt to incremental changes in screening criteria and disclosure requirements in a credible, stepwise manner.

“Streamlining EIB’s criteria and making them coherent with the logic of the EU law is a crucial exercise,” says Alexander Krauss, an associate in sustainable finance at the EIB. “You have to make sure the project information is collected and provided in a way that the market can process, on both the lending and the funding side. Operationalisation is where the EIB plays an important role.”

Romani adds: “Nobody really knows what the eventual outcome of a higher degree of non-financial disclosures will be. It's a discovery process. You need a reliable instrument that allows you to picture the status quo ad interim, so that you can establish a credible strategy for improvement over time. Additionality is a function of knowledge”.

Beyond borders

Romani believes that, ultimately, regulation will help simplify and facilitate market action by eliminating uncertainty through a focus on the “essential aspects” of sustainability and the standardisation of their measurement.

The EIB has been vocal in pleading for EU taxonomy criteria that are easy to use and easy to verify. “This is the only way in which the market can work effectively,” says Romani. “The idea is that at some point, the standardisation and data availability generated by the dialogue between market practitioners and legislators will be such that everybody will be able to collect, report, and compare core information in a straightforward manner.”

The EIB’s own CAB impact reports are being reshaped this year to highlight a distinction between what is core to eligibility and supplementary information that is useful but largely descriptive. “Markets should focus on the core aspects,” says Romani. “This kind of structuring approach to reporting would have been unimaginable until recently.”

An inclusive approach is welcomed because, as Krauss notes, a constructive engagement of all parties is crucial. In this context, the EU legislative framework for sustainable finance being drawn up also has the potential for impact far beyond the EU’s borders.

Several emerging markets are putting in place legislation that follows a similar rationale, enhancing comparability of their approaches and strategies.

Collecting relevant information to demonstrate sustainability should be less of a challenge in the future. “It’s an improvement that can hopefully create more confidence among investors and then turn into larger sustainable investment flows from Europe to other parts of the world and vice versa”, says Romani.

Romani is confident that GSS bonds will continue to bring more clarity and rigour to a market that is changing for the better, as part of a broader and dynamic process of clarification in which capital markets play a key role.

“What counts is not only the status quo but rather the direction of travel,” he says. “In terms of seeing the glass half empty or half full, I see it as filling up.”