European green bonds have grown considerably in recent years but continued scepticism and limited oversight regarding labels could be limiting its true potential, Cerulli Associates has warned.
In a Europe-focused research piece, Cerulli said the prospect of ‘greenwashing’ continues to blight adoption, with many of those speaking to the consultancy raising concerns about determining whether a bond labelled as green actually goes to a good cause.
Cerulli suggested that this could be an important impasse between quantity and quality, whereby investors are hungry to add green bonds to their portfolios but are becoming increasingly discerning about what the genuine impact of them will be.
‘Regulation is needed, but it is crucial that the right balance is struck: too harsh and it will dampen demand, too soft and the sector’s credibility is at risk,’ according to the report’s author, Justina Deveikyte, associate director in European institutional research at Cerulli Associates.
The report comes ahead of an expected boost for the European bond market, with the German government set issue between €8bn and €12bn in its mid-year 2020 auctions. This comes in the wake of several European countries either already having done so or preparing to do so.
However, Cerulli highlighted how one sovereign is noticeably absent, as the UK reaffirmed last year that it had no plans to issue a benchmark green bond. However, with Brexit ‘done’, fund managers are quietly hopeful that this policy is set to change.
“More sovereign issuance could help fix the lack of European corporate diversity and resulting illiquidity in the market,” added Deveikyte. “Fund managers want to ensure their green portfolios have a broad risk exposure across technology, healthcare and consumer staples.”
Cerulli indicated that the bulk of green bonds are issued by utility companies, European countries and prolific Chinese issuance, which does not match many European investors’ currency exposure. However, diversification is improving, with new issuers such as banks and telecom firms coming to market.
One stop-gap, Cerulli said, could be so-called ‘transition’ bonds, which could be issued by the much larger universe of ‘brown’ industries. They could help to improve firms’ activities, providing the diversity the market needs and helping to finance greener activities among polluters. On the point of quality, Cerulli said the idea of whether a green bond does deliver the necessary capital to green projects is key.
Cerulli is expecting the launch of a wave of funds structured to meet new European regulation covering green bonds and eco labels, due to be introduced this year. The rules are part of the EU’s Sustainable Finance Action Plan, which is designed to encourage the flow of capital into sustainable investment and stop greenwashing.
Source Citywire Selector