LONDON (Reuters) - The European Bank for Reconstruction and Development has urged global regulators to adopt a hands-off approach to green bonds, warning that attempts to standardise the fledgling market could end up damaging it.
Green bonds were pioneered by the World Bank almost a decade ago to fund cleaner energy or low-carbon infrastructure projects such as wind and solar farms and water and waste treatment plants.
The market is now worth an estimated $100 billion (£76.7 billion) but may also be on the cusp of a potential boom as growing interest from funds, firms and countries such as China to ‘go green’ drives demand in the sector.
Standard and Poor’s estimates that up to $28 billion of green bonds could be issued by corporates this year alone if the Chinese market takes off as expected. That prospect causes the EBRD, which has sold over $1 billion of its own green bonds, to fret about the risk of over-regulation.
“We feel that this market needs nurturing. This market needs to grow and if you put regulation on top of it then you actually might harm it rather than develop it,” EBRD Vice President, Andras Simor, told Reuters.
“Regulation costs money ... so then the question is - is it still attractive to issue because on the other side investors are unlikely to accept a lower return.”
What actually constitutes ‘green’ remains a major issue for investors keen to champion the market and is one of the reasons why some would like the kind of regulation the EBRD opposes.
The benefits of renewable power may be clear-cut, but purists argue that bonds which fund so-called ‘clean’ coal power stations shouldn’t be classed as ‘green’ because, despite the CO2 cuts new technologies give, fossil fuels remain distinctly ungreen.
“One’s view of what is green can change over time,” the EBRD’s head of funding Isabelle Laurent said, urging pragmatism.
Simor added: “In China clean coal would be a huge step forward, whereas in Britain it probably would not, so you have to take into consideration differences between countries.”
The EBRD is looking to issue more green bonds as part of its broader environmental lending strategy, which now totals almost 6 billion euros. (£5.1 billion)
At the same time the bank is wary about cannibalising the cash its traditional investors would anyway spend on its other bonds which can be more profitable for the EBRD.
Simor and Laurent also said the EBRD’s coveted AAA credit rating would not be cut despite S&P’s downgrading of both Britain, one of the EBRD’s big shareholders, and the European Union following Britain’s vote last month to leave the EU.
S&P’s move will reduce the AAA-rated portion of emergency capital the EBRD would call on in a crisis, but no development bank has ever had to draw on that ‘callable capital’ as it is known.
“Callable capital is braces when you already have a belt and a lift jacket,” Laurent said. “We manage ourselves never to have to (use it).”
Reporting by Marc Jones; Editing by Gareth Jones