Browsing by Author "Hoven, Sophie"

The financial markets play a key role in promoting sustainable development and climate change mitigation. Why? Because these require investment, investment requires money, and money comes from the financial markets. After signing the Paris Agreement in 2015, the EU solidified its commitment to combating climate change and promoting sustainable development. The EU must fill a massive investment gap to achieve its climate goals that exceeds its funding capabilities, and so private sector funding must be mobilised. As part of its new sustainability strategy in the 2018 Action Plan for Financing Sustainable Growth, the European Commission sets out a few measures to steer financial development in a more sustainable direction, among them the creation of a European Green Bond Standard (EU-GBS). The purpose of this thesis is to examine this forthcoming EU-GBS to understand what the standard entails and how it will promote sustainable investment and the transition towards a climate-resilient European economy. First, I look at green bonds as a financial instrument and how these are currently regulated, and I discuss from a regulatory theoretical perspective why this regulation has not been able to ensure the functioning of the green bond market. Then I examine the EU-GBS and compare it to existing standards, such as the Green Bond Principles and the Climate Bonds Standard. Subsequently, as the final form of the EU-GBS has not been decided to date, I discuss the potential forms it might take and how these might affect issuers and investors. Finally, keeping its environmental efficiency in mind, I ask whether the EU-GBS is appropriate considering its objectives. While green bonds, as any financial instrument, are regulated by securities market regulation, there is no statutory regulation that specifically addresses the green nature of bonds. Instead, issuers of green bonds can choose to adhere to a range of voluntary self-regulation measures, such as such as the Green Bond Principles and the Climate Bonds Standard. Nonetheless, these standards have failed to overcome the most prevalent barriers to green bond market development, mainly inconsistent labelling, confusion regarding what ‘green’ means, and the resulting risk of greenwashing. Contrary to the most adhered-to standards on the market, the EU-GBS introduces a clear and science-based definition of environmentally friendly projects through its link to the EU Taxonomy, thus creating a common understanding of what can be considered green. It also standardises the reporting requirements, which increases transparency and credibility, and introduces an external verification scheme to enhance investor confidence, thus strengthening the integrity of the market and promoting market growth. The EU-GBS is proposed to become a voluntary standard, but this makes little sense when considering that other voluntary standards have failed to address the risks that green bonds are facing. Leaving it up to the issuer to decide whether or not to comply to the EU-GBS seems like a missed opportunity for preventing greenwashing and bringing sorely needed coherence to the market. A more environmentally efficient approach could be the introduction of a comply-or-explain based regime for green bond labelling, allowing issuers some leeway in the adherence to the standard as long as they can provide adequate justification for any deviations. This flexibility would allow issuers to make adjustments based on their own needs, thus encouraging adherence. Finally, the EU-GBS could become mandatory legislation, which is the only guaranteed way of ensuring that all bonds labelled as green in fact have a positive environmental impact, eliminating greenwashing concerns. Additionally, a mandatory standard could introduce actionable rights to bondholders if they have been misled by an issuer. I conclude that, while the EU-GBS does introduce some welcome additions to the green bond market, namely a clear definition of what can be considered green as well as an accreditation scheme to ensure the credibility of green bond, a voluntary standard will not be enough to ensure the proper functioning of the green bond market. The green bond market needs stricter and legally enforceable rules to ensure that green bonds can fulfil their potential to finance the transition towards a sustainable economy and consequently their role in combating climate change.