Green bonds are here to stay. Now we must ensure they make a difference

The year 2021 has brought with it a renewed sense of optimism; the vaccine roll-out has picked up speed across Europe and so has the economic recovery. We are starting to see signs that the world may be emerging from the pandemic and returning to some sense of normality.

As we begin to look forward, attention is turning to the recovery effort and the mechanisms through which it will be financed. Therefore, it comes as no surprise that, with climate change at the very top of the agenda for governments and corporates alike, green bonds already appear to be taking centre stage.

Earlier this year, the European Commission committed to issuing over €250bn in green bonds, totalling nearly 30% of the overall recovery package, and EU member states are following suit, with France, Germany and Italy all undertaking significant bonds issuances in recent months. 

The real estate industry is no different, and in the past 12 months constituents of the EPRA Nareit Europe index have issued over €5.5bn in green bonds, marking a 139% (€3.2bn) increase on the previous year. And there are no signs of this slowing up. Recently we saw Gecina commit to requalifying its entire bond portfolio – worth €5.6bn – into green bonds. 

These figures clearly show that, much like officials in Brussels, the real estate sector sees green bonds as an essential part of the economic recovery.

It is important to stress that we welcome the increased prevalence of green bonds; creating a more sustainable, environmentally friendly listed real estate sector has always been one of our primary ambitions. However, if green bonds are going to become a pivotal part of the recovery, we cannot ignore the scepticism from some quarters about the difference they are really making in the fight against climate change.

To this day, we are still seeing some examples of greenwashing in financing where the capital raised through these new instruments is not allocated to projects with green credentials but to repay existing debt. 

Gecina, which is redeveloping 75 Avenue de la Grande Armeé in Paris, has issued more than €5.5bn in green bonds

Gecina, which is redeveloping 75 Avenue de la Grande Armeé in Paris, has issued more than €5.5bn in green bonds

We have also seen companies, especially in other sectors, use green bonds to finance projects that have little, or even negative environmental impact. A prime example being the fossil fuel industry, where green bonds have been issued under the guise of financing sustainable initiatives, but in reality, have been used to help upgrade fossil fuel refineries. 

“If green bonds are, indeed, going to be part of this green recovery, then we must take this opportunity to move away from voluntary assessment and bring in a standard that helps develop a more transparent and environmentally friendly industry”

The problem here is a lack of standardisation and transparency; currently, bonds are effectively self-labelled, allowing companies to define the terms in which the bond will support climate-change objectives. 

This is not to say that every green bond is in fact financing brown projects. Within the listed real estate sector, and especially among EPRA members, we are witnessing a concerted effort to improve transparency through reporting against both the EPRA Sustainability Best Practice Recommendations, which have been brought fully in line with Task Force on Climate-Related Financial Disclosures (TCFDs), and the Climate Bond Initiative’s Green Bonds Framework, alongside their own green bond frameworks. 

Most recently, we saw Vonovia and Montea issue €600m and €235m-worth of  green bonds, respectively, which foresee continuous monitoring and reporting of the projects financed. Through this reporting mechanism, investors will be provided with transparent, quantifiable objectives to measure the bonds against. 

Nevertheless, long term, these market initiatives alone are not enough. For as long as these standards remain voluntary, there will continue to be examples of greenwashing in green bond issuance.

To effect real change, we need a mandatory Green Bond Standard as part of the upcoming revisions to the EU taxonomy. This will help to create greater transparency across the entire finance industry, extending far beyond real estate, whilst taking the onus off companies to develop their own frameworks to attract investment.

It is clear that the wheels are in motion for a Covid recovery, and this presents a real opportunity to tackle climate change in the coming months and years.

If green bonds are, indeed, going to be part of this green recovery, then we must take this opportunity to move away from voluntary assessment and bring in a standard that helps develop a more transparent and environmentally friendly industry.

Hassan Sabir is finance and ESG director at the European Public Real Estate Association