The integrity of the fast-growing “green bond” market is at risk unless a clear definition of what passes for green can be agreed, Zurich Insurance’s investment chief told the Reuters Global Climate Change Summit.

The supply of green bonds, a fixed-income security designed to raise capital for low-carbon, or green, investments, is expected to reach $40 billion this year by some estimates, four times higher than 2013.

Money raised by green bonds can be used to fund projects from hydroelectric power plants to ecological farms. Investors around the world are snapping up the bonds, partly to offset the climate change risks to other assets in their portfolios.

Proponents of green bonds hope a large and liquid market for the securities will help lower the cost of capital for projects which will ultimately tackle climate change and other environmental issues.

The problem is that no single set of criteria for what constitutes a green bond has been agreed. There are several competing versions and guidelines, and all are voluntary. Investors want independent assurance their money will go to projects that help the environment, not harm it.

“In capital markets, trust is key. If there is going to be a lot of ‘green washing’, this market will die,” Chief Investment Officer Cecilia Reyes said at the insurer’s headquarters in Zurich.

“It’s in our best interests to safeguard the integrity of this market, otherwise it will be a one-time show,” she said.

In July, Zurich Insurance doubled its proposed investment in green bonds to $2 billion, making it one of the more significant buyers of the securities, even though that amount would still only be about 1 percent of its total investment portfolio.

How Green?

Until recently, green bonds were the preserve of development banks, such as the European Investment Bank,World Bank, International Finance Corporation and the European Bank for Reconstruction and Development.

But corporate green bond issuance has been accelerating over the past year as interest grows in ethical investing, and this has raised issues about standardization.

EDF Group, which operates nuclear energy plants in France and Britain, issued a 1.4 billion euro green bond last year. While nuclear power is low carbon, some investors may not consider it a green industry.

Other issuers have also differed on whether fitting coal-fired power plants with technology to reduce carbon emissions constitutes a clean energy project, or not.

Zurich is a signatory to the Green Bond Principles, guidelines for issuing the securities set out by the International Capital Market Association.

The voluntary principles outline broad categories of projects that qualify as green and recommend issuers give qualitative or quantitative measures of the environmental impact of the projects, where feasible.

Michael Wilkins, managing director of Infrastructure Finance Ratings at Standard & Poor’s Ratings Services (S&P), agreed that some form of agreed green standards was necessary.

“One of the big issues with green bonds is standardization, classification and ensuring there is credibility in terms of what is being financed,” Wilkins told the Climate Change summit at the Reuters’ London office.


Despite potential shortcomings, the green bond market is set for continued rapid growth for the time being.

Wilkins said S&P had increased its estimate of the global corporate green bond market to $40 billion by the end of this year, up from the $20 billion it estimated in May and the $10.4 billion issued by the private sector last year.

He said the total green bond market, including corporate and bank issuance, could reach $80-$90 billion this year but that was still a fraction of the $80-$90 trillion global bond market.

Zurich Insurance has invested more than $400 million out of the $2 billion earmarked for green bonds so far.

Other large investors have followed suit. Barclays said last month it planned to invest at least 1 billion pounds ($1.6 billion) by November next year in green bonds, more than trebling its investment in the sector.

“If this market becomes broader and deeper, then we can invest beyond the strategy that we have in place at the moment,” Zurich’s Reyes said.

She said oversubscription was becoming more commonplace as more investors took an interest in green bonds.

“It’s now a lot more difficult to invest because of competition from other investors, be it insurance companies, pension funds, or other large institutional investors who are also driven by responsibility in their investment activities.”

(Additional reporting by Nina Chestney in London; editing by David Clarke)

Topics Climate Change