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The present thesis attempts to answer the question “What makes a bond green?” by analysing the current status of the green bond market with regards to its regulation and evaluating the need for harmonizing green bond standards.
A green bond, which is characterized by allocating its proceeds exclusively to climate-related or environmental projects, is a relatively novel sustainable financing instrument that has recorded exponential growth since the first issuance in 2007. The green bond market has developed as a privately regulated market leading to a range of different green bond standards and other market mechanisms used for verifying green bonds, of which some have developed into best practice followed by most issuers. This fragmented regulation and the lack of a globally accepted green bond standard leads to the difficulty in clearly identifying what makes a bond green.
By analysing the current best practice and comparing green bond standards this paper identifies the differences between existing standards and suggests the further harmonization of standards as an important prerequisite for the further growth of the green bond market. Consequently, the challenges related to the private nature of green bond regulation is reviewed, leading to the conclusion that the intervention of the government and establishment of public regulation for green bonds could be considered. With regards to the further expansion of the green bond market the EU Green Bond Standard that is currently under development by the European Commission is critically analysed.
In the context of the global climate crisis, socially responsible investing has gained momentum in the financial market. One of its objectives is the achievement of a positive environmental impact. Among the instruments used for this purpose are green bonds. These are fixed-income instruments whose proceeds may only be used for green activities. To this point, market-based standards aimed at establishing uniform definitions of what constitutes “green” have strongly contributed to the development of the green bond market. In order to further promote the issuance and credibility of green bonds and exploiting their financing potential, the European Commission has proposed the introduction of a European Green Bond Standard.
This thesis examines how an introduction of the European Green Bond Standard could impact the existing German green bond market and lead to more private investments in green projects in the future. To address this question, information from an extensive literature review as well as quantitative data from Refinitiv EIKON's Green Bond Guide was used.
For the German green bond market to grow, in particular an increased involvement of the private sector is essential. This thesis finds that the current draft of the European Green Bond Standard offers great potential in this respect. Through increased transparency and assurance, increased demand as well as associated reputational benefits and the possibility to use targeted policy incentives it has the potential to increase the attractiveness of green bond issuance for the private sector and thus induce more issuances. An extension of the grandfather clause, which is currently under discussion, could underpin this even further.