In addition, green bonds with verification from the Climate Bonds Initiative typically achieved, on average, a price improvement of 15 basis points (Hyun et al, 2020).

Guiding principles help to spot the lemons and pick the peaches

Such intra-market distinctions are likely to become more pronounced. Rather like the economist Akerlof’s “market for lemons”, new and trusted guidelines help investors distinguish between high quality green bonds (“peaches”) and less impactful ones (“lemons”).

Such guiding principles could come from various sources:

• Institutions: such as the EU Green Bond Standards, or regulatory authorities setting green bond prospectus requirements
• Listing authorities: designated sustainable / green bond listing requirements
• Leading investors: publishing their own guidelines for green bonds
• Digital innovations: such as the blockchain-powered Green Asset Wallet platform for green bond impact reporting
• Index providers: dedicated green bond indices with clear inclusion criteria

While it may sometimes seem like a cacophony, these market agents all have a key role to play in further improving the credibility (and hence attractiveness) of the asset class.

References:

• Hyun, S.; Park, D. and Tian, S., 2020. “The price of going green: the role of greenness in green bond markets.” Accounting and Finance 60, 73-95
• Akerlof, G.A., 1970. “The Market for "Lemons": Quality Uncertainty and the Market Mechanism”. The Quarterly Journal of Economics 83, 488-500