Regtech can unlock the huge potential of green bonds | KPMG | NL

How regtech can help realise the huge potential of green bonds

Regtech can unlock the huge potential of green bonds

The green bonds market is a key vehicle for funding the transition to a climate-neutral economy and thus has enormous potential. Whoever wishes to tap into that potential can’t ignore regtech. But who’s taking the initiative?

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KPMG in the Netherlands

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Green bonds

Green bonds are hugely popular. In the past four years, the market for green bonds has grown twelvefold. At the same time, it’s still a niche market; green bonds represent only 0.1% of the total global bond market. The huge potential of green bonds is, among others, closely interwoven with worldwide climate agreements reached during COP 21 in Paris and the internationally accepted Sustainable Development Goals (SDGs). To achieve the targets from both these accords, 900 trillion euros will be required over the next fifteen years.

And yet, the question always is whether the demand for green bonds is capable of actually realising the enormous potential. The future partly depends on the investment appetite of large mainstream investors who primarily look at the financial yields of investments and less at their sustainability. And because, for the time being, they don’t have sufficient insight into the quality of green bonds, most of them are still holding back from investing in this market. Uniform standards, including shared criteria for the predicate ‘green’, are key to increasing the confidence of major investors in this market and thus to realising this huge potential. And also, to realising climate targets.

Standards for a diverse market

The question is not if there will be uniform standards because the chances of standards being introduced are big. Even regulators, such as Mark Carney, governor of the Bank of England, are convinced. The question, rather, is what type of standards are needed in the future for sufficient credibility and growth of the market. Among other things, the market for green bonds needs standards that are, in fact, based on rules but sufficiently flexible for application to a market characterised by its large diversity. It is therefore paramount to agree an approach in which it is established per sector what ‘green’ is, because it is almost impossible in the practice to find a description that applies to all green bonds and all local markets.
Such standards will create more harmonisation in the way green bonds are structured and documented. This will increase the market’s transparency and have a positive effect on its growth. But that’s not all. Greater transparency is needed to safeguard growth in the long term. Regtech can play a key role.

A well-intended attempt

In recent months, the market has seen the appearance of the first technological solutions that try to further increase the transparency of the green bonds market, among others, to support organisations aiming to issue green bonds but don’t know how to go about it. The Swedish bank SBE, for example, has set up a central database containing relevant information on green bonds already issued. The UK magazine Environmental Finance has also launched its own database with information on green bonds. Still, in the long term these well-intended attempts will fall short of actually making the market transparent.

A better solution is a decentralised database using blockchain technology. Organisations that have issued green bonds personally upload the required information on the bond, the technology assigns a rating to it, the investor can compare, and the regulators can keep track real time. Accessible, transparent for issuing organisations, investors and regulators, and it is easy to distinguish between sector or subsector. Information cannot be edited retrospectively, which benefits reliability and transparency, and there isn’t a central party holding all the power over and responsibility for data. One issue, however, is that ‘someone’ has to take the initiative for setting up such a database. The question is, who feels this need?

You get what you pay for

Banks appear to be the most logical party to come up with such a blockchain solution. It is in their interest as intermediary and, moreover, they have the required knowledge of green bonds. They also have a direct line to fintech. But even if banks hold back, the decentralised database is a fact. Then, perhaps, a rating agency, such as S&P or Moody’s, may have a go. But this nonchalance can also turn against banks. Then you get what you paid for: higher transaction costs for green bonds and a lot of red tape. That will not only hurt banks, but the world as a whole, because investments in green bonds will not be given free rein.

Regtech is therefore going to make a contribution towards resolving the climate problem. How big this contribution is, depends on who takes up the challenge: banks or rating agencies. Both have an interest, but banks have the most to gain: for investors and, as such, for themselves, but not least for the climate.

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