In the face of a recent backlash to ESG investing, the global sustainable bond market is continuing to grow — but the fledgling market could benefit from efforts to enhance the sector’s transparency and integrity, global regulators say.
In a new report, the International Organization of Securities Commissions (IOSCO) examined the state of the sustainable bond market — that includes green, social, sustainability, and sustainability-linked bonds — which recorded US$1.1 trillion in new issue activity last year, an increase of 5% from the previous year.
While the market has continued to grow, it also faces an array of challenges, including concerns about the risk of greenwashing. And, along with greenwashing risks, the report also noted that a “lack of local expertise and fragmented standards continue to hinder market development.”
The report sets out some of the measures that policymakers in various markets have adopted to address these challenges, including the adoption of tailored rules, specific disclosure requirements, and standardization efforts.
The report also calls for greater clarity in the market’s regulation to align with global standards, support consistency, “build investor confidence, and support market participation,” it said.
“Jurisdictions may find it beneficial to clarify how their existing rules/regulatory frameworks apply to sustainable bond issuances, or develop guidance and/or rules specific to the sustainable bond market,” the report said.
It also highlighted the need for principles to consistently categorize sustainable bonds; enhancing reporting on issuers’ progress toward sustainability-related goals; utilizing independent external reviewers to verify sustainability claims and mitigate conflicts of interest; and, building knowledge about the market among issuers, investors, industry firms and regulators.
The risk of greenwashing remains one of the central challenges in this market. “Without clear and ongoing reporting, investors may struggle to assess whether issuers are meeting sustainability commitments made, potentially increasing the risk of greenwashing and misallocation of capital to projects that do not deliver meaningful sustainability impact,” the report said.
“The sustainable bond market would then risk becoming ineffective in driving meaningful sustainability impact that is expected by investors in this market,” it warned.
To combat that risk, regulators should also consider enhancing enforcement, along with efforts to improve standards and regulatory frameworks, it suggested.
“Robust enforcement of regulatory violations for sustainable bonds can increase adherence to sustainability requirements,” it said.
To that end, the report also noted that stricter reviews of prospectuses and other offering documents may be needed to improve the transparency and accuracy of disclosure, and suggested that highlighting examples of misleading sustainability claims can help uncover greenwashing.
For offerings that rely on outside reviewers, the report suggested that “robust disclosure by third-party reviewers of their own governance frameworks, policies, and procedures to mitigate conflicts of interest can enhance market transparency on the safeguards in place to deter misleading external reviews.”
In terms of capacity building, the report also called for tailored educational campaigns to help build expertise and set expectations between market players.
Additionally, it said that enhancing international collaborations to build local expertise, “can create a more inclusive and transparent sustainable bond market that aligns with global sustainability objectives.”
“Our goal for the report was to identify the distinctive features of sustainable bonds and outline various approaches used to regulate these products,” said Grant Vingoe, co-chair of IOSCO’s green finance and innovation workstream and CEO of the Ontario Securities Commission (OSC), in a release.
“This report sets out key considerations for interested jurisdictions when seeking to foster a well-functioning sustainable bond market,” said Jean-Paul Servais, chair of IOSCO’s board and chair of the Belgium Financial Services & Markets Authority.