If there were a top-ten list of environmental risks, then resource depletion, pollution and climate change would be at the top. In fact, these three risks are strongly connected, just as economics and environmental management now form unbreakable linkages for a sustainable economy. The intent is certainly there to make this transition happen. At the United Nations Climate Change Conference (COP21) held in Paris in 2015, over 400 major investors representing USD 24 trillion in assets petitioned for a strong, worldwide deal to tackle climate change. Although a deal did emerge from the Conference, financing it is proving a challenge due to the scale of investment needed. It also requires being creative in how we tap into the multitrillion-dollar bonds market that is typically funded by risk-averse financiers.
The magnitude of the investment is unparalleled. UNEP, for example, has determined that by 2030, much of the world’s infrastructure will need to be redeveloped and replaced in the transition toward the new economy. What’s more, according to the New Climate Economy, the flagship project of the Global Commission on the Economy and Climate – an international initiative that examines how countries can balance economic growth with the risks of climate change – this economic and environmental revolution will require funding to the tune of USD 90 trillion.
Focusing on energy alone, the International Energy Agency estimates that the world will need to infuse at least USD 53 trillion in the energy sector by 2035 to prevent dangerous climate change. Meanwhile, on the continent that gave birth to the 2015 Paris climate change deal, the European Commission’s (EC) High-Level Expert Group on Sustainable Finance (HLEG) has calculated that the EC must invest USD 180 billion annually if it is to fulfil Europe’s ambitions in tackling climate change.
Propel and compel
While investment has already begun, significant problems have emerged due to a lack of tools to value natural resources and the absence of a robust, universal standard that at least propels, if not compels, financial institutions to reduce their exposure to climate change risks. For example, investors at the 2015 Paris Conference called for financial institutions to determin – and disclose – such risks. Yet a report by the investment house Boston Common Asset Management, published earlier this year, found this area lacking: amongst the 59 largest banks in the world, less than half were assessing climate change risks, and well over half failed to limit their financing of the coal sector.
There have been other challenges too. Over the past ten years, a new type of investment product has emerged known as the “green bond”. In simple terms, a bond is a loan whereby the lender gets a fixed return for a finite time period, after which the loan is repaid in full. Green bonds provide vital finance for sectors such as renewable energy, low-carbon buildings and transportation, energy efficiency, waste minimization, recycling and the circular economy, sustainable agriculture, and climate change adaptation. At face value, green bonds are a win-win: investors make money funding developments for a better world whilst developers receive the lifeblood for fledgling environmental projects and programmes.
Green bond beginnings
The World Bank coined the term “green bond” in 2008 when it launched its Strategic Framework for Development and Climate Change, conjuring an eco-label for a new breed of loan to finance projects and programmes in sustainable development. Since then, the green bonds market has grown substantially and, according to the Climate Bonds Initiative, an international organization working to mobilize the bond market for climate change solutions, financial institutions issued about USD 155.5 billion in green bonds during 2017. Yet, despite these efforts, green bonds currently make up less than half a percent of the global bonds market.
As with many innovations, there have been controversies, such as the bond “labelled as green” whose intended purpose was to fund incremental improvements in the operational efficiency of an oil refinery. Furthermore, varying definitions for a green bond and new schemes for assurance have been confounding and off-putting. “Different definitions for green bonds have confused and deterred investors,” comments Dr John Shideler, Chair of technical committee ISO/TC 207, Environmental management, subcommittee SC 4, Environmental performance evaluation, who has been active in the field of climate change mitigation for more than a dozen years.
“Issuers have been able to choose from different frameworks for substantiating their green bond claims, such as the Green Bond Principles, the Climate Bonds Standard, and the guidelines of the People’s Bank of China. However, the lack of uniform eligibility rules and varying definitions of “green” have been seen to restrain growth in the sector,” he deplores. Fortunately, the new family of ISO standards, including ISO 14030, Green bonds – Environmental performance of nominated projects and assets, will significantly help to allay such problems.
Setting the framework
For decades, standards have provided the keys for unlocking beneficial change, as well as the structure to support such change. Environmental management is a case in point. For instance, ISO 14001 for environmental management systems was instrumental in helping a food company recycle its waste. Numerous organizations have likewise reported enormous annual savings in energy thanks to ISO 50001’s energy management systems. Furthermore, the returns on costs invested were typically achieved in well under a year.
Building on these successes, ISO is developing the next generation of environmental management standards, which will focus in particular on melding economics and environmental management. For example, valuing natural resources and performing environmental cost-benefit analyses are both strategically and tactically important steps in sustainable development programmes.
Accordingly, ISO 14007 will enable organizations to determine and communicate the costs and benefits associated with their environmental aspects, impacts and dependencies on natural resources. ISO 14008, meanwhile, describes a set of tools for assigning monetary values to environmental impacts. “There is a growing drive towards valuing natural capital, as well as a need to undertake a monetary assessment of an organization’s environmental aspects and impacts,” explains Martin Baxter, Chair of ISO/TC 207’s subcommittee SC 1, Environmental management systems. “Therefore, having a set of standardized, harmonized methods becomes important.”
Whilst Baxter sees both standards having a role in addressing climate change risks, tackling these requires finance for adaptation, resilience and the transition to a low-carbon sustainable economy. This is where two other standards – ISO 14097 for the assessment and disclosure of climate-change risks of investments and ISO 14030 for green bonds – will serve a critical role.
Standards set sail
One year after the 2015 Paris Conference, France passed the world’s first law addressing climate-change risk and disclosure. “Article 173 of French Energy Transition Law requires institutional investors to disclose how they address climate-change risks,” explains Stanislas Dupré, Convenor of the working group that is developing ISO 14097, a standard that sets the requirements for reporting climate-related risks and the impact of financial institutions’ climate actions.
Existing standards on the subject are varied and fragmented, indicating a pressing need for a harmonized, unifying and international standard. ISO 14097 will serve that purpose. “There was a clear need for technical guidance and a standardized framework, describing how financial institutions, banks, investors and asset managers can assess climate risks and then disclose them,” adds Dupré.
At the same time, ISO 14030 will achieve equivalent credibility and uniformity for assuring green bonds. By 2015, it was clear that green bonds needed a unifying standard to build on the early foundations provided by the Green Bond Principles, the Climate Bond Standard and the variety of existing taxonomies for green bonds – and so eliminate the risk of multiplying regional standards and fracturing a game-changing market. “It will be the first International Standard for green bonds,” explains Shideler.
So how will ISO 14030 take into account existing standards? The strong suit of ISO is the harmonization of existing standards. Thus, ISO 14030 will draw upon the Green Bond Principles and the Climate Bond Initiative’s Climate Bond Standard, which is based on these principles. The standard’s working group of experts is also considering the taxonomy for green bonds developed through a joint effort of the Green Finance Committee of the China Society for Finance and Banking and the European Investment Bank. These resources and many more are providing seed documents for ISO 14030.
Meanwhile, Europe’s High-Level Expert Group on Sustainable Finance (HLEG) has recommended that the European Commission produce a standard for green bonds developed within the EU. “The HLEG’s recommendations align well with the scope and approach proposed for ISO 14030, whilst the new working group for ISO 14030 includes individuals from the HLEG and experts with experience in developing and using other existing standards,” Shideler remarks.
Benefits across the board
So how will all these standards combine to address climate change? In simple terms, they will allow decision makers to make informed choices in a way which is more likely to be economically and environmentally sustainable. “ISO 14008 can be used by all types and scale of organizations as it provides a standardized approach for natural-capital accounting. ISO 14007, on the other hand, is intended to be used at the organizational level. Therefore, the two standards will complement one another,” explains Baxter.
And what benefits will ISO 14097 bring? “There will be three main benefits,” explains Dupré. “First, it will guide those investing and managing finance to assess climate-related risks. Secondly, it will help drive the shift to a low-carbon economy by lowering the exposure to climate-related risks; and thirdly, ISO 14097 will provide the benefits of standardization. In other words, a unifying framework that provides a basis for assessment, verification and comparability,” he adds. The plan is to publish ISO 14097 in 2020.
ISO 14030 will also deliver three major benefits, Shideler continues: “Firstly, it will dispel any confusion about what constitutes a green bond. Secondly, it will provide a taxonomy of assets and projects that can be financed by green bonds, and thirdly it will provide assurance that green bonds issued in conformity with it will deliver environmental benefits, giving investors confidence.” All going well, ISO 14030 will be published in 2019.
In summary, if economies and trade underpin civilizations, then melding economics with environmental management is critical if we are to live sustainably. Making this transition requires a paradigm shift in the way we value resources and use environmental cost accounting. And if environmental finance is the key that unlocks the capital to drive the changeover, then ISO standards, through harmonization and assurance, will provide the framework, structure and strength to make it happen.