The green bond market is turning 10 years old in a few months. At first glance, it might seem like a burgeoning slice of the financial system. What started with an offering from the World Bank has spread to issuers around the globe, from Belgium and France to Honolulu, Hawaii, and Saint Paul, Minnesota. Volume hit a new high last year and is on pace to set another record in 2018.

Dig a little deeper, though, and investors will find a market still stuck in infancy.

The problem boils down to enforcement. For those unfamiliar with green bonds, they’re essentially what you’d imagine: securities issued to fund projects that are good for the environment. Think transportation agencies that take steps to reduce greenhouse gas emissions or real estate firms that seek financing for energy-efficient buildings. As Moody’s Investors Service pointed out last week, a growing number of sovereign nations are getting into the green bond boom as well.

The Climate Bonds Initiative is the closest thing to a gatekeeper for the industry. Through its Climate Bonds Standard and Certification Scheme, it provides the option for green bond issuers to verify that they adhere to a set of principles. To maintain the certification, the borrowers must update investors every year, with details such as confirming the value of the project remains at least as high as the amount of debt sold.

Anyone who has dealt with voluntary extra work probably knows how this story ends. According to a 2017 report from the Climate Bonds Initiative, the total “climate-aligned bond universe" is a robust $895 billion, but green bonds specifically are just a fraction of that, at $221 billion. And yet the group’s stated goal is for green bonds to reach $1 trillion of issuance in 2020.

To say I’m extremely skeptical that the market will grow that much in the next two years would be an understatement. The ambiguity around what qualifies as green is what’s preventing this type of investing from flourishing. Certainly, there was no shortage of dismay at the US withdrawing from a global pact to address climate change.

Green bonds present the opportunity for investors to feel as if they’re making a difference for the environment while earning a respectable return in the process.

In the short run, making the green bond designation more strict might crimp issuance. The Climate Bonds Initiative’s own database comes with the caveat that it tracks all self-labelled green bonds “but it does not provide an opinion on whether the Climate Bonds Initiative agrees". The dream of $1 trillion of sales in 2020 would be further out of reach.

But it’s not as if the issue of climate change is going away soon, so the industry should play the long game. Make certification a requirement for borrowers to proclaim they’re offering green bonds. The Climate Bonds Initiative largely agrees, stating that “standards, assurance and certification are essential to improved confidence and transparency, and further strong growth in the market". It’s not as if the group thinks the current system is perfect.

For now, though, the organisation will just ask for compliance, rather than require it. For the next 10 years to be even stronger than the first, that ought to change.

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