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Innovation Case Study: Green bonds

Can green bonds deliver additional funds to strengthen environmental integrity without creating a negative bias against less financially attractive projects?

We propose the analysis of green bonds as a climate-related policy innovation, particularly focusing on the nexus between climate and energy.

Phase 1

Green bonds will be used as a case study for understanding the role of finance within the social metabolism. We shall investigate green bonds’ environmental additionality and intrinsic financial related bias. To capture the narratives behind green bonds and understand their justification, will shall start the assessment by carrying out qualitative analysis based on selected interviews with green bond participants acting both in the supply and demand side. Specific focus will be given to European government officials involved in the issuance of green bonds and participants in the High-Level Expert Group on Sustainable Finance. We shall build the analysis around the comparison of two country-level cases of green bond issuance. The choice will be made by the end of Phase 1, following the first interviews and the definition of key narratives to be assessed. The cases should be selected from a mix of a private and a public case within the same country, or two public issuances in different countries, to be defined depending on availability of data, accessibility and relevance to the selected narratives.

Partners: CA, UAB and UiB.

Phase 2

Based on the interviews, Phase 2 will build on the narratives to be assessed through a Quantitative Story Telling (QST) analysis, inquiring about the overall potential of green bonds as a policy option. We will look into the issues of additionality, credit-rating and sectoral biases by analysing at the countrylevel the issuance of green bonds. The deliverable should provide a clearer picture on the potential solutions and challenges linked to the development of green bonds, considering them as a policy innovation for the energy-climate nexus. More broadly, the case will posit ways in which financial and monetary flows might be included in the social metabolism analyses, aiming to advance the theory in the area.

Partners: CA, UAB and UiB.

For more information:


Download the "Definition Innovation Case Studies" Milestone report


Case study: Update

Policy Developments

The final recommendations provided by the High-Level Expert Group on Sustainable Finance have formed the basis for developing the European Commission’s action plan on sustainable finance, adopted in March 2018. Aiming at the inclusion of environmental, social and governance considerations into the European financial policy framework, the action plan sets among others (i) the need to develop a clear and detailed EU classification system, named the Sustainable Taxonomy, and (ii) to establish EU labels for green financial products, here included green bonds. This is overall an entirely new initiative in the world. Given Europe’s financial weight globally, these steps have the potential to transform our entire financial systems by paving the way on the operationalisation of how to include sustainability considerations into financial decision-making.

The Taxonomy will build a classification system based on screening criteria, thresholds and metrics for climate change mitigation, expected to be released in a report in the first quarter of 2019. The classification will then follow on climate change adaptation, healthy natural habitats, water resource management & conservation, waste minimisation, pollution prevention control and other environmental activities. In parallel, the Commission will report on the proposed standard for green bonds towards the second quarter of 2019.


Within MAGIC

These policy developments matter for MAGIC, as we have been following them in real time, as well as their repercussions across policymaking and the market. In the first phase of the project we have conducted a literature review and informal interviews to understand better how green bonds are developing within the current European momentum of sustainable finance. What direction is the debate taking? What are favourable and opposing forces and, from a nexus perspective, what limitations might be spot in the consensus currently under construction? In the second semester of 2018, MAGIC will start the engagement with stakeholders within the European Commission and relevant European institutions, private sector and Academia, to capture the underlying narratives for the development of green bonds. The narratives will form the basis for the quantitative story-telling analysis of green bonds, looking at the taxonomy and green labels against their performance against feasibility, viability and desirability aspects. Results from other innovations under MAGIC will be used for a more grounded basis quality check of these standards. 

[Feedback EC] 1st phase of the taxonomy: what is sustainable?

What is the EU Taxonomy on Sustainable Finance?

The European Commission is seeking to answer “what is sustainable?”, by developing metrics, criteria and thresholds to be used by the financial industry (summary by the EC). This is initially focused on (i) climate change mitigation (pdf). Further criteria will be released in June 2019 on (ii) climate adaptation and (iii) avoidance of “significant harm” (i.e. sustainable use and protection of water and marine resourcestransition to a circular economy, waste prevention and recycling*pollution prevention control, and protection of healthy ecosystems). The thresholds for these areas will define the minimum requirements for using the label “sustainable” in projects and investments within the EU. Even though aimed at the financial industry, these metrics are likely to influence the whole economy, since they might set the direction for each individual sector. 

For the climate mitigation package, the Commission chose to include 8 big sectors for their greenhouse emissions and 2 sectors for their enabling characteristics (e.g. research, communication). The 1st phase of climate mitigation (out for feedback) has been mostly on the “easier” sectors, or the ones that are more easily considered “green” (list below, document attached). The 2nd phase will be published in June and will bring “trickier” areas into the taxonomy (e.g. biofuels, EVs etc). 

Sectors covered by the 1st Phase

* Afforestation
* Rehabilitation/reforestation
* Reforestation
* Existing forest management
* Energy and resource efficiency in manufacturing
* Manufacture of renewable energy equipment
* Manufacture of low carbon transport vehicles, equipment and infrastructure
* Manufacture of energy efficiency equipment for buildings
* Manufacture of other low carbon technologies
* Geothermal
* Hydro
* Solar PV
* Wind energy
* Ocean energy
* Concentrated Solar Power
* Passenger Rail Transport (Interurban) 
* Freight Rail Transport 
* Urban and suburban passenger land transport (public transport) 
* Infrastructure for low carbon transport 
* Freight transport services by road
* Light passenger cars and commercial vehicles
* Interurban scheduled road transport services of passengers
* Construction of new buildings (residential and non-residential)
* Renovation of existing buildings (residential and non-residential)


First thoughts: Cons

The criteria are currently very weak, barely reflecting any thresholds at all. They mostly set a few generic, aspirational and unsubstantiated directions, without much of minimum requirements. Metrics have been limited to open-ended verbs such as “improve [capacity]”, “maintain [the quality]”, “minimise [waste]” etc, without any quantification up to this point.

The Commission realised a bit too late that they set a huge task to themselves (i.e. defining thresholds for all sustainability-relevant sectors), with very little time. Expert discussions have revolved around market issues and financial strategy, largely reflecting the leading DG (FISMA - Financial Stability, Financial Services and Capital Markets Union) and the composition of the technical expert group (TEG). The group, TEG,  is mostly made of economists and experts linked to the financial sector, while criteria, metrics and thresholds are very little financial in their essence. Sector-specific, environmental and climate specialists are nowhere to be seen in the current structure. 

This might change now, as the Commission has involved JRC and has sought to add 20 new experts to the previous group of 20. However, considering the number of sectors covered, it’s not difficult to question whether this will be sufficient to make the taxonomy fit for its purpose. Another relevant point for our Nexus focus is that albeit recognising its importance, the technical expert group expressly parked a more systemic approach to the taxonomy, eroding at this stage the potential for a definition of sustainability that is in line with a complexity perspective: 

The TEG has acknowledged that the existing sector frameworks used to classify economic activities can present challenges when assessing the systemic dimensions of mitigation and adaptation activities, such as cities, land use, transport or energy systems. Further work may be done on a systems approach to economic activities to feed into the final TEG report, but this falls outside the present feedback.  

TEG on Sustainable Finance (2018), Taxonomy Pack for feedback and workshop invitation, p. 9  

On the way forward, the worst scenario would be the EU to legitimate green-washing with the approval of weak environmental standards for the financial industry. After all, this could be picked up by other sectors to justify inaction and to sell unfeasible projects with a EU stamp of sustainable. 

First thoughts: Pros

However flawed thus far, the EU is raising the issue of climate and environmental responsibility to the financial sector. Historically, the sector has been largely considered as an “enabler” or simple “provider of means” for other sectors, without any responsibility of its own. As an example, even in cases in which renewables have proven to be a cheaper and cleaner alternative and a better long-term investment strategy, the financial sector has leaned towards short-term profits and prioritised investments in the fossil fuel industry. Similar examples can be seen in all areas of the Nexus, such as with water management (long repayment horizons often deem them unable to attract investors), pollution control, biodiversity maintenance etc. This is partially due to a lack of understanding of long term risks, but also to a degree of predatory behaviour by financial actors.

The Commission’s proposal is focusing on the development of a “green niche market”, but it has already triggered the need for a broader debate. Members of the European Parliament involved in the regulatory process have consistently indicated that focusing on a green niche is not sufficient. Europe should expand to an industry-wide reform aimed at progressively aligning the whole financial sector with climate and sustainable development goals. This is a massive undertaking and we are still in the early steps of the discussion, but it represents a great potential for environmental action within Europe and globally, given the relevance of the European financial industry in the world.



The Commission has indicated 7(+) questions to guide the feedback process (pdf, Part D, from p. 37), which can be used to more easily streamline a feedback. Clearly, these questions reflect some inbuilt stories, so feel free to approach the document from other angles.

How do you think the taxonomy could be improved from a Nexus perspective? 

[Feedback EC] TEG Interim Report on a EU green bond standard*

*This feedback was submitted to the open consultantion by the European Commission's Technical Expert Group (TEG) interim report on an EU Green Bond Standard (EU GBS).


Feedback on the TEG interim report on an EU green bond standard (EU GBS)

We believe the concepts underpinning the H2020 project ‘Moving Towards Adaptive Governance in Complexity: Informing Nexus Security’ (MAGIC), of which Climate Analytics is a consortium partner, may be useful to this important initiative.


MAGIC has been looking into interlinkages between the financial system and the biosphere in a case study on the development of green bonds as a policy innovation. This case study has been following the development of the Action Plan on Sustainable Finance and included interviews with members of the Technical Expert Group (TEG) and Members of the European Parliament (MEPs) involved in the legislative process (ECON Committee). Focus has been on two specific subtasks from the European Commission’s legislative proposal of May 2018: (a) the development of an EU classification system (the ‘taxonomy’) and (b) an EU Green Bond Standard.



  • The risks of “greenwashing” are reputational for firms and the financial sector, but the failure to properly address them exacerbate the risks of material negative impacts to the whole European economy and society. By absorbing from markets the risks derived from deciding on potentially contestable definitions of green, the EU must ensure it’s not only alleviating the burdens to reputation, but also ensuring effectiveness to the ultimate “green” objective and underlying justification of the EU GBS. Effectiveness and accountability on such a core green component cannot be downplayed and replaced by a simple shift of risk ownership away from market participants, coupled with additional incentives to those same participants. The development of a green bond market must come attached to clearer goals and mechanisms to address and monitor on the delivery of green additionality.
  • Weak and unsubstantiated definitions for labelling an EU bond as “green” could also impact on the climate and environmental action in specific sectors. By publicly signalling lower levels of green expectations, not only financial actors but all other types of firms in the economy might feel justified or incentivized not to raise or erode their ambition. Even if the definition is currently being built under the ‘EU taxonomy’, the “green” remains the core of green bonds and measure for its success. The Commission and the TEG should be more explicit not only about these risks, but particularly about mechanisms to prevent or overcome them.
  • Albeit citing the Paris Climate Agreement as a key driver for the EU GBS, the TEG’s interim report fails to explain how the development of a green bond market fits in the bigger picture of European Climate Action. For example, with an inherent and ultimate climate objective, the Technical Expert Group doesn’t indicate how a green bond market can work towards the EU Long-Term Strategy and its goal of achieving net-zero greenhouse gas emissions by 2050. Is the EU GBS intended as a sufficient policy on its own or will it require additional measures in the financial system towards that long-term goal? What are the EU GBS  benefits and limitations towards the Paris Climate Agreement’s objective of making all financial flows consistent with a low carbon pathway and climate-resilient development (article 2.1.c)? How might an incremental change in green bond markets support the Paris Agreement goal of keeping global temperature rise below 1.5˚C?
  • Climate change also brings a key and imperative time component which has not been factored into the proposed EU GBS’ architecture. The interim report provides a broad vision under the objective to “increase the flow of finance to green and sustainable projects”, but it doesn’t give any clarity on how much increase and by when. A meaningful proposal must bring clearer financial and environmental goals, targets and milestones, considering the urgency to act against climate change. It should also lay down a longer-term strategy that indicates how the EU GBS intends to assess results, adapt and increase ambition over time towards full compliance with the Paris Climate Agreement and other European environmental and climate commitments.   
  • A credible EU GBS architecture must address all the points above: material risks to the environment, risks of negative contagion to other sectors, the lack of connection with the broader EU climate and environmental action, and absence of time in the current architecture are fundamental shortcomings. While some of them, such as material risks and clearer goals should be justified from the first proposed legislation, issues such as targets and milestones could potentially come at a later stage. An initial testing phase of 3 years could be beneficial to generate awareness, create market buy-in and foster innovation. However, even if planning to postpone the inclusion of certain essential aspects, that should be clearly stated and justified from the beginning of the standard, on the grounds of policy transparency, market predictability and accountability to European taxpayers. Accountability on green effectiveness is the only factor to justify incentives to issuers or investors of green bonds. Such incentives could also be explicitly linked to the phasing-out of overall European subsidies to fossil fuel-related activities.
  • The EU GBS focuses on growing a small niche, but doesn’t address the continued and potential environmental harm done by the remaining bonds issued in Europe. That should remain a crucial component of any credible strategy on sustainable finance, since even with a strong and growing green niche, unaddressed harmful structures and activities will remain responsible for pushing European financial flows away from low-carbon pathways and a climate-resilient development. While “picking losers” can be opposed on economic bases, there is no legitimate argument on political, legal and environmental terms to justify the defence of lax regulations that directly or indirectly incentivize environmental degradation. Even when the costs of pollution have been insufficiently internalised on the firm level across the economy – e.g. with a weak price on carbon -, loop-holes and underlying biases in debt markets must be addressed to prevent rational and destructive gambling that exacerbates such negative externalities to the environment. A bare minimum should be to extend the climate and environmental self-reporting of a do-no-harm requirement to the entirety of bond markets, also creating a level playing field for green bonds in terms of transparency and reporting practices. A more appropriate goal, autonomous from green additionality, is that no single bond issued in Europe should contribute to the creation or maintenance of polluting structures and activities, such as carbon-intensive stocks that will undermine the European long-term goal of net-zero greenhouse gas emissions by 2050.