Britain starts building 'guard rails' for green bonds

By Huw Jones

LONDON (Reuters) - Issuers of bonds that raise cash for "green" projects should voluntarily apply industry standards to avoid hoodwinking investors, Britain's Financial Conduct Authority (FCA) said on Wednesday.

Bonds whose proceeds are used to finance sustainable activity passed the $1 trillion mark globally last year for the first time, the FCA said in a policy statement on integrating environment, social and governance (ESG) issues into UK capital markets.

Regulators globally are looking at how to limit "greenwashing", or giving investors a flattering picture of sustainability as ESG funds attract trillions of dollars.

Green bond issuance in Britain, including government 'gilts', totalled $53.5 billion last year, the largest market in Europe for the first time, the FCA said.

"We are taking a measured approach to ESG-labelled debt instruments, with the aim of setting clear guard-rails as the market continues to develop."

Issuers should consider voluntarily applying industry standards such as principles https://www.icmagroup.org/sustainable-finance on green debt from the International Capital Market Association, a bond industry body.

There was no consensus on whether Britain should adopt a national "green bond standard" along the lines of norms being approved in the European Union, the FCA said.

Misleading advertisements for green bonds will face enforcement action, the FCA added.

The watchdog said it may consider regulating "second party opinion" (SPO) firms like Sustainalytics, Vigeo Eiris and ISS ESG used to assure investors that a bond is aligned to green principles.

"Given the increasing importance of external reviews in the ESG‑labelled bond market, respondents supported some form of regulatory oversight of SPO providers and verifiers," it said.

There is also a "clear rationale" for oversight of unregulated ESG data and ratings providers, which are widely used by asset managers to help them select investments for funds that tout green credentials, the FCA said.

"If the Treasury extends our regulatory perimeter, we will take the necessary steps to develop and consult on a proportionate and effective regulatory regime," the FCA said.

(Reporting by Huw Jones; Editing by Mark Potter)