Seeking breakthroughs to more sustainable capital markets

The Multitude of Loneliness
The Multitude of Loneliness, painting, oil on canvas, by Vilma Machado (c) 2015

Green and Social Bond standards, guidelines, issuers, investors, regulators, policy makers, stock exchanges and other stakeholders should not be content with the current pace and instruments with which current Green-Climate-Social Bonds are developing. Barriers to more sustainable capital markets should be solved at higher system levels, by concerted action of various platforms, standards and types of actors in the market. As a board member of one of the actors in this, the Green Bond Principles (GPB), I am part of this dynamic, and exposed to the same barriers and opportunities for change as many others discussed in this article.

Today’s gravity field keeps us on the ground

As an example, The Climate Bond Initiative and the Luxemburg Stock Exchange proposed actions to stimulate publicly traded green bond markets. While this is a laudable initiative, this is an other example of how disconnected solutions for Green and Social Bonds are being developed: guidelines and standards for green finance investments and debt capital markets are being developed in almost perfect isolation from national and international standard bodies, ‘guideline platforms’, second opinion providers, third party assurance providers, and policy makers. There is a lot of brain power available working with good intentions, but this brain power and the actions that result from it are thinly wired. This does not have to be a problem, if it weren’t for the absence of sufficient ambition and attempts to realise concerted and mutually reinforcing steps to arrive at clearer, more liquid and cheaper-to-produce sustainable debt capital market solutions. This is not to criticise the Climate Bond Initiative or the Luxemburg Stock Exchange, for their courage and initiative to contribute to more sustainable capital markets deserve praise. Rather, the observation and criticism goes to the collective of actors and platforms active in the space – and that I am part of myself – who all have difficulty to escape the field of gravity of market mechanisms and the different interest positions of their respective organisations. But this is not where the story should end.

Solve challenges at a higher system level

From the perspective of creating viable financial systems that stimulate green-focused or social-focused investments, disconnected attempts to create better working markets should be reviewed and reflected on with an open mind. Green and Climate Bond proposals aim to transform financial markets to produce more positive environmental and social benefits. This ambition transcends the boundaries of what any club of investors, issuers, ESG research organisations, assurance providers, and stock exchanges, each with their own role-based private interests could have the ambition or capacity to realise. Disconnected proposals coming from single sources mentioned above should therefore looked at with suspicion, since they are by definition not able to sufficiently envisage or influence the factors beyond their control. Challenges that cannot be solved at the level of an individual actor by the individual actor must be solved at a higher system level. There is no escape from this axiom, and there is plenty of evidence in decades of systems thinking and cybernetic research (cf the works of Stafford Beer, Fredmund Malik, Raul Espejo, Markus Schwaninger, Gregory Bateson, Heinz von Foerster to name a few).

Ensure a value chain-wide dialogue and stakeholder involvement

Concerted action towards joint and aligned outcomes are needed to achieve a next level of capital markets solutions that are able to more climate-smart and social benefits than current green bond solutions are able to produce. Building a common green and social capital markets agenda – preferably linked to the Sustainable Development Goals – will be able to avoid the solution of one actor (e.g. “provide more transparent and with third party assured impact reports”) will become he other actor’s cost explosion, turning a potential solution into a barrier to moving to a next growth curve through negative system feedback. If systems act independently from each other, they will encounter other system’s reactions to their actions, the systems react to each other, start to vibrate, and lose energy in becoming each other’s unwanted and unexpected antagonists. This is the perfect example of causal and circular system feedback in optima forma.

A proposal for connected thinking and concerted action

What is needed to take green and social debt capital markets to the next level is the following:

1 – Integrate diagnoses and knowledge from various actors (issuers, investors, underwriters, ESG researchers, auditors, stock exchanges, regulators, policy makers) to discover the potential effects and dynamics of solutions across the whole value chain;

2 – Develop Green and Social Bond and Climate Bond standards in unison, as to reinforce their intended consequences and minimise antagonistic feedback or untapped potential;

3 – Set up dialogue between policy makers and affected businesses and markets to jointly design solutions for market transformation and to monitor joint progress (the latter is often forgotten or conveniently ignored);

4 – Show how national standards, policy frameworks and bond standards and frameworks link up, as to widen the horizon and integrate knowledge of those working in different and hitherto disconnected professional environments;

5 – Develop solutions with an envisaged future in mind: solutions that just about confirm the current debt capital market practices and leave all options open to all actors are trivial, just because they let transformations up to coincidence to happen;

6 – Extend investment thinking from individual assets to entire value chains, and consider green solutions and connected debt finance at various system levels. For example, while a business may reduce its energy use and energy efficiency at plant level by installing new equipment or by buying or leasing new trucks for transport, the quantity and complexity of information used to decide on and implement green measures should not be transferred to higher management levels of the organisation or these higher levels as to avoid managerial paralysis by information overload. Again, this is to be considered as system science-based irrefutable knowledge. System scientists know it, generals at war know it, captain James Kirk of the USS Enterprise knows it, and CFOs and Chief Treasurers know it: in times of great complexity and with limited time to decide and act, decision-makers (treasurers, investors, etc) need concise information and the right information.

Unfortunately, the current trend in green bond markets seems to be to increase amounts and level of detail of information, which causes exponential growth of hours and costs of internal auditors, second opinion providers and external assurance providers to each of them do and check all the work anew and basically confirm what the others before them had already confirmed. Instead, when transforming information about ground-level sustainability project details into financial-economic information for reporting up the ranks and eventually to investors, the amount of information passed on should be drastically reduced, instead of dramatically increased. Markets do not necessarily need more information, and they do need the right information. Less is more. For example, proven overall reductions of energy use and increase energy efficiency on product or business line level and an indicator of how the company performance to a benchmark should suffice. Investors should only have to look at proven emission reductions of a business in combination with knowing the level of general governance of the business and the absence of severe controversies. The ultimate relevant question to be answered is: will the investment made in a business that is reducing its planetary footprint, and what is the size of that impact?

Sustainable bond markets need connected thinking and concerted action in a way that reduces barriers for bond issuers and investors. We can be sustainably stronger together.

This article reflects my personal views and not necessarily the views of Rabobank or the Green Bond Principles.

First published on, and on May 20, 2017.

Last update: 23 May, 2017