Green Bonds: Thinking Beyond Standardization | Christa Clapp | CICERO Shades of Green

Christa Clapp © CICERO

INSIGHT by Christa Clapp, a Co-Founder and Managing Partner of CICERO Shades of Green Ltd.

As the green bond market moves towards more standardization in the EU, what does this mean for the role of external reviewers?

The pressure is on. Companies and financial institutions across the EU are busy preparing for Taxonomy alignment and awaiting the final regulation, and external reviewers are considering how to assess and provide transparency on what is important for climate and environmental impact and risks. Once the final regulation is in place, there will be a level of reassurance and certainty that the Taxonomy will provide. But we have an immense task ahead of us to use the Taxonomy in a way that reduces climate risk and provides positive environmental impact for financial markets.

The EU Sustainable Finance Action Plan and the EU Taxonomy initiatives mark a dramatic shift in the discourse on what constitutes green. To aid investors and corporates in identifying green activities, the Taxonomy lays out detailed environmental requirements by industrial code. To be Taxonomy-aligned, the technical criteria for environmental thresholds, the ‘do no significant harm’ checks, and the minimum social safeguards must all be met.

For green bonds, the draft EU Green Bond Standard would require transparency on Taxonomy-alignment of financed activities to qualify for the label. But what does this imply in practice for green bond external reviewers?

The role of external reviewers will only increase in importance as they consider alignment to the EU Taxonomy, given the contextual information and interpretation that will still be critical for understanding how green a bond is.


| There are several ways in which we will add value in assessing Taxonomy alignment:

First, while alignment to the Taxonomy identifies green activities, it tells us nothing about the direction the company or organization is headed in. An oil company could issue a green bond with financed activities fully aligned with the Taxonomy, but with an overall direction that is not moving towards green. The social safeguards provide a minimal check, but without further information on the corporate environmental targets and implementing policies including on mitigating supply chain emissions, investors will not know if the green bond supports a trajectory of further green activity within the company.

Second, Taxonomy alignment indicates green activities but does not measure relative climate risk. The binary characterization of green versus not green is not a full substitute for an assessment of climate risk. Regarding transition risk, or the risk of tightening carbon prices, being aligned with the Taxonomy will show reduced risk in contrast to not being aligned, but will not necessarily help investors make decisions about which debt instruments reduce their climate risk the most or provide the greatest impact. For physical risk, or the risk of climate-related damages e.g. via flooding or heat stress, simply aligning green bond activities with adaptation activities does not necessarily reflect embedded resilience in infrastructure planning.

Third, determining Taxonomy alignment will require a fair amount of interpretation, especially in cases where data is not available. Evaluating whether the ‘do no significant harm’ criteria are met involves a deep understanding of the environmental objectives including climate change mitigation and adaptation, knowledge of local regulations, and in many cases expert judgement as to whether the criteria will be met. Further, we expect many green bond issuers to be lacking some of the required data to prove alignment with the technical thresholds. In cases where data is not available, it may be possible to apply an expert, independent judgement as to whether an activity may be in alignment with the Taxonomy.


It will be important for investors, and external reviewers in providing transparency to investors, to ask tough questions as they drive the direction of the green and sustainable bond markets.


This means not only asking if a company’s financed activities are taxonomy-aligned, but also asking about how the issuer is moving in a green direction over time, how are they managing climate risk (both transition and physical), and how they measure their green activities even in the absence of detailed data.

At CICERO Shades of Green, we have a track record of providing transparency climate risk for the green bond market. We have applied our deep climate and environmental expertise to support transparency on new directions in the green bond market (our Best Practices Report 2020 highlights some recent examples). Our approach incorporates looking at climate resiliency and GHG mitigation holistically for all financed project types and uses a scale of Light, Medium and Dark Green to indicate how well a bond addresses climate risk. We also include a governance assessment that feeds into our overall green shading, to weight the issuer-level policies and targets that can impact their implementation of their green finance framework and indicate the overall direction of the organization. Our approach can add value on top of the taxonomy requirements, both for green bond reviews and company-level assessments.

The development of a common language on green activities can help us refine our work as external reviewers, but does not replace the need for thoughtful interpretation to provide transparency on climate risk and impact for investors in the EU and beyond.


| brief bio

Christa Clapp is a Co-Founder and Managing Partner of CICERO Shades of Green Ltd., a global leader in green ratings for bonds and other financial products. CICERO Shades of Green is a subsidiary of the climate research institute CICERO, where she also leads the climate finance research track. She has 20 years of experience in climate policy and economic analysis andis a Lead Author on finance and investment for the upcoming Intergovernmental Panel on Climate Change (IPCC) assessment report.


| about

CICERO Shades of Green is a leading provider of external reviews on green finance frameworks, building on the renowned climate research of the parent organization CICERO.  Our researchers and experts have been providing second opinions on green bonds worldwide since the beginning of the market, and our approach has received multiple international awards.


All opinions expressed are those of the author. is an independent and neutral platform dedicated to generating debate around ESG investing topics.