Green bonds are set to become an increasingly popular financial instrument on the back of increasing market focus on the sustainability credentials of investments.

Further measures and mechanisms may be needed, however, to ensure that bonds aren’t simply being greenwashed by opportunistic capital seekers hoping to cash in upon the cachet of sustainable of investing.

Matthew Bell, Oceania managing partner, climate change and sustainability services at Ernst & Young, points out that the green bond market is undergoing swift expansion as a new investment category.

“While the green bond market is still comparatively small at around $40 billion, it’s nonetheless growing very rapidly,” said Bell, who will be serving as a moderator at Green Cities 2016 in Sydney. “Almost every bond being issued in the green bonds spaces is being oversubscribed.

“For example we provided assurance over ANZ’s recent green bond issuance at the tail end of last year for AU$600 million dollars, which was primarily invested in green buildings and renewable energy across the country.

“ANZ upped it from $400 to $600 million on the basis that it was oversubscribed, while at the same time other bonds issued on that same day in classic bond market fashion were undersubscribed.”

Bell notes that at present there are two primary standards governing the issuance of green bonds.

“Green bonds are essentially debt provided to a company for initiatives in line with the principles of the standards of the bond, and there are two such standards at for this at present,” he said. “There is the Carbon Bonds Initiatives, which is focused on investments that are driving towards a net zero economy 2050, and then there is Green Bond Principles, which are a set of overarching principles concerning the green nature of the investment.”

The standards provide guidelines on the issuance and usage of green debt, given that the fledgling and unregulated nature of the market means there is still some danger for the type of “greenwashing” that has blighted other industries such as the sustainable accommodation sector.

“Greenwashing is less of a potential problem for a CDI issued bond because there’s a standard, and to get it issued you actually need to have the CDI certify that you’ve done that appropriately, which requires you to obtain an assurance from EY or a global accredited group to do it,” said Bell.

“While in many ways it’s unregulated, there’s still a standardised process that has controls underneath it and has people like us involved, which gives it some rigour.

“For Green Bond Principles, however, it’s much less regulated, and essentially you can drop a few things under the banner of green bonds.”

Certain categories of sustainable investment are still not adequately covered by the existing standards, which could impede the issuance of fully reliable green bonds in such areas until these gaps are addressed.

“CDI are very set on a certain asset classes, developing more over time, and putting a lot of effort into the key standards around buildings, transportation and renewable energy,” said Bell. “They don’t have to tools to cope with certain areas yet, like residential housing projects for example.”

Bell foresees the rapid development of other mechanisms in relation to green bonds in order to ensure that investors are better apprised, and thus further facilitate the market’s expansion.

“We’d expect at some point the development of an index to say that this is a light green or dark green bond, on the basis of its potential to deliver an environmental or social good – someone like Moody’s at one point or another will come up with a ratings scheme,” he said.

“Then you’ll start to see a scenario where superannuation holders will say part of their portfolio needs to be invested in green bonds, and won’t invest in a green bond unless it’s got a rating of 50 or more, or whatever the rating scheme might be that they’ve come up with.

“We’re not quite there yet, but I’m sure that’s where we are heading.”