LONDON — Emerging economies are increasingly selling green bonds to Western investors hungry for environmentally-friendly investments, but there is a concern some of the new deals don’t meet the standards required.

Bonds from polluting countries are one example; investment in controversial hydro projects another.

Green bonds are intended to finance environmental projects such as solar and wind farms.

A record $32.2 billion worth of them were issued in the second quarter of 2017, according to Moody’s. Issuance from emerging markets has jumped from $2.3 billion to $9.2 billion year on year, about half the total from developed markets, versus 16% a year earlier.

South Africa’s Cape Town, Argentina’s La Rioja Province, Brazil’s BNDES and the National Bank of Abu Dhabi have all tapped the market, while Malaysia’s Tadau Energy sold the world’s first green Islamic bond, or sukuk.

“The market is stretching the boundaries … The push is there and I don’t see this abating in the near term,” said Rahul Sheth, executive director at Standard Chartered, said.

China accounts for over two-thirds of total emerging market green issuance and a fifth of the global tally, even though it is classed as the world’s bigger polluter by carbon emissions.

It issued $23 billion worth of green bonds in 2016, up from just $1 billion in 2015, according to the Climate Bonds Initiative (CBI).

China’s green bond boom reflects an official push for cleaner energy, says Sherry Madera, the City of London’s special adviser for Asia. Just 2% of Chinese local debt is “green” but this must rise tenfold for Beijing to meet its climate change objectives, she said.

At the other end, meanwhile, investor demand is growing. In Europe, Fitch identified 17 dedicated green bond funds whose assets have risen by 400% since 2015.

This means issuers can tap investors who might not have bought a conventional bond from the same place, says Bertrand Gacon, head of impact at Lombard Odier.

Investors get similar returns to ordinary bonds, but with an additional environmental benefit. “So for many institutions and private clients it’s just a no-brainer to switch part of their allocation into green bonds,” he said.

But emerging green bond markets are still bedevilled by variations in standards and skepticism over how the proceeds will be used if there is no third-party verification.

Lombard Odier’s Global Climate Bond fund, for example, did not buy Poland’s sovereign green bond, issued last year, concerned about issuer responsibility and so-called greenwashing. This is where an issuer promotes green initiatives but operates in a way that damages the environment.

“To protect its coal industry, (Poland) has repeatedly vetoed climate policies and obstructed negotiations both at EU and international levels and is seen to be infringing EU law through its continued subsidies,” said Stuart Kinnersley, chief executive of Affirmative Investment Management, which co-manages the fund with Lombard Odier.

The Polish bond was still oversubscribed, but this is not unusual for green bonds. The Polish Finance Ministry said in an e-mailed response that it had followed international principles and also sought outside opinion on the use of proceeds.

The opinion was that the proceeds from the bond “will have clear positive environmental impacts,” it said.

In China’s case, meanwhile, only 10% of green bonds sold last year had independent verification on the use of proceeds.

One issue is that Chinese green bond guidelines allow funding for “clean coal” power stations, which do not qualify under other market standards. Such disparities may stifle cross-border green capital flows; currently most buyers of Chinese green bonds are Asian.

“If EM issuers want to tap into (the Western sustainable) investor class then they have to think about what standards they are following and whether the European investor will be interested in projects whose green credentials are less clear-cut, such as clean coal,” said Rahul Ghosh, a senior credit officer at Moody’s.

China has acknowledged the issue and the state-run Bank of China successfully raised $500 million from a green bond issued in London last year. The deal was oversubscribed 1.8 times, attracting European investors.

Another problem is that aside from the odd large deal such as Mexico City Airport’s $2-billion issue, average issuance size is around $270-$500 million. Investors say they need bonds of at least $1 billion for meaningful exposure and to boost trading volume.

The World Bank’s International Finance Corporation and asset manager Amundi are seeking to combat this through aggregation, creating a $2-billion fund to stimulate emerging market bank issuance.

“Banks can be an aggregator of small projects — some solar panels here, a wind farm there — all these little projects couldn’t issue green bonds themselves as the critical mass wouldn’t be achieved,” said Frederic Samama, deputy global head of institutional and sovereign clients at Amundi.

Only 10-12% will initially be invested in green bonds, with the rest in standard debt. After seven years, though, the aim is to have 100% in green bonds from emerging markets. — Reuters

LONDON — Stock markets have spent the year rising on bets of a resurgence in inflation, while central bankers trying to manage the global economy have spent the same time repeatedly reassuring everyone it’s just around the corner.

Policy makers gathering at an annual monetary retreat in Jackson Hole, Wyoming in the coming week no doubt will be collectively pondering why the textbook rule that says low unemployment leads to labor shortages, then higher wages, and then in turn higher inflation, isn’t working.

Yet the global economy is growing strongly. Apart from the risk of a stock market correction, there is no evidence of disinflationary threats like those that emanated from the financial crisis that started to smoulder a decade ago.

The latest Reuters Polls of more than 500 economists covering more than 45 economies around the world showed almost no move in inflation expectations since the start of the year.

In the United States, where the Federal Reserve is raising interest rates, inflation pressures are in an extended lull, which has led to contorted arguments trying to explain it away.

Omair Sharif, senior US economist at Societe Generale, in a recent note titled “All my exes,” criticizes a recent tendency to search for suitably favorable core measures of inflation — stripped of, or “ex-”, whatever components are holding it down.

“In short, while the core CPI undoubtedly looks better when you strip out sizable price declines, all these ‘ex’ measures still show a softening in the core rate that began in January,” he wrote. “Moreover, as we have noted before, the transitory excuse is long past its sell-by date.”

Analysts who follow the European Central Bank have been equally disappointed that after spending two trillion or so euros buying mostly government bonds it’s only running 1.3% euro zone inflation, still well below the 2.0% ceiling. Some measures of core inflation are even lower.

Frederik Ducrozet, economist at Pictet, has taken heart from a recent trend move higher in the “super core” euro zone inflation rate, which excludes the cost of package holidays.

The trouble is, the euro is on a tear higher. That is a reflection of vastly improved economic performance by many euro zone economies this year, but as the common currency climbs, it acts as a drag on exports and tamps down imported inflation.

Flash euro zone purchasing managers’ surveys in the coming week are likely to show continued strong business activity, but with tame price rises.

ECB chief Mario Draghi, who famously sent shockwaves at a speech in London one month before the Jackson Hole summit five years ago proclaiming he would do “whatever it takes” to save the euro, will not be making major policy comments. To some, that underscores how little progress there is to discuss.

“This in itself suggests that the Governing Council remains to be convinced that it should announce its QE tapering plans at its next meeting (in) September,” notes Victoria Clarke, economist at Investec.

Fed Chair Janet Yellen will also speak. However, with minutes from the Federal Open Market Committee’s latest deliberations showing concern about soft inflation, she is not likely to give new guidance on policy.

Indeed, arguably the biggest influence on US inflation in the near term is completely out of the Fed’s control.

Come September, the reality may hit that prospects for sweeping US tax cuts, one of President Donald Trump’s biggest election promises and the basis of a surge in business confidence since he won the White House, have stalled.

If the stock market gets a chill, the Fed may no longer be able to rely on an argument regularly touted by New York Fed Chief William Dudley that looser financial conditions justify the case for tighter monetary policy.

But the weak inflation trend is not confined to the United States, Europe and, of course Japan. With few exceptions, national statistics show inflation remains low just about everywhere.

India, forecast in the latest Reuters polls to be the world’s top-performing economy this year with more than 7% growth, and also an economy notorious in the past for running persistently high inflation, reported inflation hit a record low of 1.54% in June.

The Reserve Bank of India cut interest rates into that roaring strength the same month inflation hit a record low.

South Africa, emerging from recession, is running inflation below historical averages and its central bank may cut rates again as soon as next month, and most likely by November, according to the latest Reuters poll.

Even in Brazil, which is beginning to emerge from its worst recession in about a century, inflation has crashed from more than 11% last year to below 4%, leading the central bank last month to lower its inflation target. — Reuters