Banks and investors are using new tools and instruments with an emphasis on transparency and accountability in a sign that the sustainable finance industry is maturing. So-called green bonds, nearing a decade of use, are now tracked on a variety of indices worldwide and boast 42% year-on-year growth in Q1 2019. Green bonds have expanded from traditional issuers, such as a multibillion euro program to expand rail and metro links in European capitals, to "browner" industries such as a European gas utility issuing "transition" bonds to finance emissions reductions and energy-efficiency projects in its own headquarters and supply chain. Leading ratings agencies assess green bonds for environmental, social, and governance ("ESG") considerations while also capturing ESG considerations more generally in debt issuer ratings.

In response to changes in climate science and regulation, green bond issuers and projects are increasingly independently verified by auditors or third-party certifiers, such as under the Climate Bonds Initiative, or accredited under programs such as the forthcoming EU Green Bond Standard proposed by the European Commission's technical experts group in June 2019. Such mechanisms bolster issuers' use of proceeds descriptions in a green bond prospectus and impose tracking, proceed management, and ongoing project evaluation and screening mechanisms. Similarly, when investing in private equity funds, a bank may require that the fund abstain from "brown" or other investments harmful to the bank's ESG goals.

German Schuldschein instruments can be an alternative (or complement) to green bonds. Unlike most bond instruments, the Schuldschein is a contract between issuers and banks that may contain specific covenants (for example, maintaining a certain ESG rating) and an interest rate linked to the issuer or project's ESG rating.

Finally, banks provide syndicated loans, revolving credit facilities, and other debt instruments for green projects and to issuers who may be required to certify use of proceeds only for green projects. ESG-linked interest rates may be adjusted periodically based on contractually identified key performance indicators ("KPIs"). Certain arranging banks may be appointed as "sustainability coordinators" to assist and monitor sustainability KPIs and ESG scores.

Sustainable finance projects bring a host of regulatory and contractual issues, such as climate risk-related diligence, climate-specific representations and warranties, and nonfinancial disclosure obligations of both the issuer's impact on the climate and climate change's impact on the issuer.

Sustainable finance projects also give rise to new litigation risks. In France, investors can bring misleading advertising or unfair commercial practice claims if information contained in the documents underlying green financial products contains misleading information or is "greenwashing." Regulators can impose penalties, and consumer class actions may emerge as a growing risk for green bond issuers and arrangers.

Issuers and banks may look to anti-greenwashing guidance in the face of these potential liabilities. In particular, banks and issuers are recommended to use aspirational vocabulary, disclaimers, and forward-looking statements when describing impacts that may be difficult to assess, such as climate change-related KPIs. Pre-deal diligence is crucial, and reliable third-party certification along with a thorough legal review of disclosures is strongly recommended.

More change is on the horizon—in both the global and regulatory climates. The European Union's 20-point action plan is in full swing, bringing ESG rating advice and disclosure guidelines from the European Securities and Market Authority and a developing EU sustainable finance "taxonomy" destined to harmonize standards and repaint "greenwashers" in their true colors. These new rules will alter how banks and investors engage in and speak about sustainable finance for years to come.

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