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 percent a year ago.
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 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 percent 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 percent 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 scepticism 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 emailed 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 percent 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 (IFC) 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 percent will initially be invested in green bonds, with the rest in standard debt. After seven years, though, the aim is to have 100 percent in green bonds from emerging markets.
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