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Investors as Regulators: Green Bonds and the Governance Challenges of the Sustainable Finance Revolution

This Article examines the role of the global financial markets in promoting sustainability and the governance challenges arising from this phenomenon. A growing range of financial instruments and strategies catalyze the desire of investors and corporations to support environmentally and socially sustainable commercial activity. This Article focuses on green bonds, a form of debt financing whose proceeds are specifically dedicated to environmentally-friendly “green” projects, assets, and business activities. Having emerged in the past three years, green bonds are expected to play an integral role in responding to the existential threat and enormous costs posed by climate change. Largely missing from the still-nascent green bond market are government regulators. Instead, its governance is decentralized and primarily shaped by private governance regimes (such as investment standards, certification schemes, ratings, and third-party assessment), which compete or collaborate with each other for market adoption. In comparison to public regulation, private governance is often faster to implement and more responsive to the needs of market participants but may suffer from a lack of legitimacy, accountability, and consistency and be susceptible to greenwashing. To address these deficits, this Article identifies and analyzes governance gaps in the green bond market and outlines a public-private hybrid regulatory framework to optimize the interests of investors and stakeholders.