Growing the Green Bond Market to Finance a Cleaner, Resilient World
March 4, 2014
- Green bonds give investors an innovative way of supporting clean energy, mass transit, and other low-carbon projects that can help countries adapt to and mitigate climate change.
- The World Bank has mobilized over $5.3 billion through 61 green bond transactions in 17 currencies*, and the IFC has issued $3.4 billion in green bonds, including two $1 billion issuances in 2013.
- New Green Bond Principles and a call to double the market by September are helping expand the young market and attracting a new set of investors.
The growing risks brought on by climate change are raising development costs for the world’s fast-growing cities and developing countries. Government funds alone will never be enough to build resilience to extreme weather and deal with the threats to energy, water, and food supplies – the private sector and institutional investors must be involved.
That’s where an innovative funding stream is starting to make a difference. Green bonds are delivering finance for clean energy, mass transit, and other low-carbon projects that can help countries adapt to and mitigate climate change, while giving investors high-quality-credit, fixed-income investment opportunities that have a positive impact.
“Green bonds create a new flow of finance for low-carbon development. That’s crucial. But they do more – they have the potential to move the finance fulcrum in a cleaner direction, away from traditional fossil fuel investments and into the projects that will build our low-carbon future,” said World Bank Group Vice President and Special Envoy for Climate Change Rachel Kyte.
It’s a young market, but with strong potential, and new developments are bringing its value for investors into the spotlight:
• At the World Economic Forum in Davos, World Bank Group President Jim Yong Kim called for doubling the global market for green bonds to $20 billion by September, when the United Nations convenes a high-profile climate summit, and reaching at least $50 billion by the UN climate negotiations in Paris in December 2015.
• A new green bond issue by the French company EDF in December showed that the depth of interest and ability to trigger climate finance is far wider than today. The 1.4 billion euro issuance was two-times oversubscribed from the start.
• New green bond principles being developed by leading investment and commercial banks are also expected to encourage more investors.
Green bonds create a new flow of finance for low-carbon development. That’s crucial. But they do more – they have the potential to move the finance fulcrum in a cleaner direction, away from traditional fossil fuel investments and into the projects that will build our low-carbon future.
Using green bond proceeds to address climate change
Two entities of the World Bank Group – the International Bank for Reconstruction and Development (World Bank) and the International Finance Corporation (IFC) – have been instrumental to the development of the global green bond market, from the first World Bank offering in 2008 to IFC’s two benchmark $1 billion sales last year. Proceeds from these bonds are being used for investments that help address climate change.
In Tunisia, green bonds issued by the World Bank help improve efficiency in irrigation and reliable water supply in rural areas where groundwater sources are stressed. In China, they help reduce communities' vulnerability to natural disasters through flood control management and warning systems. In Colombia and Mexico they support energy efficient mass transit systems, and elsewhere, renewable energy projects.
Green bonds issued by IFC support private sector investments in renewable energy and energy efficiency. This includes diversifying South Africa's electricity away from coal-fired power by using energy generated from mirrors that reflect and concentrate the sun’s rays, and helping a bank in Armenia introduce lending for energy-efficient housing, reducing power demand and lowering utility bills for residents.
In the case of green bonds issued by the World Bank and IFC, investors benefit from the Aaa/AAA ratings of the issuers and also help rally the climate financing the world desperately needs to confront the challenges of climate change. Investors ranging from pension funds to global asset managers, leading companies and central banks are refocusing their investment strategies to include climate considerations.
IFC's most recent $1 billion offering, in November 2013, attracted a new set of green bond investors, including the Ford Motor Company, Microsoft, and the central banks of Brazil and Germany. A floating rate green bond issued by the World Bank in January 2014 drew large institutional investors such as BlackRock, TIAA-Cref and Goldman Sachs Private Wealth Management in addition to other pension funds and sustainable investors. Zurich Insurance recently announced it would invest $1 billion in green bonds issued by the World Bank, IFC, and other development banks.
With growing investor demand for green bonds, there are also growing numbers of green bond issuers in North America, Europe and Asia setting up programs to meet the demand, ranging from development banks to local authorities, corporates and utilities.
Financial institutions launch Green Bond Principles
To provide greater clarity and transparency for issuers and investors, last month 13 commercial and investment banks launched a set of voluntary Green Bond Principles that describe a process for designating, disclosing, managing and reporting on green bonds. The principles were developed by the banks in consultation with IFC, the World Bank, and other green bond issuers and investors.
President Kim called the principles a key step toward attracting more financing for renewable energy and clean technology, especially for emerging markets where the green growth financing gap is significant.
"We need to seize the opportunity, one that many financial leaders have been calling for," President Kim said at Davos. "Let's use appetite for green bonds to expand the universe of investors who are investing in green assets."
By providing guidance to new issuers and more bond underwriters, the Green Bond Principles are expected to further broaden the issuer and the investor base. Reaction from across the market has been extremely positive.
Green bonds and the World Bank Group
Since 2008, the World Bank has mobilized over $5.3 billion through 61 green bond transactions in 17 currencies, and the IFC has issued $3.4 billion in green bonds, including two benchmark-sized $1 billion issuances in 2013 [updated with the March 13, 2014, World Bank issuance of a EUR 550 million green bond]. Proceeds from World Bank and IFC green bonds are earmarked through separate accounts that are set up to support the financing of projects that meet specific eligibility criteria.
Both institutions have sizable climate programs, with the World Bank approving an average of $5.5 billion in climate adaption and mitigation projects annually over the past three years. IFC's climate-smart investment portfolio grew by 50 percent in fiscal year 2013, to $2.5 billion.
*This story was updated on March 13, 2014, with the World Bank issuance that day of a benchmark EUR 550 million green bond, raising the World Bank total to $5.3 billion.
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