The world’s fast-growing cities and developing countries face an increasing financial challenge from climate change – they need roads, airports, buildings, water systems and energy supplies that can stand up to rising global temperatures and extreme weather patterns. Farms and food supply chains are also at risk without new investment. While it’s clear in many cases what needs to be done, finding the funding for it is often challenging, especially for governments with already pinched budgets.
Climate-friendly investment is starting to flow from a relatively new and increasingly popular source – the green bond.
Green bonds were created to increase funding by accessing the $80 trillion bond market and expanding the investor base for climate-friendly projects worldwide. They are fixed income, liquid financial instruments that are easy to understand, and the funds green bonds raise are dedicated exclusively to climate-mitigation and adaption projects, and other environmentally beneficial activities. This provides investors an attractive investment proposition as well as an opportunity to support environmentally sound projects.
“Green bonds have opened a new finance flow that will be essential to confronting climate change,” said Rachel Kyte, World Bank Group vice president and special envoy for climate change. “They are providing green investment opportunity for an ever wider investor group, including those who wish to divest and diversify from fossil fuel-intensive portfolios, and they have proven that a stream of investor capital exists for green assets.”
World Bank and IFC pioneer the green bond market
The World Bank Treasury issued its first green bond in 2008, at a time when investors didn’t have liquid, fixed income investment options that specifically supported climate-focused and environmentally-friendly projects. The World Bank has since issued about US$8.5 billion in green bonds in 18 currencies, including a 10-year US$600 million benchmark green bond and green growth bonds linked to an equity index and designed for retail investors. Separately, the IFC has issued US$3.7 billion, including two US$1 billion green bond sales in 2013. Proceeds from World Bank and IFC green bonds are used to support renewable energy, energy efficiency, sustainable transportation and other low-carbon projects, as well as financing for forest and watershed management, and infrastructure to prevent climate-related flood damage and build climate resilience.
The two institutions – whose AAA/Aaa ratings provide security for investors and development mandate and safeguards provide assurance for the use of proceeds and impact – have helped pioneer the green bond market, expand the investor base, and raise awareness about the needs and opportunities for climate-friendly investment.