Green Bonds Attract Private Sector Climate Finance
July 23, 2014
- Green bonds are fixed income, liquid financial instruments that are used to raise funds dedicated to climate-mitigation, adaptation, and other environment-friendly projects.
- Since 2008, the World Bank has issued more than $6.4 billion in green bonds in 17 currencies, and the International Finance Corporation has issued $3.6 billion in green bonds.
- The World Bank and IFC have helped pioneer the green bond market and raise awareness about the opportunities in climate-friendly investment.
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. The market took off in 2013, and it has been growing as investments in environmentally friendly growth gain popularity. Green bonds are fixed income, liquid financial instruments that are easy to understand, and the funds they 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 more than $6.4 billion in green bonds in 17 currencies. Separately, the IFC has issued $3.6 billion, including two $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.
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.
Issuers ranging from other development banks to states, cities and corporates have looked to the World Bank and IFC for leadership and guidance in how to issue bonds to raise financing for climate-friendly activities. Both issuers are sharing their knowledge and experience to help grow the market – in addition to building the fundamentals for the market through their own green bond programs. For example, in April 2014, the World Bank signed the first advisory services agreement with the Dubai Supreme Council of Energy (DSCE) to design a funding strategy for Dubai’s green investment program.
At the World Economic Forum in Davos in early 2014, World Bank Group President Jim Yong Kim urged more investors to get involved and called for doubling the green bond market by the UN Secretary-General's Climate Summit in September.
The market, at $11 billion in 2013, passed that goal in July, and analysts forecast it could reach $30 billion and possibly $40 billion by the end the year.
Utilities and corporates lead charge for further market expansion
The involvement of the multilateral development banks has expanded interest in green bonds, with government agencies, municipalities, and more recently utilities and corporations finding ways to use the financial instruments.
State of Massachusetts, Ile de France, and Export Development Canada have all issued green bonds. In May 2014, the French utility GDF Suez issued the largest green bond to date, a 2.5 billion euro ($3.4 billion) bond to fund renewal energy projects that was more than three times oversubscribed. It was nearly twice the size of the previous 1.4 billion euro record set by EDF in November 2013.
Another key driver of the market is the growing number of asset managers with mandates to increase investment in instruments that support low-carbon growth. For example, BlackRock was selected by Zurich Insurance in November 2013, to manage a green bond portfolio of USD 1 billion.
Standard & Poor’s said in May that corporate issuers were increasingly interested in green bonds as a finance avenue offering access to a diversified investor base, and forecast there would be $20 billion in corporate green bond issuances this year, almost double the rate seen in 2013.
Green Bond Principles specify use of proceeds
The financial industry is also playing a key role in raising awareness for the green bond market and the need for it to have a solid base on which to grow. In January 2014, a group of banks launched the Green Bond Principles aimed at standardizing practices for issuers and investors and improving transparency. The principles specify sectors in which green bond proceeds can be invested, including in renewable energy, energy efficiency, sustainable waste management, sustainable land use, biodiversity conservation, clean transportation, and clean water.
The principles, developed with the support of the investor group Ceres and in consultation with investors and issuers such as the World Bank and IFC, already have the support of 25 financial institutions, including Bank of America Merrill Lynch, Citibank, Credit Agricole, JP Morgan Chase, Goldman Sachs, HSBC and SEB. The International Capital Markets Association (ICMA) is serving as the Secretariat for the Green Bond Principles.
Green bond-supported projects yield multiple benefits
World Bank and IFC green bonds have supported solar and wind power installations, the reduction of methane emissions, more efficient transportation in cities, reforestation, flood protection, and building climate-resilience in developing countries.
The benefits of these projects can be measured both in the benefits to society and in the reduction of carbon dioxide and other greenhouse gases.
In Indonesia, for example, a geothermal project supported by World Bank green bonds is designed to increase access to affordable, clean energy and also reduce 1.1 million tons of greenhouse gases every year. Another World Bank green bond-funded project in China is reducing costs through improved energy efficiency in factories and is expected to cut greenhouse gases by 4 million tons a year.
IFC green bonds are supporting a new large-scale solar power facility in Mexico that doesn’t require subsidies and will meet the energy needs of 164,000 people while creating jobs and reducing dependency on polluting diesel generators. In India, IFC green bonds are also helping a company recycle e-waste from computers, discarded mobile phones and other electronics that can be harmful to the environment and to peoples’ health.
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