Green Bonds Access Investor Capital to Fight Climate Change

October 1, 2015

  • Green bonds offer investors a way to simultaneously make money and help the planet
  • The World Bank helped pioneer the green bond market, which now exceeds $30 billion a year
  • Global action on climate change needs private sector financing such as green bonds

“Investing to reduce global warming” said the announcement in 2008 of the first green bonds issued by the World Bank (International Bank for Reconstruction and Development, or IBRD) in response to demand from Scandinavian pension funds.

Worth $390 million in Swedish krona at the time, the initial foray into debt investment for a specific environmental outcome offered a return of 0.25 percent above Swedish government bond rates.

Seven years later, more than $8 billion in World Bank Green Bonds have been issued in U.S. dollars, Russian rubles, Malaysian ringgit, Colombian pesos and 14 other currencies to fund projects intended to lessen climate change and prepare for rising seas, altered weather patterns and other impacts already certain to happen.

Some are large-scale transportation and energy projects, including rapid transit and solar power systems to reduce greenhouse gas emissions that cause climate change. Others take a local approach, such as turning methane from animal waste into fuel for cooking, lighting and heating.

For 2015, the global green bond market that the World Bank helped pioneer is expected to exceed the $37 billion issued last year.

Earning interest, combatting climate change

The finance factor aside, the green bond market contributes to a broader shift toward socially conscious investing in recent decades by increasing options available to people wanting to simultaneously make money and benefit the planet.

“Today, climate people are talking about finance and finance people are talking about climate,” said Heike Reichelt, the World Bank’s Head of Investor Relations and New Products, to describe a dialogue that she says once seemed unimaginable.

Those conversations are crucial for any chance of raising the trillions of dollars  needed to prevent catastrophic impacts from climate change and help societies cope with shifting agricultural production, increased drought and wildfires, and other effects already happening.

The bottom line is public funding is not enough to meet the challenge to help countries on a low carbon growth path and build resilience. Private sector funding is vital.  Investors with trillions of dollars under management can fill much of the gap, Reichelt explained, and green bonds are part of new tools and strategies that enable them to explicitly assess climate risks and exploit opportunities.

“I think it’s fascinating that we can harness the power of innovation in financial markets to make changes in the real world on an issue as important as climate change,” noted Paul Brown, a former venture capitalist who specializes in impact investing – including green bonds – as a professor at the University of Utah’s David Eccles School of Business.

A product in demand

Demand for such a product inspired the first World Bank Green Bonds, when the Scandinavian pension funds sought fixed-income investment options that would fund projects with climate change benefits.

“This was not invented out of thin air,” Brown said, calling it part of the environmental, social and governance (ESG) investment movement of recent decades. “People are willing to say look, if I’m going to support something with my capital, maybe I ought to care about what that capital is being used for.”

The World Bank has issued 100 Green Bonds, with proceeds from them going to 77 projects deemed eligible because of their benefits in confronting climate change. They carry the Aaa/AAA rating of regular World Bank bonds to provide financial security sought by institutional investors.

To qualify for Green Bond money, projects go through a review and approval process to ensure that they meet development priorities. The process includes the regular World Bank screening for any development project, as well as additional screening by environmental specialists to ensure they meet Green Bond eligibility criteria.

Green Bond Impact Report

A new World Bank Green Bond Impact Report uses information from investors to detail how the projects contribute to the climate change battle. Examples include:

• Two industrial energy efficiency projects in China are estimated to reduce carbon emissions equal to removing 2.7 million passenger cars from the road each year, according to a formula used by the U.S. Environmental Protection Agency.

• Nine renewable energy projects receiving $1.5 billion in Green Bond money will generate 2,284 megawatts of power – equal to the total installed capacity of Panama in 2010.

• A project in Mexico helping people replace almost 2 million older refrigerators with new, energy efficient models. Under it, households receive loans that they repay through savings in electricity bills, with expected reductions in carbon emissions of more than 1 million tons a year.

Investors praised the new impact report as further evidence of the World Bank’s commitment to continue adding value to its Green Bonds program.

“Especially noteworthy is the effort to harmonize various indicators in cooperation with other multilaterals,” said Andrea Weber, a sustainable investment analyst at Bank J. Safra Sarasin of Switzerland. “This not only leads to a more consistent reporting of the extra-financial characteristics of the green bond issuances, but also is an important step in enhancing the credibility of the green bond market in general.”

“We ain’t seen nothing yet”

Brown, the University of Utah professor, noted that varied entities including investment firm Morgan Stanley, automaker Toyota and a Thai-owned oil company were issuing their versions of green bonds.

“It’s a pretty good sign when oil companies and car companies are investing in climate change and environmental issues,” he said, adding that “we ain’t seen nothing yet” in terms of further creative financing initiatives under development.

A money manager at an insurance company with a portfolio totaling hundreds of millions of dollars recently told Brown that issuing green bonds signaled that a corporation or municipality was up-to-date and competent.

“How could someone ignore this kind of instrument?” Brown recalled the insurance company official asking. “How could someone ignore climate change?”

And for those wanting to explore the potential of green bonds, but who may not be familiar with the basics of finance and green bonds, there’s an easy-t-read- Q and A style guide which is perfect for a smart phone or tablet.