What are green bonds, and why are they important?
Over the last 14 years, green bonds have become an important tool to address the impacts of climate change and related challenges. Clean water and food security are at risk in the world today and about 1 million of the world’s 8 million animal and plant species face extinction. Climate change threatens communities and economies, and it poses risks for agriculture, food, and water supplies. A lot of financing is needed to address these challenges. It’s critical to connect environmental projects with capital markets and investors and channel capital towards sustainable development – and green bonds are a way to make that connection.
What inspired green bonds?
Let me give you a brief history. In 2007, the Intergovernmental Panel for Climate Change—a United Nations agency that provides scientific data on climate change and its political and economic impacts—published a report that linked human action to global warming. In late 2007, a group of Swedish pension funds sought to invest in projects that help the climate. Less than a year later, in November 2008, the World Bank became the first institution to issue a green bond, raising funds from fixed-income investors to support lending for eligible climate-focused projects.
Then, in 2013, IFC issued the market’s first global U.S. dollar benchmark-sized green bonds, with two $1 billion issuances in that year; this set a precedent as the largest green bonds at the time of issuance and helped to solidify the market.
How have green bonds grown?
We have been witnessing changing attitudes toward sustainable investing for a number of reasons. Investors have increasingly become aware of the risks of climate change to their portfolios and, through mechanisms such as the Task Force on Climate-related Financial Disclosures (TCFD), they are also beginning to report on such risks. Additionally, stakeholders are pressuring the investment community to employ heighted environmental, social, and governance (ESG) policies. Green bonds address some of these changes to the new landscape. They offer investors a platform to engage in good practices, influencing the business strategy of bond issuers. They provide a means to hedge against climate change risks while achieving at least similar, if not better, returns on their investment. In this way, the growth in green bonds and green finance also indirectly works to disincentivize high carbon-emitting projects. Green bonds enjoyed a 49% growth rate in the five years before 2021, according to Climate Bonds, whose analysis suggests the green bond market annual issuance could exceed the $1 trillion mark by 2023. The success of green bonds has inspired the creation of other labelled bonds, such as social bonds.