Green Bonds Can Drive Low Carbon Economy After Paris

But Standards Need Firming and Tuning

Bonn, July 7 – First issued by the World Bank in 2008, green bonds have been a growth story in the last eight years. Analyst forecasts predict strong future growth, fueled by demand, environment-friendly projects and the adoption of the Paris Climate Change Agreement last December.

Green bonds are no different from regular bonds in their nature. Both types of securities offer a predictable return to investors in the form of a fixed coupon yield, in exchange for medium to long-term funding for economic activities. By definition, the mission of a green bond is to finance projects that bring environmental gains, which requires a credible method of assessment over the life of the investment.

The requirements needed to ensure the credibility of green bonds are, however, still a work in progress. Misuse of proceeds can damage reputations, if not the market itself. For this reason, investors  are calling for robust, transparent standards for the investment community.

But while there are question marks and problems to solve, the future of green bonds is promising. The road set of national plans to take climate action which underpin the Paris Agreement are expected to  accelerate government and business investment in large-scale climate-friendly projects with known returns, providing a fertile field for the issue of more green bonds.

A New Twist to Known Securities

Bonds are used by organizations to borrow money at cheaper rates than bank loans. Once labeled green, their proceeds spur renewable energy, energy efficiency, sustainability, biodiversity and clean infrastructure.

Institutional investors buy the bonds to increase their exposure to green assets and diversify their portfolios. SEB, a Swedish bank, says that so far more than 250 institutions have at least one green bond in their portfolios.

The market’s growth is undeniable. Only USD$3 billion of bonds were sold in 2002. Between 2013 and 2014, the market trebled in size, reaching USD$36.6 billion according to the Climate Bonds Initiative.

Moody’s ratings agency expects sales to exceed $50 billion this year, in comparison with $42 billion in 2015. HSBC bank is even more optimistic, predicting an increase to reach $55 billion and as high as 80 billion. This would raise the total outstanding green bonds issuance to a range of $133 to 158 billion.

The challenge and the opportunity are highlighted in the fact that these numbers however represent only 0.06% of a global bond market that was worth around $87 trillion at the end of the third quarter, 2015, according to the Bank for International Settlements.

New Issuers

Green bond issuance was largely dominated by multilateral banks and the World Bank until 2012. But two years later, a third of issuances were made by companies in the energy, utility, consumer goods and real estate sectors, according to the Gearing Up for Green Bonds report published by the KPMG auditing, tax and advisory firm.

National development banks are also joining the market.  In January, China approved two bonds worth $15.2 billion from the China Industrial Bank and Shanghai Pudong Development Bank.

The public sector had also joined the fray. States and local governments in the United States have issued $7.5 billion in green bonds since 2010, according to Bloomberg data.

In February, the New York Metropolitan Transportation Authority (MTA) issued $500 million in green bonds to finance infrastructure renewal and upgrade. The MTA also launched a targeted ad campaign to sell the bonds to individual New Yorkers.

Meanwhile, in the corporate sector, Apple entered the market in February, issuing $1.5 billion in green bonds to run clean energy projects. The mobile devices maker makes securities a part of its environment strategy and it pushes suppliers to adopt clean energy. For its part, HSBC has pledged $1 billion for a portfolio of green, social and sustainability bonds focused on renewables, energy efficiency, clean transport, adaptation and related sectors. Toyota was the first carmaker to issue a green bond in 2014. In June 2015, the Japanese company sold more than $1.2 billion of these securities.

This broad-based interest in green bonds from multilateral to national and private sector banking, from cities and regions to companies has now, therefore, established a strong platform for further growth.