Green shoots of green bonds

30th November 2017

Rick Gould outlines the history of green bonds and explains how the financial sector is demonstrating their credibility

In 2007, the European Investment Bank launched the first bond specifically targeted at investments to tackle climate change. One year later, the World Bank coined the term ‘green bond’ when it launched its strategic framework for development and climate change to attract investors to environmentally beneficial projects and programmes. Also in 2008, the World Bank partnered with Skandinaviska Enskilda Banken (SEB), the Nordic financial services group, to issue the first labelled green bond. This bond was an immediate success and, since then, the World Bank has issued over US$10 billion in green bonds.

From this relatively modest beginning, the market has soared. There are currently US$895 billion worth of active green bonds and related climate-aligned bonds, according to Bonds and Climate Change: The State of the Market 2017, the sixth annual report produced jointly by HSBC and the Climate Bonds Initiative. The report defines climate-aligned bonds as those whose issuers have not labelled them as green bonds, even though they finance the low-carbon economy.

However, as the market has grown, several analysts have challenged the environmental credibility of some of the projects that green bonds were funding. They have asserted that strong governance and verification will be critical for this market to prosper and retain the confidence of investors.

The role of the green bond

Put simply, a bond is a loan. The commonest form of bond is a fixed-rate redeemable bond, giving investors a fixed rate of annual interest income for a fixed term. When the term ends, investors get their capital back.

Green bonds are typically used to fund renewable energy, low-carbon, urban transportation, waste-minimisation, the circular economy, sustainable agriculture, climate-change resilience and efficient water use. The World Bank and its business partners developed the green bond in response to a demand for a low-risk financial product aimed at environmental protection. In particular, the aim was to finance climate change mitigation.

Green bonds are now contributing to that need, although there is still a long way to go, as this task needs investment on an unprecedented scale. The International Energy Agency, for example, estimates that we need to invest at least $53 trillion in the energy sector by 2035 to avoid dangerous climate change. Meanwhile, global commission The New Climate Economy has determined that US$93 trillion is needed across the entire economy by 2030. Putting these figures in perspective, the present global bond market is valued at US$100 trillion.

The growth of the market

The green bond market grew steadily, albeit modestly, from 2009-2013. However, in the past four years, during which time many large, institutional investors have entered this sector, its growth has been exponential. Since 2013, demand has far exceeded supply, while several high-profile institutions, such as the European Bank for Reconstruction and Development and the African Development Bank, started issuing their own green bonds. In the same year, Gothenburg became the first city to issue one. Since then, many other cities worldwide have realised the benefits of issuing green bonds to finance environmentally beneficial projects, such as flood resilience programmes and low-carbon transportation. In the past two years, China officially launched its own domestic market for green bonds and has dominated the market since 2016.

Growing pains leading to principles and certification

Meanwhile, in 2013, as green bonds expanded, a group of institutions active within the sector worked with the International Capital Market Association (ICMA) to develop and publish a code of practice entitled the Green Bond Principles. This is a voluntary code to show that bonds are transparent, accountable, traceable and credible.

The principles do not specify types of green bond projects and programmes, but provide guidance on a range of suitable applications, such as renewable energy, energy efficiency, low-carbon transportation, and sustainable forestry. The ICMA periodically reviews and revises the principles, based on feedback, and the latest version was published in June 2017.

As the principles strongly encourage independent auditing and verification, in 2015, the Climate Bonds Initiative developed and published the Climate Bonds Standard, applied through a certification scheme for bonds. This framework standard incorporates the Green Bond Principles, and adds a taxonomy of clearly defined investments to form the backbone of the low-carbon economy.

The Climate Bonds Initiative has also developed complementary, sector-specific standards for investments in the fields of water, solar power, wind energy, low-carbon buildings, geothermal energy and low-carbon transport. Additionally, it is developing standards for bioenergy and land-use. The first green bond was certified under the Climate Bonds Standard in 2015, and there are currently well over $30 billion of bonds certified.

Sean Kidney, a co-founder of the Climate Bonds Initiative, explains: “If we are to successfully tackle climate change, then we need an enormous investment in projects to make this happen.” He adds that “we founded the CBI to keep track of the green bonds market and provide models and advice in this field”. The Climate Bonds Standard in particular is aimed at unlocking the massive bonds market and directing investments to the low-carbon economy. “Even though we have seen a lot of progress during the past 10 years, we need to significantly increase investments to combat climate change,” he emphasises.

The International Organization for Standardization (ISO) recently started a working group to develop a unifying standard for green bonds, ISO 14030.

This will build on the Green Bond Principles and Climate Bonds Standard.

Meanwhile, as this market grows, it means opportunities for a range of environment and sustainability professionals, such as in verification services and developing sector-specific standards in technical working groups.

Kidney asserts that anyone wishing to work in this field, especially from an environmental background, needs to learn and use the language of business and finance. If green bonds continue as they have started, they could underpin the transformation to the low-carbon economy.

Rick Gould MIEMA CEnv works for the Environment Agency, but is writing in a personal capacity as a freelance journalist

Image credit: Getty Images


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