Tackling the climate crisis won’t come cheap. The United Nations’ Intergovernmental Panel on Climate Change estimates that limiting the temperature increase to 2C, the goal of the Paris Agreement, will require about $3 trillion of investment every year to 2050.
To raise those vast sums, governments and corporations are increasingly turning to green bonds.
Green bonds work like regular bonds with one key difference: the money raised from investors is used exclusively to finance projects that have a positive environmental impact, such as renewable energy and green buildings.
With countries around the world stepping up their efforts to reduce carbon emissions, the market for green bonds is booming. This rapid growth was highlighted in October 2021, when the European Union issued about $14 billion of the bonds – the largest deal ever. The money raised will support projects including a research platform for energy transition in Belgium and wind power plants in Lithuania.
Volume green bonds, Europe.
Image: Statista
The first green bonds were issued in 2007. The market grew slowly for nearly a decade, but then it started to take off. Global green initiatives such as the Paris Agreement on climate change and the UN Sustainable Development Goals have helped spur this expansion.
Strong demand for green bonds is also driving growth, with major investors from asset managers to insurers and pension funds keen to scoop them up. Just look at that EU deal: orders exceeded the securities available by more than 11 times. Such is the demand that it can cost less to issue green bonds than the conventional variety.
What is the World Economic Forum’s Sustainable Development Impact summit?
It’s an annual meeting featuring top examples of public-private cooperation and Fourth Industrial Revolution technologies being used to develop the sustainable development agenda.
It runs alongside the United Nations General Assembly, which this year features a one-day climate summit. This is timely given rising public fears – and citizen action – over weather conditions, pollution, ocean health and dwindling wildlife. It also reflects the understanding of the growing business case for action.
The UN’s Strategic Development Goals and the Paris Agreement provide the architecture for resolving many of these challenges. But to achieve this, we need to change the patterns of production, operation and consumption.
The World Economic Forum’s work is key, with the summit offering the opportunity to debate, discuss and engage on these issues at a global policy level.
Turbo-charged by this combination of political resolve and investor appetite, the green bond market is expanding rapidly. Annual issuance could hit $1 trillion in 2023, according to the Climate Bonds Initiative. That’s a big milestone, though it’s still just a niche in the overall global bond market, which has been estimated at about $130 trillion. So there’s plenty of room for green bonds to keep on growing.
The green bond market is booming.
Image: Climate bonds
The first green bond was issued in 2007 by the European Investment Bank, the EU’s lending arm. This was followed a year later by the World Bank. Since then, many governments and corporations have entered the market to finance green projects.
The US is the largest source of green bonds, led by the government-backed mortgage giant Fannie Mae. Corporations from Apple to Pepsi and Verizon have got in on the act. State and local governments have also turned to green bonds to pay for infrastructure projects.
Looking ahead, the EU is set to become the biggest force in the green bond market, with plans to issue around $300 billion in total over the next five years to finance sustainable investments. Individual EU countries such as France, Germany and the Netherlands have issued their own green bonds. A Swedish property company, Vasakronan, issued the world’s first green corporate bond back in 2013.
Greenwashing – making false or misleading claims about the green credentials of a company or financial product – is a major challenge for the market in green bonds and other sustainable investments.
Regulators and the industry itself are working hard to address this issue.
Many borrowers adhere to guidelines called the Green Bond Principles, which have been endorsed by the International Capital Market Association to help bring transparency to the market. There’s also a range of companies that offer to assess and certify bonds.
The EU is taking transparency a step further with its voluntary Green Bond Standard. This is intended to help the market grow by giving investors the information they need to assess and compare securities that claim to be green.
For all the urgency around tackling climate change, the fossil fuel industry raked in far more financing than green projects in the years following the signing of the Paris Agreement. That’s changing in 2021, according to Bloomberg Green, indicating that we may be at a tipping point in the fight to save the planet.
2021 could be a milestone year for green bonds.
Image: Bloomberg League Tables
Sustainable investment looks set to continue its breakneck growth as governments put climate concerns front and centre in their plans to build back better after the pandemic, taking advantage of what the World Economic Forum sees as a “rare but narrow window” to reset. These plans include the European Green Deal and US President Joe Biden’s infrastructure framework.
Green bonds will remain a crucial element in this push toward sustainability, providing financing for major projects around the world.
