Capital Markets, Climate Finance
The green bond market has seen explosive growth in the past decade, presenting an unrivaled opportunity in climate finance. Annual issuance has now risen from zero to more than $155 billion globally, with more growth ahead. But in emerging markets, the green bond era is just beginning.
Combating climate change is one of the greatest challenges of our time, requiring far more financing than governments alone can provide.
Yet there is good news. Climate change is increasingly viewed as a business opportunity, opening many profitable ways for investors to help protect the planet.
One of the most promising opportunities is green bonds. Almost unknown a decade ago, they now stand as a key private sector solution helping finance the world’s transition to a low-carbon future.
Green bonds generate financing for projects in renewable energy, energy efficiency, sustainable housing, and other eco-friendly industries. They tap the vast pools of financing — the trillions of dollars held by institutional investors such as pension funds, insurance companies, and sovereign wealth funds — available in global capital markets. These investors are looking for climate-smart initiatives that make good business sense: opportunities that carry the right risk-reward profiles and meet investor-specific criteria for rating, tenor, yield, and geographic diversity.
But as green bond volumes increase, it will become ever more important to agree to common guidelines that promote integrity and standards governing transparency, responsible investor behavior, and impact evaluation.
Growth of the Green Bond Market
Over the course of just one year — 2017 — new green-bond issuance grew by 78 percent, to more than $155 billion worldwide. That number is expected to reach $250 billion in 2018, according to the Climate Bonds Initiative, an international nonprofit with an important certifying role.
Yet, in the developing world the market is still in its nascent stage.
Globally, most green bonds have come from developed nations. In emerging markets, most activity has so far has come from just two countries: China and India. But many experts see great growth for green bonds in emerging markets, pointing to a few early examples. In May 2017, Brazilian development bank BNDES raised $1 billion in one of the largest green-bond offerings from Latin America. Proceeds are being used to finance a wide range of wind and solar projects in Brazil.
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Green bonds could do much to support the 2015 Paris climate accord’s goals of holding the increase in the global average temperature to well below 2 degrees — by mobilizing the financing necessary for businesses to shift toward low emissions and climate-resilient growth.
But what can be done to enable developing countries to take on a larger role in this arena? Expanding the green-bond market in these countries will require several things: defining the asset class, setting standards, structuring transactions, and attracting investors. This is the global action plan — one where IFC plays a central role.
The Origins of Green Bonds
The market began with a climate awareness bond issued by the European Investment Bank in 2007. Since then the World Bank Group has created a notable supply of investable green bonds.
Since 2010 IFC has issued more than $7 billion in green bonds to private investors in its own name — proceeds that have been used in solar power in Mozambique, wind power in Panama, climate-smart public transit in Turkey, and a host of other projects.
At the same time, IFC has helped client banks in Colombia, the Philippines, Morocco, and other countries begin to do the same. The most recent: subscribing to a $100 million, seven-year issue from Argentina’s Banco Galicia to finance projects in energy efficiency, renewable energy, and sustainable construction, among others. These projects are expected to reduce greenhouse emissions in Argentina by about 157,500 metric tons of CO2 per year, roughly the equivalent of taking 33,700 cars off the road.
Sovereign issuers are also becoming important players, beginning with issues by Poland, France and Belgium. To protect its 900,000 citizens and their livelihoods, in 2017 Fiji worked with IFC and the World Bank to become the first developing-country government to launch its own sovereign green bond. With the aim of raising 100 million Fijian dollars (US$50 million), the first two tranches drew unprecedented demand from investors and were heavily oversubscribed. Through the bond, Fiji has created a new way to mobilize finance for development — and a market for private capital seeking climate-smart investment opportunities. Since the Fiji bond, Nigeria has also issued a green bond.
A Landmark Transaction
Just last month in Paris, IFC partnered with Europe’s largest asset manager, Amundi, to launch the world’s largest green-bond investment vehicle focused on emerging markets: the Amundi Planet Emerging Green One (EGO) fund.
The fund closed at $1.4 billion. It is expected to deploy $2 billion into emerging-markets green bonds over its lifetime as proceeds are reinvested over the next seven years. IFC’s $256 million anchor investment helped mobilize roughly four times that amount from other investors — $1 billion of the funds came from private institutional investors.
“Issuing a green bond is also a way for issuers to better communicate on their strategy with respect to climate change adaptation and mitigation,” explains Amundi CEO Yves Perrier. “The combination of these two aspects makes green bonds one of the key instruments to mobilize capital markets to support sustainable development.”
“Amundi Planet is a unique way to increase financial flows and develop sustainable financing to support the energy transitions in countries where it is most needed.”
— Yves Perrier, Amundi CEO
“Leveraging Amundi’s emerging-market debt investment capabilities, our commitment to ESG, and IFC’s unique outreach in emerging countries, Amundi Planet is a unique way to increase financial flows and develop sustainable financing to support the energy transitions in countries where it is most needed.” Added IFC CEO Philippe Le Houérou: “In fact, we are literally creating a market by building both the demand and the supply side. This is unprecedented.”
As part of its unique structure, the fund includes a parallel IFC-managed technical assistance program, funded initially by a $7.5 million grant from the Swiss Secretariat for Economic Affairs (SECO). The program will support the creation of new markets for climate finance by developing green-bond policies, providing training programs for bankers, and facilitating the adoption of the Green Bond Principles and international best practices in emerging markets.
The fund’s committed investor base consists of capital raised from leading pension funds (Alecta, AP3, AP4, APK Pensionkasse, APK Vorsorgekasse AG, ERAFP, MP Pension), insurance companies (Crédit Agricole Assurances, LocalTapiola General Mutual Insurance Company, LocalTapiola Mutual Life Insurance Company), asset managers, the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB) and other international development banks, and other institutions.
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To mature fully, the green bond industry needs to be guided by agreed environmental, social and governance standards and terms for transparency, responsible investor behavior, and impact evaluation.
Standards — known as the Green Bond Principles and first published in June 2014 — were developed by the Executive Committee of the Green Bond Principles, a collaborative industry group combining issuers, underwriters, and investors. IFC is member of the group, which is housed within the International Capital Market Association in Paris, and part of the Executive Committee itself.
“The Green Bond Principles have gained broad market acceptance — as good practice driving openness and accountability — and membership is now at more than 150 members who voluntarily adhere to the principles,” said IFC Vice President and Treasurer Jingdong Hua. “The more financial institutions, governments, and standards-setters work together on new markets, impact reporting and green projects eligibility, the more investors will see green bonds as a viable asset class — and the more the annual volume of green bond issuance will increase in emerging markets.”
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