Climate change is an urgent threat to the planet, and major injections of capital are required to finance less carbon-intensive technologies and infrastructure. Think wind turbines and solar, low-carbon transport, and technologies that will make buildings and cities more water-efficient.
The green bond market – which marks its 10th anniversary this year – is critical to financing a lower-carbon economy. It enables companies to tap the growing pool of cash that is looking for climate-friendly investment opportunities, converting those funds into environmentally sustainable projects.
At present, green bonds still account for less than 1 per cent of the overall global bond market. But we believe the market is rapidly growing up.
Authorities in China and India have thrown their considerable weight behind efforts to green their economies
First, there have been profound changes in the way businesses, consumers and investors perceive the risks stemming from pollution and rising global temperatures. The 2015 Paris Agreement established a global consensus on the need to address climate change. It required countries to develop national plans to help limit the increase in global temperatures, galvanising global green-tech investments.
Second, technological advances are making more and more low-carbon alternatives (from alternative energy technologies to electric vehicles and batteries) economically viable. Green investments are increasingly not just ethically but also financially sound.
Third, authorities in China and India have thrown their considerable weight behind efforts to green their economies. Chinese and Indian institutions launched their first green bonds in 2015, entering a market that had until then been dominated by the likes of Scandinavia, the US and the UK. Last year, more than USD33 billion of Chinese green bonds were issued. That’s over one-third of the global total. Indian volumes are more modest, at just over USD1 billion last year, but the country is likewise embracing low-carbon technologies.
The increasing momentum behind green bonds means issuers and investors can no longer afford to ignore them.
True, there is lingering scepticism among investors over the “greenness” of specific bonds. Who assesses whether a particular issue is as “green” as another? But progress is being made on standardisation and monitoring. For example, Standard & Poor’s in April launched a tool designed to evaluate not just whether a bond is green, but how green it is.
Meanwhile, the advantages of issuing a green bond are substantial. It allows companies to tap demand among pension funds and sovereign wealth funds who are concerned about their portfolios’ exposure to unsustainable activities. A recent HSBC survey found that two-thirds of global institutional investors want to put more capital into low-carbon and climate-related investments.
What’s more, the launch of a green bond allows an issuer to demonstrate they are preparing for the challenges of global warming. Over the long term, this could well create an advantage over less well-prepared companies in terms of valuation and business prospects.
Given what’s at stake, the green bond market’s coming-of-age can only be welcome. Happy 10th birthday.