Will Green Bonds Continue to Flourish in the Wake of COP21?
On Friday, 22 April 2016, 175 countries met at the United Nations to ratify the 2015 Paris COP21 Agreement. Five months after COP21, it appears that political momentum for tackling climate change has been sustained. The build-up of excitement around the global climate change agreement throughout 2015 may have given the nascent green bond market a boost as 2015 saw the largest amount of green bonds issued. The global market for green bonds ended 2015 with $41.8 billion worth of bonds being issued, a 13% increase over 2014’s $37 billion and dwarfing 2013’s $10 billion worth of issuance. Global appetite doesn’t appear to be letting up as the first quarter of 2016 witnessed $17 billion worth of green bonds being issued. But the question to ponder is: will this growth keep pace?
Green bonds are loans which the issuer has earmarked to fund or refinance environmental projects such as green infrastructure or parkland development. This can be considered different from climate bonds which are loans to finance projects more directly related to tackling climate change (both mitigation and adaptation) such as wind farms or sea walls to protect coastal cities. Global development banks like the World Bank have been the backbone of green bonds – consistently issuing the largest number of bonds.
While there is only a weak link between the objectives of Paris’ COP21, and the investment patterns of global corporations, some firms, such as Apple, Hyundai and Sweden-based Sveaskog have started to embrace green bonds. In February, Apple issued the largest corporate green bond to date, $1.5 billion. The proceeds of Apple’s green bond is to be used to finance green buildings, energy efficiency initiatives, renewable energy, energy infrastructure, water efficiency and recycling programmes. This bond is third party assured to make sure the receipts were used in accordance to the documentation accompanying the issue. However, not all green bonds are assured and there is still latitude for firms to make investments that may not meet the requirements to be referenced to as a green bond. Is a new highway a green investment if it is intended to reduce congestion?
Several groups are working to bring standardization to the green bond market to enable easier certification and verification of the use of funds raised through green bonds. Investor group Ceres, collaborated with a group of banks to develop the Green Bond Principles. In London, the Climate Bonds Initiative has developed green bond standards and criteria for certifying green bonds. The World Bank is collaborating with other organizations to develop standards as well. All of these different groups will need to agree on a coherent single standard to enable the comparison of green bonds and the outcomes of green bond use across projects.
The market for green bonds, while promising, still has a ways to go before it becomes mainstream with project objectives and achievements aligned with an accepted standard of environmentalism and measurement. The legally binding nature of the COP21 agreement will hopefully keep interest in development of the green bond market strong. This type of funding could be used to further government and corporate investment in cost effective green infrastructure projects such as those mentioned in Verdantix’s report ‘Why CSOs Can’t Escape Action On Natural Capital’ – helping to sustain market growth.