I am delighted to be here today with several of the creators of the Green Bond Principles and pioneers of today’s green bond market. In just one year, the principles are having an impact on transparency and definitions, and the market is growing fast.
You must be proud of what you have accomplished with green bonds in such a short period of time. You are fostering a financial product that holds great promise to mobilize new capital flows toward investments in clean, sustainable growth that addresses climate change. Nurture it carefully. Don’t take your eyes off the prize.
I will be talking today about how bonds can rise to that challenge, and some of the hurdles to overcome. I’ll also touch on what we’re doing with green bonds at the World Bank Group and get into four ways that, together, we can scale up the use of green bonds for climate finance.
At the World Bank Group, we have two overarching goals: to end poverty and increase shared prosperity. Climate change makes both much harder to achieve. It threatens to roll back decades of development progress and puts lives and property at risk.
The green bond market is opening up one avenue of opportunities for investment in clean growth and resilient development that are necessary to mitigate climate change. Each of us in this room can use our resources to innovate and help the market evolve to help meet the global climate challenge.
The Challenge
Globally, we need a smooth, managed transition to low-carbon and resilient growth or we will pass on a dwindling economy, hemmed in by the impacts of climate change and scarcity of natural resources. It will be crucial to have effective policies in place in each economy that both send signals that we share a long-term goal of low-carbon growth and resilience and provide a support structures that protects the poor and vulnerable so we leave no one behind.
The challenge is clear and the science underpinning it is also clear. We need, by the end of this century, to have a global economy that meets the needs of humanity and which is in balance with the Earth’s chemistry.
That means getting prices right, getting finance flowing, and working where it matters most. We need to increase energy efficiency, scale up renewable energy, and manage land differently to reduce net emissions. In many ways, we need to live differently to create a cleaner world.
At the same time, as we transition towards low-carbon and resilient development, we need to solve the political issue of how to mobilize $100 billion per year by 2020.
This is where green bonds can play a bigger role.
Developed countries have committed to invest $100 billion annually to help developing countries adapt to and mitigate climate change. This is money that will come from both public and private sources. Right now, only about $34 billion is actually flowing North to South, primarily through the multilateral development banks. The question the international community is grappling with is how to fill that approximately $70 billion gap in order to strike a political deal at the climate talks this year in Paris.
The cumulative green bond market currently stands at about $59 billion, with some 300 bonds from 19 countries in 23 currencies.
Globally, new green bond issuances more than tripled last year to about $36 billion, after more than tripling the year before. They could double or triple again this year to $70 billion or even $100 billion. You heard S&P estimate this week that we could see $30 billion in new green bonds issued by companies alone this year. That which is flowing from North to South should count towards the $70 billion gap.
So, how can green bonds help? By branching out into more project-level green bonds, expanding the market to new currencies, supporting new issuers and considering new forms of green bonds, and by expanding the green bond concept to resilient infrastructure, we can play a major role in expanding the flow of new North-South finance.
What We Do
Before we tackle the evolution of green bonds, let me describe what we do now.
At the World Bank Group, we issue green bonds through two separate bodies – the World Bank and IFC.
The World Bank Treasury helped launched the modern green bond market in 2008 and has issued more than $8 billion in green bonds in 18 different currencies since then. It has issued index-linked green bonds for retail investors and a 30-year green bond. Its green bonds have funded energy efficiency in Eastern Europe, clean energy in Asia, and public transportation in Latin America, among many other projects and locations.
IFC, the arm of the World Bank Group focused on private sector development, has issued about $3.7 billion in green bonds, including two $1 billion issuances, which provided much needed liquidity to spur investor participation in the market.
Some of the projects supported include:
- In Indonesia, a geothermal project supported by World Bank green bonds is designed to increase access to affordable, clean energy and reduce 1.1 million tons of greenhouse gases every year.
- Another World Bank green bond-funded project in China is reducing costs through improved energy efficiency in factories and is expected to cut greenhouse gases by 4 million tons a year.
- And IFC green bonds are financing a 44 megawatt wind power plant that is increasing Croatia’s wind energy capacity by 35% and is estimated to cut emissions by 33,000 tons of CO2 per year.
Together with many of the issuers represented here, we support the framework of the Green Bond Principles because they highlight transparency in the criteria for defining “green,” for selecting projects that meet the criteria, for earmarking proceeds, and for impact reporting.
The World Bank and IFC have been working with other multilateral development banks to provide examples of good practice. We are expanding the toolkit for measuring results in addressing climate change, such as harmonizing greenhouse gas accounting and developing risk management products.
Right now, we are working with the African Development Bank and the European Investment Bank on a draft reporting framework that shares ideas on how to report on the impact of green bond-eligible projects in more consistent ways. The draft framework includes some suggested core indicators, starting with energy efficiency and renewable energy. The objective is to build broader consensus and refine the framework over time.
Telling fixed-income investors how their money is used is proving to be a powerful tool – we’re seeing that in the green bond market for a couple of reasons. Increasingly, segments of the bond investor market care about extra-financial characteristics of their investments. And even with incomplete policy signals, the general public and institutional investor stakeholders are demanding a move towards more responsible investing.
The simplicity of the market helped it become what it is today. We need to develop guidance and encourage greater transparency, but also encourage growth in a new directions. We can bring in more issuers who can support climate-friendly growth, encourage more investors to expect a positive impact from all their investments, and get more innovative products building the finance needed.
The risk-return fundamental of investing is no different for green bonds than for any other investment – this is about investors looking for meaningful impact.
Climate Finance
So, we know this is a market with momentum and great potential to help build a better world.
Moving forward, the challenge from the perspective of expanding the flow of finance to support the orderly transition to low-carbon is that most green bonds tend to be “use-of-proceeds bonds,“ where investors are relying on the issuer’s credit rating in addition to its project selection, due diligence and monitoring.
If the World Bank Treasury issues $1 billion in green bonds, that money goes to support climate-smart projects, but the projects are still on the World Bank’s balance sheet, supported by the World Bank’s capital regardless of the source of funding.
Direct project finance at the World Bank and IFC requires a lot of expertise, and that carries additional costs. Through green bonds, investors can build their green credentials without being exposed to project risk. They’re only exposed to the risk of the issuer, and the World Bank and IFC are both triple-A.
This is helping to build investor expertise around climate finance as the market is in its early stages, but the bonds are still priced flat to other bonds. At some point, the risk needs to be shared beyond the issuer.
What kind of bonds do we need to get finance flowing?
So as the market matures, how do we leverage green bonds to get more climate finance flowing? Where do we want to see this market go so it has a significant, credible impact on climate finance?
I would like to focus on four ideas: greater use of asset-backed bonds, greater support for new and local markets, using local currencies, and investing in resilient infrastructure.
Asset-Backed Bonds
Project-level finance is not a large part of fixed-income investments in general, and the bonds are likely to be lower rated or unrated because of the construction and delivery risk. But interest is growing from investors looking for diversity in credit ratings and duration. Asset-backed bonds pool that project risk.
Hannon Armstrong Sustainable Infrastructure, for example, started assets-backed bonds in 2013 with a $100 million bond backed by the cash flow from over 100 wind and solar power and energy efficiency projects.
We’re happy to see more corporates and subnationals getting involved and issuing green bonds, but the fact is, most green bonds remain on balance sheets. There have also been very few issued in developing countries.
How do we move to more investors taking appropriately mitigated project-level risk rather than simply relying on big issuers’ balance sheets?
Asset-backed bonds are one avenue. There are also different ways of using credit enhancements, such as guarantees, to get finance flowing. OPIC has issued a couple of green guarantees, which act like green project bonds backed by a U.S. government guarantee, for solar and hydro in Chile.
Local Markets
Development banks – in addition to being issuers – can bolster new markets to help grow climate finance. IFC is currently considering investing $50 million in a green bond for infrastructure issued by India’s Yes Bank. By being a buyer, not just an issuer, IFC would signal to the market that the bond has credibility and that it meets IFC standards.
Local Currencies
Creating green bonds in local currencies also expands the investor base. The World Bank has issued green bonds in 18 currencies, including rubles, pesos, Turkish lira and Australian dollars. The IFC’s issued a green bond in Peruvian soles last year that allowed a Peruvian insurance company to invest.
We are in the early stages of a mandate to support green financing that could include the issuances of green sukuk. There is no market yet, but we have discussed the possibilities, and the UAE is considering issuing the first Sharia-compliant bond aimed at financing green energy projects this year.
Specialized Bonds
We can also do more with the green bonds concept to finance resilient infrastructure. We saw the need earlier this month when Cyclone Pam devastated the Pacific Islands of Vanuatu and wreaked havoc on its neighbors. Should we be looking at resilience bonds that rely on standardized climate risk screening?
Building climate finance isn’t easy. Building a market isn’t easy, but look at what you’ve done so far. We need to be looking ahead to what needs to happen next.
So, we can move beyond balance sheets and push for more project-level and asset-backed bonds.
The development banks can work with governments – subnational and sovereign – to issue their own bonds in accord with the Green Bond Principles.
We can issue green bonds in local currency to expand the investor base and buy locally issued bonds.
And we can consider new forms of green bonds, such as Islamic finance and bonds for resilient infrastructure.
We can look beyond the current paradigm – always recognizing the need for integrity.
I urge all issuers to continue to be transparent in how they approach the market, what they include as green, and how their processes work. And I encourage new issuers and investors to get involve and to take on more risk to support additional climate finance.
At the World Bank Group, we are pleased to have been involved in the green bond market from its beginning, and we’re looking forward to future growth and greater scale of a robust, deep, and diverse green bond market.
These four routes are just a few of the ways the green bonds market can innovate to increase climate finance and support projects that are necessary to bring down greenhouse gas emissions.
All of you in this room are specialists in this area. You can lead the innovation in this market. These are the things we are thinking about. I’m looking forward to hearing from you how you feel we can help build the market.
