Investors
have increased their demand for assets that meet standard financial objectives
while tackling the challenges of environmental issues such as climate change.
In response to this, the European Investment Bank and the World Bank launched
the first Green Bonds in 2007.
With the same financing features and
pricing as traditional bonds, Green Bonds brought a new dimension to the mix,
with bond proceeds being explicitly allocated to environmental projects, such
as energy efficiency, promotion of the circular economy and sustainable
agriculture.
Since
then the market has expanded as sustainability rises steadily up the social and
regulatory agenda. A major turning point came in 2013 when corporates began to
see the unique benefits of issuing these instruments, bringing the market to
over USD 11 billion by the end of that year, a three-fold increase compared to
2012.
The last
two years have marked a further breakthrough for corporate issuers. A host of
new issuer types have entered the market, and growth in green issuances in Asia
Pacific has broadened the geographic footprint of Green Bonds, specifically in
China and India. With over USD 90 billion worth of Green Bonds issued to date,
it’s clear that the popularity of this impactful tool is only increasing.
Green
Bonds also attract a diversified investor base, being a welcome tool for the
growing body of socially responsible investors. This demand is underpinned by
the proliferation of regulatory measures around the world promoting sustainable
behaviour, not least by requiring disclosure of investors’ environmental,
social and governance (ESG) policies. France for example, as part of a new
Energy Transition Law, has introduced mandatory carbon reporting for
institutional investors. Additionally initiatives such the United
Nations-sponsored Principles for Responsible Investment (PRI) and a host of
industry groups specifically promoting decarbonisation, are all exerting
pressure on investors to support environmental initiatives. This also includes
the PRI Montreal Carbon Pledge initiative, in which 120 Instituional investors
have committed to measure and publicly disclose the carbon footprint of their
portfolios.1
The
momentum of sustainable capital markets intensified in late 2015 around the
Conference of Parties in Paris (COP21), where a landmark agreement was signed
between 195 nations to limit the temperature increase to well below 2°C above
preindustrial levels. Further to this, the agreement encourages nations to
attempt to limit the temperature increase to 1.5°C above preindustrial levels.
USD 100 billion of annual funding has also been pledged to developing countries
from 2020 onwards for mitigation and adaptation projects.2 The historic Paris
agreement should provide additional acceleration for the Green Bond market, as
the necessity to finance green infrastructure projects will be paramount in the
coming years. This financing tool is unique in allowing issuers to align their
funding tools with their sustainable business strategy.
[1] UNPRI:
[2]. UNFCCC