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.
Last 2 years, a breakthrough year for corporate Green Bond issuance
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.