The world is currently well on track to heat up the climate by six degrees, which would cause huge losses to humans, the environment and the global economy. In order to avoid this scenario, significant investments in low-carbon technologies and projects are needed. But where should the cash come from? Many governments, particularly in the Western world, are already struggling against a huge debt burden. Meanwhile, institutional investors globally are putting up a meagre 0.001 percent of their US$70 trillion investment pool towards climate finance.
Will Green Bonds be the saving grace? A Green Bond, like a regular bond, accesses the financial markets to raise capital. However, the proceeds of a Green Bond are dedicated to specifically finance "green" initiatives, such as renewable energy or energy efficiency. The World Bank issued the first Green Bond in 2008, raising "funds from fixed income investors to support World Bank lending for eligible projects that seek to mitigate climate change or help affected people adapt to it." Since then, the GB market has experienced breathtaking growth, particularly over the past two years. According to figures from the Climate Bonds Initiative and HSBC, in the first half of 2014 alone, over $US35 billion of Green Bonds were issued, representing year-on-year growth of over 60 percent. The climate-themed potential Green Bond universe is estimated to be worth over $US500 billion. As well as multilateral institutions, private issuers such as Unliever, Toyota or GDF Suez have entered the scene. Remarkably, although the bulk of Green Bonds are issued in Europe, Asian investors have been taking a stronger interest of late. For example, Taiwanese corporations ASE and Neo Solar both issued Green Bonds in July 2014.
The big challenge that comes with this impressive growth story is the question of quality and transparency. So far, there are hardly any rules or standards defining a Green Bond; essentially it's a Green Bond because the issuer says so. Key issues to safeguard the credibility of GBs are:
1. Impact: How can the issuer demonstrate and, if possible, quantify the positive impact of the GB, and how can an investor measure impact consistently across portfolios?
2. Additionality: How can the issuer ensure that the proceeds are indeed used for the declared "green" purpose (ie that they are ring-fenced), and that the new GB is not just a re-branded normal bond that would have been issued anyway?
3. Verification: Is there any third-party monitoring and verifying that the purpose of the GB has been met?
As long as the Green Bonds concept was in a pilot phase, getting the industry excited without asking too many questions was good enough. However, at the current growth speed, Green Bonds must prove that they do indeed contribute to solving pressing environmental issues.
The industry thus needs to move very fast and agree on simple but robust standards to address the issues mentioned above. Initiatives like the Green Bonds Principles, the Climate Bonds Standard or the CICERO Second Opinions on Green Bond Investment Frameworks are great contributions to achieve this goal. Regarding additionality of Green Bonds, the UN Climate Convention's approach of setting Standardized Baselines could provide meaningful input.
Green Bonds have the potential to soon emerge as the number one instrument to finance environmental technology and projects - or to enter the history books as a failed exercise to paint business as usual financial streams in a bright green colour.