Green bond market’s growth is boosting low carbon projects

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25 March 2015

LONDON: The international rating service Standard & Poor’s (S&P) estimates companies will issue green bonds for a record US$30 billion in 2015, helping the growth of the low carbon industry.

These predicted market trends are based on the forecast that the Chinese market will grow and there will be a significant increase in the transparency of the green investment system, according to S&P. The market has already tripled in size between 2013 and 2014 and is therefore set on a consistent growth track.

The surge of the green bonds market means a great amount of investment will flow directly into low carbon projects - mainly solar and wind - keeping up the momentum of the already fast-growing clean energy industry.

The Climate Group is at the very forefront of promoting low carbon investments, as witnessed by the RE100 initiative, which supports global companies in their commitment to go 100% renewable.

Emily Farnworth, Campaign Director of RE100, stated: “The growth of a global green bond market is great news for renewable energy. Providing opportunities for investors to direct private sector finance to clean energy projects that offer a reliable and steady return is exactly what is needed to support the growth of the low carbon economy.

“We have seen signs of this growth for years. But now there is no doubt scaling investment in the low carbon sector makes good business sense.”

What are green bonds?

Green bonds can be considered as the financial market’s answer to the global call to invest in a prosperous low carbon future.

“Bonds” are a form of debt which regulate investments. The “buyer” lends money to a company or a project, with the agreement to be fully paid back within a precise timescale, with regular interest rates. Based on this same principle, green bonds are entirely devolved to projects that have a positive environmental and/or climate impact.

Projects that are generally funded by green bonds are wind and solar energy installations, energy efficiency measures and investments in low carbon transportation and infrastructures.

Green bonds are mainly issued by development banks and corporates, such as utilities and real estate companies, and are purchased by institutional investors such as pension funds and funds managers. In the Netherlands and South Africa, banks have recently started to issue bonds to smaller private investors.

The S&P report looks at China as a key market for green finance growth. With the Chinese government representatives openly admitting the threat of climate change to the nation's economy and environment, green bonds could experience substantial growth if they become popular in the country. Yes Bank, a private sector bank in India, has already issued its first green bond, raising around US$150 million – doubling the initial estimated US$75 million.

Declining oil prices are not expected to hinder the green bond market either, according to S&P. Climate change is in fact a long term concern and renewables have already proven not to be impacted by the declining crude oil price.

However, the rating agency warns that transparency is still a major issue in the market and suggests setting clearer standards for a further development of the green bonds.

Green investment trends

The growth predicted by S&P in the green bond market does not come as a complete surprise to those who have been analyzing the global shift to a low carbon economy.

First established in 2007 by the European Investment Bank (EIB) together with the World Bank, the green investment market has witnessed a steady increase since its launch. However, it was only in November 2013, when the first corporate green bond was introduced, that the market size rose to US$11 billion. The low carbon finance system took hit a record with a US$36.6 billion worth bond in 2014, tripling the amount reached in 2013.

According to the S&P estimates, the global market for green bonds could reach US$100 billion by the end of this year. This forecast is in line with the expectations of various experts who see the global green bonds market valued at US$1 trillion by 2020.

Several factors may have played a role in boosting the growth in the green bond market. Between 2013 and 2014, corporates and local administrations took bold initiatives to tackle climate change, issuing more green bonds, together with development banks - the traditional backbone of the green bond market.

Additionally, new development banks such as Germany’s KfW, France’s ADF and Netherland’s NWB also joined the traditional issuers, adding momentum to the market.

According to the World Bank, “Green bonds have created a new way for investors to achieve the return they need while also supporting climate-friendly development projects. Many long-term investors today consider climate risk and sustainability in their investment choices."

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By Arianna Tozzi

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