In December, The Fifth Estate released its ebook Green Bonds and Property, which was created around a salon event held in London in the lead-up to the COP21 climate conference in Paris. We brought together the world’s brightest minds in sustainable property and finance to explore how sustainable finance could help fast track emissions reductions in the built environment. Following is the ebook’s introductory story, explaining the potential of green bonds.

The next 20 years is set to see more infrastructure built than has occurred in the past 6000 years, according to World Bank president Jim Yong Kim.

So happens a great opportunity to make sure the infrastructure we must build is resilient and climate sensitive. Indeed, a successful response to climate change demands significant investment in areas like renewables, green buildings, low-carbon transport and sustainable water infrastructure.

“We can choose to build smart cities and develop clean transportation systems,” Dr Kim has said.

This is where financial instruments like green bonds can play a role in tackling the climate challenge.

In short, green bonds are relatively new debt instruments used to finance or refinance projects that have positive environmental outcomes. The issuing entity makes a guarantee to repay the bond over a set period of time, plus a fixed or variable rate of return.

Green bonds operate in a context of numerous factors affecting investment, governance and development, such as globalisation, changing political landscapes, ecosystem depletion, urbanisation, resource utilisation, demographics, climatic patterns and climate change, employee attitudes and consumer preferences. Their potential application is correspondingly manifold.

A range of currencies, geographies and maturities now feature in the market, with new issuers and new types of green bonds such as asset-backed securities from Toyota linked to hybrid and electric vehicle loans, to bonds from Mexican and Indian developments banks and green ‘pfandbrief’ (covered bonds) in Germany. Beyond the corporate sector, municipal green bonds have been a growth area in 2015.

China and India will lead the way in 2016. These bonds are seen as vital to support sustainable development in developing nations, for example Latin American countries looking to increase their renewable energy capacity.

Market growth

According to the last Climate Bonds Initiative State of the Market report from mid-2015, “climate-aligned bonds” – both those labelled as green and those unlabelled (not officially labelled green but deemed to be going towards green projects) – totalled $US597.7 billion (AU$817.42 billion).

Sounds like a large figure, but there’s still a lot of work to do. The International Energy Agency estimates there needs to be cumulative investments of US$53 trillion in energy and efficiency to limit climate change to 2°C. With governments now agreeing to head towards 1.5°C, investment will need to be greater.

A huge ramp up is needed. But luckily the green bonds market has been booming.

Total issuances of labelled green bonds – those that have been certified as going towards climate-friendly projects – hit $65.9 billion in June 2015, and went up to $97.8 billion by December 2015, according to the CBI.

For 2015, issuances were $42 billion, the highest level of green bonds achieved in a year, with $7.92 billion in new issuances in November making it the biggest month ever for green bonds.

Graph: Climate Bonds Initiative, 10 December 2015

However, the CBI did expect 2015 to produce green bond issuances of up to $70 billion, so it’s not all good news. The slowdown relates to poor economic conditions that have affected the entire bonds market, though there are signs of a recovery.

One signal that green bonds are on the agenda in a big way is the release of the Paris Green Bonds Statement at COP 21, where 27 global investors representing $11 trillion of assets under management released a statement committing to working to “grow a large and robust market that makes a real contribution to addressing climate change”.

The statement calls on:

  • industry experts and stakeholders to develop clear standards for the climate change impacts and benefits of bond financed projects
  • bond issuers to ensure transparency around the use of bond proceeds and their impact
  • governments to develop projects that can be financed by green bonds

How green is green?

Labelling a bond as “green”, though, is a process that demands scrutiny. Investors need to be sure what they are funding actually has positive outcomes.

Commonly, issuers will abide by the Green Bond Principles, created in 2014 by a group of banks and guided by the International Capital Market Association. They are described as “voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of the green bond market by clarifying the approach for issuance of a green bond”.

The Green Bonds Principles comprise:

  • Use of proceeds: All designated green project categories should provide clear environmentally sustainable benefits, which, where feasible, will be quantified or assessed by the issuer
  • Process for project evaluation and selection: The issuer of a green bond should outline the decision-making process they follow to determine the eligibility of projects using green bond proceeds
  • Management of proceeds: Funds should be credited to special accounts until allocated to support financing of eligible project disbursements
  • Reporting: Detailed project reporting, summarised project information and green bond impact reporting should be made available
  • The principles, however, have been criticised by NGO BankTrack. In 2015 it released a letter criticising what it said was a lack of transparency.

“We are increasingly concerned about the significant gap between the stated aims of the Green Bond Principles to increase transparency and disclosure, and their actual contents, which explicitly allow and provide for important information on green bonds to remain under wraps,” the letter said.

“Combined with the decision of the principles to avoid addressing the issue of ‘what is green’ head-on, this lack of transparency means that observers, civil society organisations and others do not have the information available to adequately scrutinise the market’s development.

“Without a clear definition of what is green, our fears that the Green Bond Principles may be associated with the financing of destructive projects have already been realised,” the letter said, pointing to a GDF-Suez green-labelled bond that financed the Jirau mega-dam in Brazil, which BankTrack said had “egregious environmental, social and human rights impacts”.

Third-party certification is a potential solution, including the Climate Bonds Initiative’s Climate Bonds Standard, a screening tool for investors and governments that provide confidence that funds are being used to tackle climate change.

The world has massive infrastructure upgrade needs over the next 20 years. Ensuring the infrastructure we build contributes to a low-carbon world that keeps warming to 1.5°C is crucial to the climate challenge. Green bonds are one weapon in the arsenal of strategies too help us get to where we need to go.

  • To learn more about green bonds and reducing emissions in the built environment, see the Green Bonds and Property ebook.

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  1. I’m not sure I understand Green Bonds – can’t you already invest in the companies that do good stuff? The Bond bit presumably gives a more secure (but smaller) return, but isn’t the “Green Bond” mostly marketing fluff to investors?