In January, World Bank Group President Jim Yong Kim urged the audience at the World Economic Forum in Davos to look closely at a young, promising form of finance for climate-smart development: green bonds. The green bond market had surpassed US$10 billion in new bonds during 2013. President Kim called for doubling that number by the UN Secretary-General's Climate Summit in September.
Just a few days ago—well ahead of the September summit—the market blew past the US$20 billion mark when the German development bank KfW issued a 1.5 billion Euro green bond to support its renewable energy program.
Since the launch in 2008, the World Bank’s green bonds have grown quickly and reached an important milestone in August. Earlier, this month, the World Bank launched a US$550 million green bond bumping the total amount of World Bank green bonds issued to over $4 billion dollars since the green bond program began. This milestone prompted us to pause and take stock of the program and the new market it helped start.
As countries move toward a low-carbon, climate resilient future, the appetite for innovative climate finance is growing. One way to fill this financing need is through the capital markets. The World Bank’s green bonds, first launched in 2008, have been recognized as a catalyst for the growing market of climate bonds. This market is on its way to becoming an important source of funding for countries looking to grow in a clean and sustainable manner. A sampling of expected project results – over 165,000 tons of carbon dioxide equivalent emission reduction benefits per year in Belarus, and 800,000 tons per year in China, reducing vulnerability to climate-related flooding and water scarcity flood events for about 500,000 farmer households in Indonesia, and producing 6MWhs of electricity out of a landfill in Jordan – highlights the crucial role green bonds and other innovative funding mechanisms could play in financing the fight against climate change.
The World Bank started issuing green bonds in 2008, responding to a group of Scandinavian pension funds interested in supporting activities that address mitigation and adaptation to climate. Skandinaviska Enskilda Banken (SEB) was the lead manager of this inaugural green bond.
Why would a group of large investors care about climate change when their primary concern is ensuring adequate returns for their investment portfolio to meet their future financial obligations? This group includes pension funds, insurance companies or foundations. Pension funds alone are estimated to hold over US$25 trillion globally
As Alan Miller indicated in his recent blog, a report published by Mercer (a well-known investment advisor) estimates that uncertainty around climate policy could contribute as much as 10% to overall portfolio risk for investors to manage over the next 20 years. So, investors are beginning to pay attention. Choosing to support investments that help address climate change or increase climate-resilience also helps reduce the exposure of portfolios to this risk.
Green bonds issued by the World Bank is one such instrument. Funding raised through green bonds is earmarked for eligible low-carbon and adaptation projects financed by IBRD in its member countries. For example, the money could be used for funding an eco-farming project in China, or improving the solid waste management in Amman, Jordan. On the mitigation side, eligible projects could include solar and wind farms. On the adaptation side, it could be protection against flooding or droughts.
Earlier, this month, a 'Green Bond Summit' gathered about 110 representatives of the investment community. The event was hosted by State Street Global Advisers -- an asset manager with over $2 trillion under management in different asset classes. The goal was to discuss how green bonds could attract greater participation from large investors to scale-up financing of climate solutions through the capital markets. The World Bank, a pioneer of the green bond, and other issuers such as ADB, EIB, and IFC deliberated with the participants on prospects for common green bond standards, the financial characteristics investors expect, and the policy issues that underlie the demand for climate investments.