A bond for climate solutions

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.  

At the summit, Andrew Steer, special envoy for climate change at the World Bank, briefed the audience on the current state of international climate policy discussions and the key role that private finance is expected to play in the Green Fund that the international community agreed to in Cancun.

Who buys World Bank green bonds and why?

Over the past decade, there has been increasing interest from investors not only in the traditional financial characteristics of green bonds (currency, coupon, maturity, safety), but also in the use of funds. And there is an increasing concern about climate change and a desire to put assets to work that contribute to climate solutions.

To date, the World Bank has raised over US$ 2 billion through 34 green bonds in 15 currencies. World Bank green bonds have been bought by a range of investors worldwide, including pension funds, life insurance companies, asset managers and financial institutions. Nikko Asset Management, a UK-based fund manager has set up World Bank green bond funds, which give investors an opportunity to invest in a fund comprised of World Bank green bonds in a variety of currencies. Investors are attracted by the security of our triple-A rating and financial features of the bonds, but motivated by concerns about climate change. Some investors are actively looking for investments in renewable energy, energy efficiency, and other green projects. For others, this green bond product provides a way to invest their fixed income assets through the platform that the World Bank provides. In other words, investors can support climate change mitigation and adaptation projects but don't have to take on the specific project or country risk - they benefit from the World Bank's credit, due diligence and monitoring process.

Why does the World Bank issue green bonds?

The World Bank's green bond program was started to respond to specific demand from a group of investors. We think the product contributes not only to the funding program of the World Bank, but also to raising awareness in the investor community about the specific climate activities in our member countries.

Although the green bond market is still in its early stages, interest in green bonds - or 'environment bonds' more broadly - seems to be increasing rapidly. More issuers are entering into the market and work is being done to lay the groundwork for more complex products.