What does public debt have to do with combatting climate change?
A few years ago, this would have seemed a strange question, as debt management and climate policy have traditionally been regarded as unrelated fields. But at a workshop at the annual Debt Management Forum in Vienna on May 22, 2017, debt managers from 50 developing countries discussed the role of emerging debt instruments such as green bonds and blue bonds, in raising capital for climate-friendly projects that range from reforestation to renewable energy.
While green and blue bonds resemble more traditional debt instruments in terms of structure and returns, they represent a novel approach to climate finance. Created just ten years ago, the total value of green bonds has grown at a spectacular pace, reaching US$82.6 billion in 2016. By the end of 2017, the total value of green bonds will likely exceed US$100 billion.
Some of the world’s largest economies are driving the dramatic rise of green bonds, and some of the smallest are breaking new ground in bond design. Starting from close to zero in 2015, the value of Chinese green bonds rose by US$37 billion in 2016 alone. Meanwhile, Seychelles signed a landmark debt-buyback agreement with the Paris Club in 2015, under which it exchanged a portion of its debt for marine conservation. Seychelles is now introducing a “blue bond” to finance the protection of its fragile marine ecosystems and to support the transition to sustainable fisheries.
The World Bank and IFC are among the world’s largest issuers of green bonds . As of April 2017, the World Bank had issued a total of 130 green bonds worth over $10 billion and IFC had issued 77 green bonds worth $5.8 billion.
But despite the rising profile, green and blue bonds still remain a niche market, representing just 1 percent of the total bond market. Market growth has been constrained by a lack of comprehensive standards for designing and evaluating climate-related financing instruments. Green bonds are currently issued under voluntary certification schemes, including the Climate Bonds Standards and Green Bond Principles. These schemes offer broad guidelines for transparency and disclosure, but they do not establish a universal standard for “green,” as individual countries are left to apply their own definitions.
Standard and Poor’s has developed a new evaluative methodology to address the lack of standards for green bonds. Presented at the Innovate4Climate Finance and Markets Conference in Barcelona in May, Standard and Poor’s approach does not assess the “greenness” of a specific project, but its environmental impact against a range of alternatives. The “green evaluation” score is a weighted average of transparency (the comprehensiveness of information gathered and reported), governance (the efficiency of how proceeds are managed), and benefits (the extent to which the project mitigates climate change or facilitates adaptation). It is hoped that this score will enable investors to better assess the environmental quality of a project, improve benchmark pricing, and take the environmental impact into consideration when pricing financial instruments.
The S&P score represents a step in the right direction, and green and blue bonds are just one of many emerging financial mechanisms to fight climate change (others will be the subject of the next blog). The scale of the problem requires an all hands on deck approach, and financial innovation may turn out to be as important as new technologies and effective policies.
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