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Fighting climate change with capital markets

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As a structured finance specialist in the World Bank Treasury, I work on a trading floor and talk to banks, investors, and development partners daily, so together we can find cost-effective and sustainable solutions to address climate change. The World Bank estimates that without urgent action, climate change could push an additional 100 million people into poverty by 2030.  Climate is now a key consideration in all our development projects, and we have committed to ramp up adaptation financing to $50 billion over FY21–25. However, the public sector alone cannot finance the trillions of dollars needed for green infrastructure. We need to mobilize significantly more private sector flows to have any realistic chance of achieving climate goals.  Enter: bonds and the power of the capital markets. 

The World Bank (IBRD) has been borrowing in the markets to finance its lending activities for over 70 years.  Over this period, IBRD has introduced several groundbreaking innovations (the first global bond, the first swap, the first bond issued on a blockchain platform, to name a few) and developed a stellar reputation in capital markets. We developed the following three innovative solutions to raise awareness and combat climate change. 

Green Bonds

Ten years ago, we issued the very first labeled green bond.  This bond ultimately created a blueprint for the market and catalyzed a sustainability revolution. The World Bank has been a leader in creating standards around use of proceeds and impact reporting—how investors come to understand the impact of their investment. Today, having issued almost $13 billion through more than 150 green bonds, we are advising many of our clients to access this market.

Looking back, I think a big reason why green bonds became a success is because they offered an attractive entry point for institutional investors that, in the aggregate, manage trillions of dollars. Like conventional debt instruments, green bonds are straightforward in that they are principal protected  – investors are not exposed to the risk of the underlying projects. They are backed by the balance sheet of the issuer. On top of this simple structure, investors get greater transparency on what the funds are used for and the impact generated.

Structured Bonds

The World Bank Treasury has for decades customized bonds for institutional and retail investors.  Over the last few years, we have structured bonds that meet investor needs while contributing to the climate global goals. For example, we issued bonds with coupons linked to the generation of Certified Emissions Reductions (CERs) by projects in China and Malaysia. Other bonds paid coupons linked to the performance of a low carbon equity index. In both cases, the principal was protected, but investors shared risk in the coupon. Under the Pilot Auction Facility, we structured and issued around $55 million in bonds that incentivized investors to reduce emissions of harmful gases like methane by offering a guaranteed return on CERs. These bonds had a full social impact bond-style risk sharing structure where investors retained the economic risk of the projects they were running.

Catastrophe Bonds

In response to client requests for disaster risk management solutions that do not use up credit lines and transfer risks to the market, we developed a program to use the IBRD balance sheet to intermediate these risks. Since 2008, we have executed $4.3 billion in coverage for member countries.  By transferring risks to capital markets, and providing rapid payouts based on objective triggers, cat bonds change the dialog from crisis to risk management and build greater resiliency. 

Unlike green bond investors, the alternative funds that buy these bonds are willing to put their full investment at risk in exchange for higher returns and diversified risk.  We have been able to tap into this capital to provide customized solutions to clients at competitive pricing levels. For example, we structured a $450 million transaction for UTE, a state-owned hydro-electric power company in Uruguay. UTE relies on oil to meet its energy needs during times of low rainfall, so a combination of drought and high oil prices raises prices for consumers. We designed a solution that would have protected UTE with payouts in those circumstances.

What’s next?

Innovative financing will continue to play a key role in combating climate change.  I anticipate several future trends: (1) We will continue to issue bonds linked to the Sustainable Development Goals; (2) we will issue more cat bonds from increased client interest after our high-profile transactions providing coverage to Mexico and the Philippines; and (3) we are exploring ways to reduce risk in renewable energy projects and lower the cost of financing. The path may differ, and the solutions will evolve, but one thing is clear – the future looks cleaner and brighter than ever.


Akinchan “Aki” Jain

Senior Financial Officer, Capital Markets, World Bank Treasury

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