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Green Bonds: From evolution to revolution

Heike Reichelt's picture
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© ThickStock.com/Getty Images
© ThickStock.com/Getty Images

The first green bond issued by the World Bank 10 years ago created the blueprint for today’s US$500+ billion labeled bond market. This blog post looks at how green bonds changed investor and issuer behavior and how the same model can be applied to help achieve the Sustainable Development Goals.


The capital markets have evolved over the last 10 years from a market where investors knew - and cared - little about what their investments were supporting, to one where purpose matters more than ever. There’s a revolution in the bond markets that was sparked by green bonds.

The green bond market has grown from a market dominated by issuers like the World Bank, an international organization owned by 189 countries with the sole purpose of eradicating extreme poverty and boosting shared prosperity, to one that includes a broad range of issuers - from private companies and banks, to utilities and governments. The simple concept behind green bonds has expanded to other labeled bonds, including social bonds and blue bonds. 

Last month, the Seychelles—an archipelago of 115 islands known for beautiful beaches and coral reefs—issued the first blue bond of its kind to support sustainable marine and fisheries projects. The Seychelles raised US$15 million from investors like Calvert Impact Capital, Nuveen and Prudential and will report back on how funds are being used to achieve a positive impact.

That bond is the most recent in a series of innovations in the fixed income market that raise funding from the capital markets dedicated to a defined social purpose, with issuers engaging with investors around purpose and offering more transparency on the financing. These types of products allow issuers and investors to benefit from standardized debt products that support investments at scale, while at the same time connecting investments to their social purpose.

Estimates for the volume of these purpose-related bonds vary, depending on how narrowly the market is defined. Looking only at the labeled bond market, the volume is over US$500 billion for the last 10 years. Considering issuers - even just municipalities and development banks - that support social projects financed through the bond markets, the number quickly goes up to several trillions of US$ per year. 

Investors’ interest in the social and environmental purpose of their investments reflects a fundamental shift in the bond market. Investors want data that shows not only how they can reduce environmental, social and governance risks in their portfolios, but also how their investments are helping to contribute to society. They recognize the power they have to support initiatives their stakeholders care about, and the ability to do so without giving up return. Issuers are responding. Issuers are engaging with investors to show how their bonds present opportunities to achieve both financial and social returns.

Ten years ago, concerned that climate change posed a significant risk to their portfolios, a group of Swedish pension funds - through Skandinaviska Enskila Banken (SEB) - looked for opportunities that support climate-friendly solutions. They wanted high quality, liquid products that would not carry additional project risk. And they wanted information about how their investments would achieve impact. They approached the World Bank and we worked together to design a new product. The green bond was born.

Issued in 2008 by the World Bank, this bond created the blueprint for today’s green bond market. It defined the criteria for projects eligible for green bond support, included a recognized climate research institution, CICERO, as a second opinion provider, and added impact reporting as an integral part of the process, highlighting the importance of transparency.

The World Bank’s first green bond received strong support from the market and interest from others, including climate policymakers, Ceres and the Climate Bond Initiative. They raised awareness for the challenges of climate change and demonstrated the potential for institutional investors to support climate-smart investments through liquid instruments without giving up financial returns. It formed the basis for the green bond principles coordinated by ICMA, the International Capital Markets Association. It highlighted the social value of fixed income investments and need for a sharper focus on transparency. And – starting with the first green bond issued in 2008 - investors have been publishing their names and providing quotes when they buy green or other labeled bonds, 

In November 2018, the World Bank raised US$eq.1.5 billion through benchmark green bonds in AUD, EUR and US$, including the first dual-currency supranational green bond that was placed with over 60 orders investors committed to following socially and environmentally responsible principles. The issuances mark the ten-year anniversary of the green bond market and were heavily oversubscribed. In the last decade,  the World Bank has raised about US$13 billion through more than 150 green bonds in 20 currencies for institutional and retail investors all over the globe. Other green bond issuers now include companies and banks of all sizes and several countries. All issuers are measuring, tracking and reporting on the social and environmental impact of their investments. Fannie Mae is the largest issuer of green bonds by volume in a single year. Fiji last year issued the first emerging market sovereign green bond. Every bank active in the international capital markets has staff dedicated to green or sustainable bond financing. Green lending criteria are being incorporated in loans. There’s an industry of second opinion providers and verifiers - including rating firms and others providing information to investors and supporting issuers. And the green bond concept has been expanded to other labels – social, sustainable, blue, etc.

Green bonds have sparked a revolution in thinking about sustainability, purpose and potential for liquid bond investments to achieve a positive impact. If fixed income instruments can support financing for climate solutions, they can do so for other social purposes as well. The green bond process—with its model for project selection, second party opinion, and impact reporting—is already being applied to other areas. The Sustainable Development Goals (SDGs) are a collection of 17 global goals agreed by 193 countries in 2015 that range from education to health and sustainable cities. They are a helpful framework for investors and issuers to focus on areas beyond climate. The World Bank has started to engage investors around specific SDGs through a series of bonds to raise awareness for specific development challenges through its sustainable development bonds. Others are following.

The challenge now is to ensure that we harness the revolution and momentum towards achieving the SDGs. In the future, for every investment, investors will be asking “how is this making a positive impact to society?” and will expect solid impact data as a response. There’s a long way to go. But recognizing the urgency for action and the power of investment, collaboration, technology and innovation will get us there.

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