The meteoric ascent of green bonds
Green bonds — both socially responsible and sustainable — are set to continue their rise in 2020, growing 24% to reach 400 billion dollars*. The pace of issuance is exceeding expectations, boosted by high demand from sustainability-conscious investors. All the same, the idea of green bonds remains a fluid concept and to date there are no restrictive rules specific to this market…
An important driver for the ecological and energy transition, green bonds are distinguished from conventional bonds by the environmental benefit expected from the project funded. Thanks to the impetus of the Paris Climate Agreement to promote a carbon-neutral global economy, these green bonds are experiencing remarkable growth, going from zero to several hundred billion dollars in just a few years**.
While major financial institutions — the World Bank and development banks — have played a key role in this rise, the arrival of new actors — companies, governments, sovereign wealth funds, etc. — has enlarged the investment ecosystem. By far, renewable energy and energy efficiency are mobilizing the use of these funds, although other areas are emerging, such as sustainable waste and water management and clean transport.
In this relatively young bond market developing at lightning speed, green bonds represent a comparably small share of the total capitalization. The arrival of major bond issuers, namely governments, is starting to be a game-changer. In the wake of pioneering France and Poland, many issuers are concentrating on the impacts of climate change and resilience solutions.
The UN indicates that 60 countries — including France, Germany and the United Kingdom — ultimately intend to reach zero net carbon emissions in their energy production. Nonetheless, one of the largest carbon emitters, China, has not stated any such aims… yet features, alongside the United States and France, in the top three largest issuers of green bonds!
Governments’ growing appetite for this source of funding is boosting the growth of sovereign green issuance. In the future, a large share will come from countries that have already turned to it, such as France and Poland. In this respect, the European Union’s Green Deal on the ambitious funding of climate projects could be a major incentive for member states to issue green bonds.
The dynamic of a quality green bond market in emerging countries such as Chile, forced to turn to it due to a lack of fiscal space, is now arousing investors’ interest.
Given the inexorable ascent of sustainable finance, the entire financial industry must rise to the challenge of measuring and structuring this market. Based on several criteria: a regulatory definition and universal standards, regulation and certification concerning green bond labelling, communication (transparency, publication of information, etc.), yield, liquidity, and portfolio diversification.
* Moody's Investors Service, report “Sustainable Finance – Global: Green, Social And Sustainability Bond Issuance To Hit Record $400 Billion In 2020”
** One thousand billion dollars (891.50 billion euros) is set to be reached at the end of the first half-year of 2021, taking into account green, social and sustainability bonds (Estimates by the British bank HSBC, reported by Bloomberg.com).
© Colin Ziemer / AP/ SIPA