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February 25, 2014

Is 2014 the Year for Green Bonds?
    by Robert Kropp

As You Sow hosts a webinar exploring the role of green bonds in the transition to a low-carbon economy.

SocialFunds.com -- The market for green bonds is projected to more than double in 2014, to $25 billion, according to a recent webinar hosted by the nonprofit organization As You Sow. Green bonds, which are fixed-income products that invest in clean energy and other sustainability measures, were highlighted recently by expressions of support for the Green Bond Principles (GBP) by many of the world's largest investment banks.

“In 2013, there were over $10 billion in green bonds issuances,” said Amelia Timbers of As You Sow, “and that figure is expected to double in 2014.”

“Green bonds are quickly emerging as one of the most competitive options for financing the trillions of dollars for a low-carbon infrastructure,” Timbers continued.

The first speaker on the webinar panel was Sean Kidney, CEO of Climate Bonds Initiative, a London-based nonprofit whose goal is to help facilitate the flow of $1 trillion in investments each year to low-carbon industries.

“It's important to understand that bonds are primarily a refinancing tool,” Kidney said. He noted further that 89% of bonds currently issued are investment grade, with low-carbon transport bonds currently being the most successful. And he pointed to the issuance in 2012 of green bonds by French municipalities as a watershed moment in the growth of green bonds. They were over-subscribed several times, Kidney said, largely due to purchases of them by French sustainable investors.

“The public sector has a role,” Kidney continued, “in encouraging the growth of the refinancing market.”

Colin MacNaught of the Massachusetts State Treasurer’s Office said that of the $11 billion his agency plans to borrow over the next five years, at least $1 billion will be directed to environmental or energy improvement capital projects.

“In order to take advantage of the growing investor interest in sustainable investments, to attract new investors to diversify the state’s investor base, and to give investors the ability to invest directly in environmentally beneficial projects, the Commonwealth decided to be the first state to offer Green Bonds,” MacNaught's presentation stated.

“We pulled out all of our environmental projects and decided to put them in one bond,” MacNaught said. “Knowing that we did not have a specific mandate to reduce carbon or reduce climate change, we still wanted to offer investors a totally rational investment that would allow the investor to invest directly in projects that make strong improvements to the local environment.”

Last June, MacNaught reported, the state sold $100 billion in green bonds. “In total, the state received 154 retail orders for green bonds and at least 7 new institutional investors. During a difficult market environment in which the overall financing had to be substantially downsized, the Green Bonds saw significant investor demand, receiving 30% more orders than there was supply available.”

Evelyn Hartwick, the head of the socially responsible bond program at the International Finance Corporation (IFC) noted in her presentation that climate change and environmental and social sustainability is one of the five major focus areas of the organization.

“IFC climate change activities have grown from 4% of total commitments in 2005 to 14% in 2013,” Hartwick's presentation stated. “Growth is due to a greater focus by IFC and explicit institutional mandate, but also market to renewable energy’s high growth.”

“We are scaling our investments in climate change for three reasons,” Hartwick said. “First, because there is compelling evidence that the impact of climate change effects will hit the poor the most. Second, because we know that businesses everywhere are susceptible to climate risks. And third, because there's no doubt that the private sector, and especially the private sector in emerging markets, is the key source of innovation and solutions to address climate change.”

IFC engages in three major areas, Hartwick observed: clean energy and energy access, resource efficiency, and climate adaptation. Since its inaugural issue in 2010, IFC has raised $3.4 billion through its green bond program, including a landmark $1 billion three-year public issue in February 2013, she reported; and a subsequent $1 billion three-year issue was made in November 2013.

Hartwick also noted that the transparency of IFC's green bond offerings is enhanced by third-party opinion services provided by Center for International Climate and Environmental Research – Oslo (CICERO), an independent research center which provides consultancy services.

"Green Bonds will help deliver trillions of dollars of investment in low-carbon infrastructure that is needed to stabilize emissions," Timbers of As You Sow said. "Green Bonds are an ideal financial vehicle for the challenge of climate change in that their ability to scale and be deployed quickly matches the urgency of climate change."

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