The Evolution of The Green Bonds Market

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The phone call to the World Bank Treasury came out of nowhere: in late 2007, a group of Swedish pension funds wanted to invest in climate-friendly initiatives but had no idea where to go. However, they knew who to turn to and requested assistance from the World Bank. The World Bank issued the first green bond less than a year later, paving the path for a new method for investors to fund climate initiatives.

Bonds are simply a contract in which issuers borrow money from investors and must return them at a certain rate after a set period of time. Bonds are issued by governments, corporations, and a variety of other entities to raise funds for initiatives. The World Bank has been issuing bonds since 1947 to obtain funds for its development programs from the financial markets. However, the notion of a bond devoted to a single project had never been tried before. The green bond proved to be a watershed moment in history, forever altering the way investors, development specialists, lawmakers, and scientists collaborate.

A strong cautionary note

The Intergovernmental Panel on Climate Change (IPCC), a United Nations institution that provides scientific data on climate change and its political and economic consequences, released a report in 2007 that unequivocally connected human activity to global warming. The discovery, along with an increase in natural catastrophes, motivated a group of Swedish pension funds to consider how they might put their assets toward a solution. Their bank, SEB, was contacted to see what might be done. And SEB was able to connect the dots between the finance, which aimed to decrease risks for investors while also having a good effect, and the Globe Bank, which has extensive experience investing in environmental projects all over the world.

Imaginative problem-solving

In retrospect, the answer seems to be simple. Investors want a secure haven where they could store their money while also knowing that they were having a positive impact. The World Bank has environmental projects to fund, a history of issuing high-quality bonds, and the capacity to report on the effect of its programs. However, there remained a gap: how could investors be sure that the initiatives they were funding addressed climate concerns?

Another phone call was made, this time to CICERO, the Centre for International Climate and Environmental Research, an interdisciplinary climate research facility in Oslo. CICERO scientists were world-renowned climate specialists. They could provide a competent opinion on whether a project would have a good environmental effect.

Many further discussions ensued between the pension funds, SEB, CICERO, and the World Bank Treasury. Conversations were frequently tough, particularly since various groups spoke different languages, and bridging the gap between finance, development, and research was difficult.

A shared determination to find a solution

The World Bank issued the first green bond in November 2008, and it was a huge success. The bond laid the groundwork for the current green bond market. It established the eligibility requirements for green bond projects, including CICERO as a second opinion source, and made impact reporting a mandatory element of the process. It also served as a test bed for a new partnership paradigm including investors, banks, development organizations, and scientists. It was ultimately the product of their dedication, tenacity, and determination to find a solution.

The World Bank green bond increased awareness of climate change concerns and illustrated how investors may assist climate solutions via safe investments without sacrificing financial gains. It served as the foundation for the International Capital Markets Association’s Green Bond Principles. It emphasized the social benefit that ties may provide, as well as the necessity for a greater emphasis on transparency.

Since then, the World Bank has raised more than US$13 billion from institutional and ordinary investors throughout the world via almost 150 green bonds in 20 currencies. There were 91 qualified projects and $15.4 billion in pledges at the conclusion of the fiscal year 2018. Green Bond revenues of US$8.5 billion have been authorized and distributed to assist projects in 28 countries, with another US$6.8 billion remaining to be disbursed.

Renewable Energy, Energy Efficiency, and Clean Transportation projects accounted for the majority of the Green Bond qualified project portfolio as of June 30, 2018. These industries accounted for almost 69 percent of all Green Bond obligations.

Green bonds gaining popularity and attention

The market regards the World Bank’s inaugural Green Bond Impact Report as a benchmark and model for impact reporting. Other green bond issuers now include a wide range of firms and institutions from a variety of nations. The social and environmental effect of all issuers’ investments is being measured, tracked, and reported on. Fannie Mae is the year’s leading issuer of green bonds in terms of volume. The first developing market sovereign green bond was issued by Fiji last year.

Green or sustainable bond financing is handled by every bank participating in the international capital markets. Loans are being written with green lending standards in mind. Rating companies and others supply information to investors and help issuers, and there is an industry of second opinion providers and verifiers. The notion of the green bond has also been broadened to include additional terms such as social bond and blue bond.

What role do green bonds play in combating climate change?

Green bonds increase awareness of climate change concerns and show how institutional investors may support climate-smart investments via liquid products without sacrificing financial gains. They also emphasize the need of a stronger emphasis on transparency and the social value of fixed income investments. The Worldwide Capital Markets Association (ICMA) developed international green bond rules based on the first green bonds.

“On climate change, we need decisive action,” stated Kristalina Georgieva, World Bank Group Interim President and Chief Executive Officer. “It boils down to a simple choice: we keep doing what we’re doing and hoping for the best.” Alternatively, we may take action today to create a more resilient future. Our generation may not be able to tackle all of the issues surrounding climate change, but we can do our bit to leave a better world for future generations.”

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