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Prospects for Green Bonds On the Rise



Green bonds give investors an innovative way of supporting clean energy, mass transit, and other low-carbon projects that can help countries adapt to and mitigate climate change. The World Bank has mobilized over $5.3 billion through 61 green bond transactions in 17 currencies, and the IFC has issued $3.4 billion in green bonds, including two $1 billion issuances in 2013.[1] New Green Bond Principles and a call to double the market by September are helping expand the young market and attracting a new set of investors.

Types of green bonds

Green Bonds are instruments in which the proceeds will be exclusively applied (either by specifying Use of Proceeds, Direct Project Exposure, or Securitization) towards new and existing Green Projects– defined as projects and activities that promote climate or other environmental sustainability purposes. There are currently four types of Green Bonds:

Green Use of Proceeds Bond: a standard recourse-to-the-issuer debt obligation for which the proceeds can be moved to a sub-portfolio or otherwise tracked by the issuer and attested to by a formal internal process that will be linked to the issuer’s lending and investment operations for projects. Pending such investment,  the issuer can make known to investors the intended types of eligible investments for the balance of unallocated proceeds.

Green Use of Proceeds Revenue Bond: a non-recourse-to-the-issuer debt obligation in which the credit exposure in the bond is to the pledged cash flows of the revenue streams, fees, taxes etc., and the Use of Proceeds of the bond goes to related or unrelated Green Project(s). The proceeds can be moved to a sub-portfolio or otherwise tracked by the issuer and attested to by a formal internal process that will be linked to the issuer’s lending and investment operations for projects. Pending such investment, the issuer can make known to investors the intended types of eligible investments for the balance of unallocated proceeds.  

Green Project Bond: a project bond for a single or multiple Green Project(s) for which the investor has direct exposure to the risk of the project(s) with or without potential recourse to the issuer.

Green Securitized Bond: a bond collateralized by one or more specific projects, including but not limited to covered bonds, ABS, and other structures. The first source of repayment is generally the cash flows of the assets. This type of bond covers, for example, asset-backed securitizations of rooftop solar PV and/or energy efficiency assets.

The Role of World Bank and IFC

For most of their history, such bonds have been the preserve of international financial institutions (IFIs). Because it is hard for investors to know what excactly is green and what isn’t, green projects meant those designated as such by the World Bank’s environment department. Starting in 2008 the bank issued bonds to finance its projects: the first green bonds. The sums were small—tens of millions and investors were few.

In Tunisia, green bonds issued by the World Bank help improve efficiency in irrigation and reliable water supply in rural areas where groundwater sources are stressed. In China, they help reduce communities' vulnerability to natural disasters through flood control management and warning systems. In Colombia and Mexico they support energy efficient mass transit systems, and elsewhere, renewable energy projects. 

Green bonds issued by IFC support private sector investments in renewable energy and energy efficiency.  This includes diversifying South Africa's electricity away from coal-fired power by using energy generated from mirrors that reflect and concentrate the sun’s rays, and helping a bank in Armenia introduce lending for energy-efficient housing, reducing power demand and lowering utility bills for residents. 

However, as the growing risks brought on by climate change have steadily raised the development costs for the world’s fast-growing cities and developing countries, the sentiment towards green bonds have changed. It is now well-accepted in the international commuinty that Government funds alone will never be enough to build resilience to extreme weather and deal with the threats to energy, water, and food supplies and therefore the private sector and institutional investors must be involved.[2] That is where an innovative funding stream is starting to make a difference. Green bonds are delivering finance for clean energy, mass transit, and other low-carbon projects that can help countries adapt to and mitigate climate change, while giving investors high-quality-credit, fixed-income investment opportunities that have a positive impact.

The first signs of change came in 2013. In February 2013 the International Finance Corporation, raised a $1 billion green bond—large enough for money managers to take notice. Proceeds from World Bank and IFC green bonds are earmarked through separate accounts that are set up to support the financing of projects that meet specific eligibility criteria. Both the World Bank and IFC have sizable climate programs, with the World Bank approving an average of $5.5 billion in climate adaption and mitigation projects annually over the past three years. IFC's climate-smart investment portfolio grew by 50 percent in fiscal year 2013, to $2.5 billion.

Growing Class of Investors

Just as issuers have changed, so have investors. At first they were public-sector institutions, such as the California state teachers’ pension fund and Sweden’s AP pension funds. But in November 2013 Zurich, an insurance firm, said it would invest $1 billion in green bonds. It appointed BlackRock, an investment-management giant, to run its portfolio. Other money managers are piling in. In 2012, 95% of investors were owners of assets. Now more than half are asset managers.

In the case of green bonds issued by the World Bank and IFC, investors benefit from the Aaa/AAA ratings of the issuers and also help rally the climate financing the world desperately needs to confront the challenges of climate change. Investors ranging from pension funds to global asset managers, leading companies and central banks are refocusing their investment strategies to include climate considerations. IFC's most recent $1 billion offering, in November 2013, attracted a new set of green bond investors, including the Ford Motor Company, Microsoft, and the central banks of Brazil and Germany. A floating rate green bond issued by the World Bank in January 2014 drew large institutional investors such as BlackRock, TIAA-Cref and Goldman Sachs Private Wealth Management in addition to other pension funds and sustainable investors. Zurich Insurance recently announced it would invest $1 billion in green bonds issued by the World Bank, IFC, and other development banks.[3]

Corporate Issuers Taking Notice

With growing investor demand for green bonds, there are also growing numbers of green bond issuers in North America, Europe and Asia setting up programs to meet the demand, ranging from development banks to local authorities, corporates and utilities.  

Green bonds are still a young market, but with strong potential and new developments are bringing its value for investors into the spotlight:

·         At the World Economic Forum in Davos, World Bank Group President Jim Yong Kim called for doubling the global market for green bonds to $20 billion by September 2014, when the United Nations convenes a high-profile climate summit, and reaching at least $50 billion by the UN climate negotiations in Paris in December 2015.

·         A new green bond issue by the French energy group EDF in December 2013 showed that the depth of interest and ability to trigger climate finance is far wider than today. The 1.4 billion euro issuance was two-times oversubscribed from the start. Similarly, Toyata raised $1.75 billion to help finance sales of car loans for hybrid and electric car. These two developments marked the point at which corporate issuers took over from IFIs as the main issuers of such bonds. These bonds were for new, self-evidently green projects: renewable energy and electric vehicles.[4]

·         New Green Bond Principles being developed by leading investment and commercial banks are also expected to encourage more investors.


Green Bond Principles

To provide greater clarity and transparency for issuers and investors, last month 13 commercial and investment banks launched a set of voluntary Green Bond Principles that describe a process for designating, disclosing, managing and reporting on green bonds.[5] The principles were developed by the banks in consultation with IFC, the World Bank, and other green bond issuers and investors.

The said Principles recognize several broad categories of potential eligible Green Projects for the Use of Proceeds including but not limited to:

·         Renewable energy

·         Energy efficiency (including efficient buildings)

·         Sustainable waste management

·         Sustainable land use (including sustainable forestry and agriculture)

·         Biodiversity conservation

·         Clean transportation

·         Clean water and/or drinking water

Accordingly, the issuer of a Green Bond should outline the investment decision-making process it follows to determine the eligibility of an individual investment using Green Bond proceeds. Where applicable, the issuer should, as a first step, review the investments’ overall environmental profile. In all cases, the issuer should establish a well-defined process for determining how the investments fit within the eligible Green Project categories identified in the Use of Proceeds disclosure. A process of review should determine and document an investment’s eligibility within the issuers’ stated eligible Green Project categories. If possible, issuers should work to establish impact objectives from the projects selected. To the extent feasible, issuers should consider direct and indirect impacts of Green Projects, such as cases where investments lock-in a current level of emissions into the future.

 Multilateral and bilateral agencies and other IFIs have established processes to ensure that environmental criteria are considered for each project to which they allocate funds, independent of whether they qualify for use of Green Bond proceeds. These reviews are carried out with resident teams of environmental experts. Many Green Bond investors may also take into consideration an issuer's overall environmental and social and governance framework.

President Kim called the principles a key step toward attracting more financing for renewable energy and clean technology, especially for emerging markets where the green growth financing gap is significant. By providing guidance to new issuers and more bond underwriters, the Green Bond Principles are expected to further broaden the issuer and the investor base. Reaction from across the market has been extremely positive.


[1] Source: World Bank


[2] World Economic Forum, Davos 2014


[3] Source: World Bank Fact Sheet on Green Bonds


[4] Source: Financial Times


[5] Financial Times, Climate Focus Drives Demand for Green Bonds, March 11, 2014

Reported by Shambo Dey


To read our articles on securitisation, click here

To read our articles on infrastructure financing, click here


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