30 Sep The rise of green bonds and their impact on climate finance
The International Renewable Energy Agency recently stated that approximately $33 trillion needs to be invested into low-carbon energy systems by 2050 in order to reduce emissions to the expected level. This volume of money can only be acquired on capital markets, and investors are preparing for this impending transformation.
The rise of global green bonds, a market that was barely recognisable a decade ago, reached a value of $97 billion in 2016 and exceeded a staggering $290 billion in 2020. It is currently on track to reach a record half-trillion this year after reaching $496 billion in the first half of 2021, according to the Climate Bonds Initiative. Projections suggest that by 2023, this figure will likely rise to $1 trillion.
These record figures are driving sustainable investment to another level as issuers of green bonds raise money and commit to investing in green projects ranging from wind sites to electric vehicle infrastructure.
Green bonds are becoming a vital asset in the climate finance market, and issuers now range from banks and companies to sovereign states. Green Bonds are being implemented in the UK to support the transition to net-zero emissions and strengthen the market for environmentally sustainable investments. The EU is also planning to expand its market over the next five years, with Brussels, for example, intending to issue up to $300 billion in the form of green bonds.
The Green Driving Force
The demand from sustainably conscious investors is very high and the pandemic hasn’t slowed down the surge in this market. Green bonds have transformed into a mainstream activity, as investors continue to explore ways of allocating more revenue towards impact investments. The creation of a transition bond framework with the green bond credential driving high-emitting businesses to raise enough capital to move towards net-zero should only drive more investor appeal. They are also predicted to become even more attractive to issuers as the scope increases to resilience bonds and gradually transition bonds.
Once regarded as a niche area, green bonds have developed into a credible addition to any mainstream credit portfolio. Green bonds have become a regular in credit portfolios, with predictions expecting it to continue to expand even further. The increase of green bonds represents a rise in businesses taking the risks of climate change more seriously.
Measuring the performance of green bonds
Non-performance regarding commitments of green bonds is a factor of consideration, but as the market continues to mature, industry experts believe there will be further protection incorporated into these bonds. The current lack of guarantee that green bonds will deliver positive results does, however, pose a challenge. Aside from the reputational damage of not meeting real-world expectations, there are currently no financial penalties when not these outcomes aren’t reached. Some analysts highlight that green bonds are a necessity, but admit they’re not currently capable of supporting the necessary environmental transition.
Industry experts point to the need for further due diligence to monitor greenwashing, ensuring projects are meeting all of the necessary standards and obligations. It is critical to focus on an investment process that incorporates stewardship. We need to look beyond the obvious green credentials and ensure we have a clear understanding of the businesses involved, their strategies and their intentions. Investors must take a holistic approach and look beyond labels to avoid the possible risk of greenwashing.
Not all green bonds should be considered equal. Investors must be intuitive and assess the overall quality and integrity of the issuer before making a commitment to a business.