The challenges posed by global climate change are increasingly pressing and countries are stepping up their fundraising efforts for environmental protection and infrastructure projects. This in turn offers enormous potential for the development of the green bond market.
John Barry, head of capital financing Asia at National Australia Bank, said: “The global economy is facing unprecedented challenges posed by climate change. Consequently, the attractiveness and potential of green bonds is really starting to be recognised.”
Barry highlights the fact that there has been a strong demand for green bonds recently, including several oversubscriptions. However, shortages of supply have become one of the major constraints hindering the development of the green bond market.
According to the International Energy Agency (IEA), a global investment of up to US$53 trillion will be required by 2035 to limit global warming to the two degree target set at COP21. Given the current size of the global bond market is approximately US$90 trillion (as of June 2016), with the labeled green bond universe at $118 billion[1], it is clear that the green bond market boasts immense potential.
Barry added that governmental and multilateral support will be key to promote the development of the green bond market.
While China, India and others have already rolled out their own development plans and guidelines, green finance is also one of the most eagerly anticipated topics to be discussed at the G20 Summit in Hangzhou in early September.
Bottlenecks Caused by Short Supply
As highlighted in recent data published by Environmental Finance, over USD150 billion has been raised by green bonds since the market’s inception in 2007. All proceeds are earmarked to finance new or existing projects benefitting the environment. To date, they have largely been concentrated in the energy sector, followed by the buildings and industry sectors.
John Barry said: “Currently, government entities are the main green bond issuers. Looking at Asia for example, government agencies and state owned entities in countries such as China, India and Korea are active market participants, along with some development banks and international financial institutions. As the green bond market develops, liquidity and market recognition of relevant products will increase. We then expect that more and more corporates will start to issue such products.”
Worldwide, 45 corporates and banks issued green bonds last year. There were approximately 30 in 2013 and less than 10 in 2012[2].
At present, green bonds are mainly denominated in US dollars and euros, representing more than 80% of the issuance. With China’s active promotion of its green bond market, investors will see more of such bonds denominated in renminbi.
Issuers Beware of “Greenwashing” Allegations
In recent years, the green bond market has developed rapidly but products are still not clearly defined. Many investors remain wary of ‘greenwashed’ products, and these concerns have posed risks to green bond issuers.
Barry said: “Greenwashing allegations are one of the major risks that corporate issuers may encounter. To date, there is still no universal market standard to define green bonds. Some so-called green bond issuers lack transparency around the use of proceeds and independent third-party verification.”
He suggested that issuers should define green bonds carefully by referencing existing market standards, for example the Green Bond Principles or the Climate Bond Standards. They must also appreciate the importance of full and frank information disclosure.
Green is the new black
As the clean energy mega-trend accelerates, NAB is building on its established leadership position in clean energy finance. For instance, in 2015 the bank committed to undertake financing activities of AUD18 billion over seven years to help address climate change and support the transition to a low-carbon economy.
Barry stated, “At NAB, we believe the financial sector has an important role to play in assisting the transition to a low carbon economy, through both the energy we purchase directly and through financing. However, this transition needs to take place in a considered and balanced manner, supported by a stable policy environment that can underpin the transition and provide investment certainty over time.”
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[1] Climate Bonds Initiative: Bonds and Climate Change – The State of the Market in 2016
[2] Climate Bonds Initiative: Bonds and Climate Change – The State of the Market in 2016
