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Green bonds for a climate-resilient future

Nine years ago, when the green bond market had few takers, the International Finance Corporation set a precedent by engaging the private sector to support climate action in emerging markets. Today, IFC's green bonds issuance in Asia-Pacific has reached US$1 billion, showing that green bonds offer an unrivalled opportunity in climate finance

Engaging the private sector is a top priority to mobilise financing, scale up national climate plans, and support the 2015 Paris climate accord’s goals. In this context, innovative financing tools such as green bonds offer a pathway.

CLIMATE change is no longer an abstraction, but an acute threat to lives, nations, and the world, cutting across all segments of society. The effects are already showing through more intense and frequent natural disasters. Without a strong action plan, it will trigger further dramatic shifts in rain patterns affecting power generation, agriculture, and the security of the global food supply. That's not all. Climate impacts could push an additional 100 million people into poverty by 2030.

To meet this challenge and mitigate climate impact, the public sector, private sector, and civil society need to join hands and invest trillions of dollars across the globe, especially in emerging markets. While this may seem daunting, there is a silver lining - climate change offers a tremendous business opportunity for strategic investors. The International Finance Corporation (IFC) estimates that by 2030, investment opportunities in 21 emerging markets will exceed US$23 trillion.

Engaging the private sector is therefore a top priority to mobilise financing, scale up national climate plans, and support the 2015 Paris climate accord's goals. In this context, innovative financing tools such as green bonds offer a pathway.

They provide an expanse of scope to issuers, helping them diversify their investor base - opening the market to new issuers and transactions in new currencies. In this scenario, institutional investors can play a pivotal role to provide the necessary capital and development institutions can boost the market through cornerstone investments. In addition, issuers, investors, and fund managers can achieve first mover advantage in this fast-growing asset class with adequate risk-return.

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Further, green bond issuances can establish a new asset class. This will potentially attract more financial institutions to the climate finance market in emerging economies, given the high demand for green infrastructure but a limited supply of long-term financing.

The incentives are not always enough. Often, despite the capacity and appetite, private investors lack the proper tools to invest in climate-smart projects. Also, potential issuers and asset managers may initially hesitate to venture into green bonds. This is because they may not understand the qualification of green assets and the requirements of monitoring and reporting.

So, the need of the hour is to educate issuers and explain green assets and their features. It is equally important to partner the private sector through climate-smart investments and innovative financing that signal the market and serve as demonstration cases. Alongside actual investments, two components make a green bond especially attractive - impact reporting and the availability of a third-party opinion on the programme's environmental standards. Finally, adhering to international green bond standards is essential to enable issuers to tap a significantly larger pool of capital from global sources.

We speak from deep experience. In 2010, when the green bond market was still nascent, we were determined to transform this market from niche to mainstream. Today, IFC's green bonds issuance in Asia-Pacific has reached US$1 billion, addressing environmental and social challenges in some of the world's most vulnerable and poorest countries.

Though it took time to develop, the green bond market is now growing across Asia with pioneering transactions in the region. In fact, the number of climate-aligned bonds from Asia jumped from 4.1 per cent (2012) to 42 per cent (2017). Moreover, the Asia-Pacific region achieved the highest regional year-on-year growth rate at 35 per cent, and in 2018, the region had the second largest volume after Europe.

The bulk of the regional growth can be attributed to the increasing weight of financial corporate issuers in the market. This represents more than half of Asia-Pacific issuance volumes in 2018. There was also a steady rise of issuance from non-financial corporates, green loans, government-backed entities, sovereigns, and local government.

Against this backdrop, strategic partnerships between IFIs and institutional investors in the region can help spur additional green bond issuances in Asia. For example, launched last year, the Amundi Planet Emerging Green One is the world's largest targeted green bond fund focused on emerging markets. It is expected to deploy US$2 billion in emerging markets green bonds, creating a market and boosting the capacity of banks to fund climate-smart investments.

Further, pioneering initiatives have been taken to build local capital markets and promote renewable energy in the region. A case in point is the issuance of the first internationally-rated AAA peso-denominated green bond (2018) in the Philippines - worth some US$90 million with a 15-year maturity. Similarly, the Indonesian Rupiah Komodo green bond (2018), raised around US$134 million. This was the first such green Komodo offshore rupiah-denominated issuance by a multilateral development bank for investment in Indonesia's climate projects. In India, YES Bank's green masala bond (2015) of around US$50 million helped the bank diversify its funding sources beyond local banks to support its growing investment in RE infrastructure.

Also, responding to the urgent need for an enabling environment in Asian sovereign green bond markets, Fiji became the first emerging market to issue a sovereign green bond, raising US$50 million. This bond in 2017 helped Fiji create a new way to mobilise finance for development.

As the market accelerates and green bond volumes increase in Asia, standard guidelines are essential to promote integrity and transparency. This will inspire confidence among investors that green bonds are a viable asset class. Further, crowding in mainstream investors will be critical for a robust green bond market as will be a strong regulatory and policy foundation for a green economy.

By 2020, IFC's goal for the green bond's initiative is to catalyse US$13 billion annually for climate-friendly projects worldwide. To make this a reality, IFC continues to support regulators, issuers, and other stakeholders. Together, we need to unlock more investments to deliver global climate solutions.

  • The writer is the regional director for East Asia & the Pacific at the International Finance Corporation, a member of the World Bank Group