Green Bonds: The Way Forward To Finance A Cleaner, More Resilient World?

By Sade Ayinde

The path to 2030 is a critical timeline for the world, as we look towards the post-2015 development agenda and the Sustainable Development Goals.  In the coming decade, there will be a high need and projected demand for conservation financing and inclusive models of development that account not only for economic but also environmental sustainability.

As global climate change has increasingly become a priority on the post-2015 development agenda, a need for eco-conscious development has risen. So, what are “Green Bonds”? A bond is a form of debt security, in the form of a legal contract with the purpose of raising capital by borrowing. A green bond is any financial instrument exclusively used for the financing of “Green Projects,” with green projects being defined as a broad range of environmentally oriented projects (energy efficiency, sustainable land use, water management, and clean transportation).

The World Bank has spearheaded the support of green projects globally with over 70 projects initiated in effort to promote low-carbon investments and climate resilient growth in recipient countries, like Brazil, China, Belarus and Morocco. The projects differ from financing geothermal clean energy investment in Indonesia to support energy efficiency improvement for low-carbon projects in Shanghai, China. With the varied outcomes resulting in 1.1 million tons of Co2 avoided per year, and 622,000 Mwh annual energy savings, respectively. The popularity of green bonds is picking up as a new mechanism of financing to adapt to climate change and low-emission projects.

Additionally, the bond market has peaked interest from private investments, creating opportunities for public-private partnerships (PPP) that crosscut different sectors to create deeper social impact. However, there are still various challenges such as the lack of well functioning bond markets in developing countries and risk-averse investors. Since emerging as a new form of environmental financing in 2007, green bonds, compared to more traditional forms of financing and investment methods, are still viewed by investors as a niche product.

Overall, in 2014, the green bond market expanded, accumulating to an almost $37 billion in issuance. The new investments have raised the urgency towards an environment that actively supports and promotes climate resilient development. As green bonds only constitute a small fraction of the global bond market, 2016 will be a critical period for the conservation finance market.