What Are Climate Bonds?

According to the United Nations’ Intergovernmental Panel on Climate Change estimates, limiting the global temperature increase to 2 degree Celsius, the goal of the Paris Agreement, will require about $3 trillion of investment every year to 2050. Raising such huge investments is a challenge. To tackle it, governments and corporations are increasingly turning to Climate Bonds.

What are these Climate Bonds?

Climate Bonds, or Green Bonds, are fixed-income financial instruments (bonds) linked to climate change solutions, just like any other bonds. The point that differentiates green bonds from other bonds is that they are issued to raise funds for climate change solutions, for example, mitigation or adaptation-related projects. The scope includes projects like greenhouse gas emission reduction projects, or climate change adaptation projects, such as building Nile delta flood defenses or helping the Great Barrier Reef adapt to warming waters.

Green Bonds differ from Sustainability Bonds. Apart from having a positive impact on the environment, the latter also needs to have a positive social outcome. The London-based Climate Bonds Initiative provides the world’s first Certification program for climate bonds, a model on which countries may set up their green bond listing guidelines.

Who Can Issue Climate Bonds?

Just like any other normal bond, governments, multi-national banks, or even corporations may issue Climate Bonds. The institution issuing the bonds guarantees either a fixed or a variable rate of return on repayment over a certain period.

The issuer generally raises the capital on the promise of investing all the funds toward specified climate-related programs or assets – such as renewable energy plants or climate mitigation funding programs. Hence, they are use-of-proceeds bonds.

The first green bond was issued in 2007 by the European Investment Bank, the EU’s lending arm. This was followed a year later by the World Bank. Since then, many governments and corporations have entered the market to finance green projects.

The Growing Demand for Climate Bonds

The countries around the globe are stepping up efforts to reduce their emissions, as many major polluters aiming to go carbon neutral by and around the mid of the century. With growing interest in green bonds, the financial instrument is on the boom. From $2.6 billion in 2012, green bond issuance reached around $270 billion by 2020. In fact, since 2008, the World Bank issued approximately USD 18 billion equivalent in Green Bonds through over 200 bonds in 25 currencies.

Similarly, Global green initiatives such as the Paris Agreement on climate change and the UN Sustainable Development Goals have also helped spur this expansion. In addition to the developing world, the Bonds are also becoming more attractive to the western nations – the EU and the US.

Green Bonds in the Developed World

Europe holds the maximum share in the global Green Bond Market in 2021, while the Asia-Pacific is set to be the fastest-growing regional market. According to World Economic Forum, the EU will become the biggest force in the green bond market as the region plans to issue around $300 billion in total over the next five years to finance sustainable investments. Some EU countries, such as France, Germany and the Netherlands have issued their green bonds.

Australia is increasingly becoming a keen green bond issuer with around $3.2 billion of green debt having been sold this year. This was around a 150 per cent increase from the year earlier. The sentiments are in favour of establishing green bond standards and tax provisions even as the Green Party received a record number of votes in the last election, indicating a shift in the political scenario. In addition, Westpac Banking Corp. also joined the Net Zero Banking Alliance – targeting net-zero emissions by 2050. This is good news for the emergence of the green bonds market in the country which is the biggest exporter of coal and whose energy demands depend heavily on fossil fuels.

Green Bonds in the Developing World

If the world aims to bring down its emissions, emerging economies can’t be left behind. While few are striving to push for emission-free development, many of the emerging economies are in dire need of the push to help realise their non-renewable energy potential.

India

India, for instance, has witnessed its sustainable debt market increase to $7.5 billion, a whopping 585 per cent increase from 2020. The Climate Bonds Initiative (CBI) believes India’s sustainable debt market to be valued at $19.5 billion. Its report, the India Sustainable Debt Market State of the Market 2021, states that 26 out of 29 Indian issuers surveyed have provided at least one green debt instrument since 2015.

India’s first green bond was issued by Yes Bank in 2015 to raise INR 5 billion to fund infrastructure projects in renewable and clean energy. Since then, the market has developed manifolds.

In January 2022, ReNew Energy Global issued $400 million worth of senior secured dollar notes, recognised as gr­een bonds by the Climate Bonds Initia­tive, at a rate of 4.5 per cent. Earlier, in September 2021, Adani Green Energy Limited (AGEL) issued its first ListCo senior green bond as the firm raised $750 million to pay the equity part of the capex for renewable energy projects. Two months prior to that, Adani Electricity Mumbai Limited also raised $300 million through green bonds as part of its $2 billion glo­bal medium-term note programme, the first of its kind in the world by any energy utility player in India. In July 2021, ACME Solar also raised $334 million in debt investment through the issuance of offshore green bonds.

African Countries

Similarly, there is a substantial potential for the development of the green bonds market across the region of Africa. The African nations are hoping to develop their low-carbon oil and gas industries, even as there is a major interest in the development of renewable energy as well. The region is blessed with vast solar and wind resources. But they largely remain underdeveloped. Green Bonds investments will play a substantial role in the development of African countries, largely deprived of investments so far. The African Development Bank (AfDB) has launched a green bond strategy for the same.

Nigeria became the first African nation to receive sovereign green bond funding in 2017 – $29 million. This set in motion investments for other nations of Africa as the total green debt now stands at $3.96 billion. This is merely 0.4 per cent of the global green bond issuance.