FEATURE: Power Technology – Global Green Bond Partnership: reinvigorating green energy investment, again

As urgency begins to underpin the need to finance projects that will deliver the Paris Agreement goals, a coalition of international organisations has launched a new Global Green Bond Partnership to accelerate the issuance of green bonds. Heidi Vella speaks to one of the founding members, as well as industry experts, to find out what impact green bonds can have in funding a cleaner, greener future.

In October, the world’s leading scientists warned that in as little as 12 years, if not mitigated, global warming could exceed the optimal temperature of 1.5 degrees Celsius, above which catastrophic droughts, floods and extreme heat for millions is predicted.

To keep warming below this level, which is the main goal of the Paris Agreement, the United Nations has said $1.5tn of investment per year is needed.

The issuance of green bonds is one way to provide some of this finance at low cost. However, presently, green bonds, which are essentially the same as normal financial bonds but designated specifically for ‘green’ projects, only make up around 0.5% of all bonds in the market.

To boost their issuance, particularly in middle-income and emerging nations, a coalition of organisations, including the World Bank, The European Investment Bank (EIB), Amundi and others, formed the Global Green Bond Partnership in September.

The group’s aim is to support efforts of sub-national entities, such as cities, states, countries, corporations and private companies, as well as financial institutions, in issuing green bond financing.

The green bond market

Like regular bonds, green bonds are a form of financing that offers issuers a typically low and fixed interest rate of financing for a pre-defined time – a set of lending terms often considered more attractive than regular banking loans.

“One of the very first green bond purchases the EIB [European Investment Bank] supported was for an Italian water utility that used a mini-bond scheme in Italy to achieve lower cost and longer-term funding than would have been possible from a bank,” says Martin Berg, an investment officer in the climate and environment department of the EIB.

“From that perspective we believe it is important to further build this market,” he added.

The EIB was the first bank to issue a green bond in 2002, which was then called a Climate Awareness Bond (CAB). The CAB has since helped finance 160 renewable energy and energy efficiency projects all over the world.

Back then, the green bond market was slow to develop, says Berg, and only in 2013/2014, and subsequent years, has it seen a significant increase in issuance.

According to the new partnership, the green bond market grew from an annual issuance of $3.4bn in 2012 to $161bn in 2017. However, Moody’s Investor Service has cut its green bond forecast to between $175bn and $200bn for 2018. Initially predicted to be $250bn in size worldwide, Daniel Farchy, also from EIB’s climate and environment department, says the market is still emerging.

He adds: “There is now some evidence of slightly cheaper cost of financing and wider participation and issuance.”

Providing financial and technical assistance

All institutions in the Global Green Bond Partnership are already involved in the bond market. Though it’s very early days for the group – they’ve had one organisational call so far – its long-term aim is to share collective expertise with those who want to issue green bonds but lack the expertise or know-how. This will include providing targeted technical assistance, capacity building, de-risking, investing, and underwriting support.

“A large European bank can probably figure this out fairly easily,” says Farchy. “But if you’re a smaller bank in an emerging market or a medium-sized corporation, it may be more difficult. They may view it as more than they can realistically do, but having someone come in and offer financing or technical assistance can be really helpful.”

As an example, he says, with the partnership’s help, a bank that is a borrower can structure the financing as a green bond, instead of doing a standard loan.

The new group will also be developing a Green Bonds Readiness framework and toolkit for organisations to access.