Corporations, development banks, municipalities and other investment bodies will issue $100 billion in green bonds this year, according to a projection from Moody’s Investors Service.
Green bonds — debt securities meant to raise money for environmental projects — tripled last year from 2013 in issuance to $37 billion, driven in part by a surge in corporate and municipal offerings.
"We expect the global green bonds market to continue growing as more issuers with varying credit profiles emerge, especially as countries like China and India move towards more eco-friendly economies," said Falk Frey, one of the report’s authors.
Multilateral banks and their related investment arms, like the World Bank, the International Finance Corp. (IFC), the European Investment Bank (EIB) and the Development Bank of Japan, led 2014 issuance with 44 percent of new bonds. The pool of sellers is becoming less homogeneous, however, with corporate (33 percent) and municipal (13 percent) issuance making up large portions of 2014’s new bonds.
The EIB issued the first labeled green bond in 2007, and development banks have been the primary market suppliers since. Until 2009, green bonds were denominated in only three currencies: euros, U.S. dollars and Swedish kronor. There were 16 currencies involved last year.
These investments compose a small but expanding portion of global bond markets, the research note published Wednesday found. And new demand from clients in what was once a niche financial pursuit — sustainable, responsible and impact (SRI) investing — is fueling the growth.
Two years ago, professional managers oversaw $13.3 trillion worldwide using SRI strategies, according to Moody’s. SRI-managed assets now make up an estimated $21.4 trillion globally.
Investment with an eye toward sustainability has also grown as the frequency and severity of "catastrophic climate events attributed to global warming" has risen, the report reads.
Huge potential seen in China, India
Moody’s projects green bond markets in the European Union and the United States will grow and become more "sophisticated, while developing countries such as India and China explore these instruments for the first time."
Emerging economies, including India and China — the third-biggest and the biggest carbon-emitting countries, respectively — present "sizeable growth potential" for eco-friendly debt, the note says.
For both nations, each with massive coal reserves and government objectives to balance growing energy demand with smothering pollution, tapping the bond market could prove key to pay for aggressive low-carbon energy efforts.
Yes Bank Ltd., a commercial bank based in Mumbai, sold the first Indian green bond in March, a rupee-denominated note worth about $150 million that will fund renewable energy projects nationwide. Later that month, the Export-Import Bank of India sold a five-year $500 million bond to finance low-emission transportation, wind and solar projects.
Yaduvendra Mathur, the bank’s chairman and managing director, called the sale an "attempt to open an increasing important market segment" to Indian issuers.
"We see more Indian companies following suit to tap the green bond markets," he said.
India is expected to sharply ramp up coal production, though Prime Minister Narendra Modi has set a goal to expand the country’s solar capacity to 100 gigawatts.
China’s bond market, the third-largest in the world in volume behind U.S. and Japanese markets, has yet to see an officially labeled green bond.
The chief economist for the People’s Bank of China, the Chinese central bank, supports growing green bond markets and has suggested creating green banks, which would provide credit for environmentally minded projects (ClimateWire, March 25).
"This presents opportunities for green bonds," the Moody’s report reads, referring to Chinese signals to open up debt markets to foreigners, "which could potentially transform the market if backed by clear regulation as well as standards, verification and reporting systems."
How do you verify money is ‘green’?
The fledgling green bond market, about 0.2 percent of all outstanding bonds, has several potential flaws.
The Green Bond Principles, voluntary signposts first released last year by a group of investment banks, are the seminal rules for the market.
The group overseeing the principles released updated guidelines in March, but uncertainty remains. Complying with the GBP framework is voluntary, and there are no methods to enforce compliance.
Verification and proceed use are two other hurdles: Questions remain about just what projects should be considered green and if, in fact, the capital raised actually goes to renewable energy and clean water projects, instead of borderline projects.
Some issuers have sold bonds they already planned to sell but repackaged them as green bonds in order to drive up demand, the report found.
"The lack of comparability makes investment choices difficult," the report reads. "If investors fail to understand these processes there is a risk they will be unable to distinguish between a bond that promotes genuine environmental benefits and one that does not, leading to skepticism over the investment."
For example, there are questions about whether bonds financing a nuclear power plant are green, since nuclear facilities can lower emissions but also churn out toxic waste.
Global bond markets, valued at roughly $80 trillion, are significantly larger than global equity markets, which were worth $64 trillion in 2013, according to the World Federation of Exchanges.