As funding needs increase for all types of hydroelectric and additional renewable energy infrastructure -- so called green projects -- money from municipalities and federal jurisdictions may likely combine with green bonds from private investors to complete project-finance.
But, do internationally recognized laws exist that define green bonds? Is there concern about what types of investors are moving toward green bonds as a means of environmentally friendly infrastructure investment?
One thing is certain, published reports indicate 2014 investment is estimated at “US$36.6 billion of new green bond issuance from borrowers including international and national development banks, as well as municipal and corporate issues,” according to the World Bank and International Capital Market Association (ICMA). “The market is expected to grow substantially in 2015.”
Investors are pulling the green bonds market, according to information from Climate Bonds Initiative (CBI), and pension funds are among the more active purchasers of green bonds.
Sean Kidney, chief executive officer for CBI, said, “We are very confident we'll see $50 billion of green bonds issued in 2015 and we believe we have a good shot at getting to $100 billion, which is our target.”
Generally speaking, the majority of pensioners are not market experts able to understand bond markets, let alone green bonds.
As a matter of fact, according to Motoko Aizawa, senior fellow at CBI, “Apart from true project bonds, municipal bonds, and bonds issued by international financial institutions, ordinary corporate green bonds usually have virtually no legal basis for the green claim: No environmental, social and governance covenants, maintenance or reporting covenants, no green event of default, and no penalty.”
As of now there is no singular internationally empowered regulatory agency that defines green bonds. However, one internationally recognized organization, ICMA, suggests green bond principles (GBP).
ICMA provides in-depth detail of GBP in its report, “Green Bond Principles, 2015 Voluntary Process Guidelines for Issuing Green Bonds,” which was released in March.
The report defines green bonds as any type of bond instruments where the proceeds will be exclusively applied to finance or re-finance in part or in full new and/or existing eligible green projects that utilize four GBP: Use of Proceeds; Process for Project Evaluation and Selection; Management of Proceeds; and Reporting.
ICMA is generally recognized by market participants and regulators as the organization and trade association representing the international capital market and has also been formally recognized as such in the UK and Switzerland.
According to the World Bank, “The growing risks brought on by climate change are raising development costs for the world’s fast-growing cities and developing countries. Government funds alone will never be enough to build resilience to extreme weather and deal with the threats to energy, water, and food supplies – the private sector and institutional investors must be involved.”
The World Bank and the International Finance Corp. (IFC) have been instrumental to the development of the global green bond market, according to a March 2014 World Bank report.
The first World Bank green bond offering was in 2007 and since then, information the organization published said it has mobilized more than US$5.3 billion through 61 green bond transactions in 17 currencies. IFC has issued $3.4 billion in green bonds, including two $1 billion issuances in 2013.
According to the World Bank, “Green bonds give investors an innovative way of supporting clean energy, mass transit, and other low-carbon projects that can help countries adapt to and mitigate climate change.”