New Growth Sprouts For Green Bonds

Morgan Stanley has recently released a report that details the recent growth in the global Green Bond market. Green bonds suddenly have a whole new reason for being. What was in 2013 a $9 billion niche market of bond offerings tied to environmental projects has this year surged to $72 billion of issuance in the 11 months to end-November 2016. Moody’s Investors Service expects it to exceed $80 billion by the end of 2016, almost double the previous record set in 2015. The development of this new global asset class is an opportunity to advance a low carbon future while raising global investment and spurring growth. A key characteristic is that Green Bonds are about funding of specific green assets and projects. In practice, Green Bonds can finance clean energy and water projects, sustainable land-use, low-carbon transport, and energy-efficient buildings.

Green bond issuance has become a global phenomenon. China has become a leading issuer this year and Indian issuance is growing. The Green Bond market growth has many wider benefits. It can be a catalyst for wider national action on green finance and green infrastructure planning, as governments grow confident that there is private sector capital available for green solutions. But to adequately meet the challenges it aims to address, the market needs to grow much bigger, and quickly. Given the urgency of climate change investment needs, incentives will also be needed.

One barrier to the development of Green Bond markets is the lack of clear and widely accepted definitions around what is green. This has also raised concerns around “greenwashing”, where the “green” label is misused to attract investors and leads to the financing of projects of ambiguous environmental value. This can shake confidence in the market, defy the purpose of labeling to reduce market friction and hamper efforts of a low-carbon transition. Green Bond issuance is highly regulated, with rules around disclosure and reporting of use of proceeds. An approved list of eligible assets is made available and mandatory requirements around external reviews may also be included. The “green” label needs to be approved by the regulator before the issuer is allowed to go to market.

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