Green BondsJune 5, 2012
As fixed-income securities that raise capital for projects with specific environmental benefits, the Green Bonds Policy Brief states, green bonds are an important mechanism for transitioning to a low carbon, resource efficient and resilient economy. The bonds can be used to fund a variety of projects including public transit, renewable energy and energy efficiency.
The policy brief also examines some of ways governments, investors and corporations can overcome the barriers to growth in these markets and provides policy recommendations for governments at all levels. Key recommendations include:
- providing credit enhancement/guarantee/de-risking
- tax preferencing
- bond issuance/marketing - (issuing retail bonds similar to the Canada Savings Bonds)
- Green bonds are broadly defined as fixed-income securities that raise capital for a project with specific environmental benefits. Most green bonds issued to date have been climate bonds, where the proceeds go to climate mitigation or adaptation efforts.
- Corporate, infrastructure and other projects have reduced access to traditional finance given the financial crisis’ effect on the global financial sector, so debt capital markets represent a key pool of assets that must be tapped in order to finance the transition to a low-carbon, resource-efficient and climate resilient economy.
- Institutional investors are a natural market for higher rated green bonds, given their growing concern for managing the risks associated with long-term issues such as climate change, and their existing heavy investment in low-risk bonds. However, given that not all green bonds have been investment grade (at least BBB), the lower rated bonds are not of sufficient interest to large institutional investors due to their limited size and higher risk.
- There is already a sizeable global market for green bonds, though the issuances to date are dwarfed by the mainstream bond market. The biggest immediate issues for the expansion of a green bond market are issuance scale, liquidity and monitoring. A larger number of bigger green bond issuances are needed, especially for renewable energy and other corporate green bonds. A liquid green bond market requires at least USD $200–300 Billion, made up of bonds rated BBB or higher.
- In this early stage of development for green bonds, governments can play a role in growing the market by creating a secure policy environment for environmental technologies, which creates investment opportunities, and providing guarantees, tax incentives and other support.