GREEN CAPITALI$M

What Are Climate Bonds?

By Felicity Bradstock - 

Green bonds could give lower-income countries the potential to help develop their renewable energy industries by incentivising new projects. As the world aims to transition away from fossil fuels to greener alternatives, many governments and private companies are looking to the Developing South for their vast renewable resources. Now, the under-talked-about concept of green bonds could be just what many developing economies need to help develop their energy sectors, as investors pump funds into the future of sustainable energy. 

So, what exactly are green bonds? Green, or climate, bonds are funds raised for new and existing projects that support the environment and the economy. They are typically used to encourage more sustainable development, with the aim of mitigating climate change. Green bonds go to funding climate-friendly construction projects, green transportation development, and renewable energy operations, among other things. Green bonds often come with tax incentives, including tax exemption and tax credits, making them more attractive than alternative bonds. 

In 2012, green bond issuance totalled $2.6 billion. However, over the last half a decade, green bonds have grown in popularity. China accounted for $32.9 billion in green bond issuances, or around a third of the global total, by 2016. But the concept is also becoming more attractive in the E.U. and U.S. In 2020, global green bond issuances reached an estimated total of $270 billion. 

And now Australia is becoming a keen green bond issuer. Thanks to the new government’s commitment to cutting carbon emissions and combatting climate change, interest in green bonds is increasing. A record $3.2 billion of green debt has been sold this year, around a 150 percent increase from the same period last year. And there is more momentum now than ever before to establish clear climate bond standards and tax provisions. The Green Party received a record number of votes in the last election, encouraging the new Labour Party Prime Minister Anthony Albanese to focus heavily on climate policy. And as a fourth banking institution, Westpac Banking Corp., joins the Net Zero Banking Alliance – targeting net-zero emissions by 2050, we are likely to see more green bonds issued in Australia over the next few years.  However, Australia still relies heavily on fossil fuels, the world's biggest exporter of coal. In 2020, fossil fuels accounted for 90 percent of the country’s energy consumption, with petroleum covering 33 percent of energy needs, followed by coal at 30 percent, and natural gas at 26 percent. Some are reluctant to support Australia’s green bonds as they believe it contradicts the country’s overarching energy industry aims.  

But as the developed world develops its green bonds industry, greater attention needs to be given to the potential for sustainable development in emerging economies. Green bonds are already being used in India, and some are now proposing a national blue bond standard, which could make climate bonds more accessible. The markets regulator Sebi has suggested the development of blue bond standards – which support oceanic resource mining and sustainable fishing – could support sustainable development in India. It believes that aligning national standards with the Green Bond Principles (GBP), published by the International Capital Market Association (ICMA), would attract greater interest in sustainable debt. With a 7,500-kilometre-long coastline, the introduction of a blue bond scheme could help India protect its waters, while still encouraging development. 

In 2021, India’s sustainable debt market increased to $7.5 billion, a 585 percent increase from 2020. The India Sustainable Debt Market State of the Market 2021 report, by the Climate Bonds Initiative (CBI), shows that 26 out of 29 Indian issuers surveyed have provided at least one green debt instrument since 2015. The CBI believes India’s sustainable debt market to be valued at $19.5 billion.

As well as in India, there is significant potential for the development of the green bonds market across several African countries. As a multitude of African governments look to develop their low-carbon oil and gas industries, greater attention is also shifting to the renewable energy prospective of the region, with the potential to develop fossil fuels and renewable resources hand-in-hand to ensure the longevity of Africa’s energy industry.

Despite having vast solar and wind resources, these industries are largely underdeveloped across the African region. While green bonds have grown in popularity in recent years, little investment has been directed toward Africa. Nigeria achieved the region’s first sovereign green bond funding in 2017, at $29 million. And since, green debt across the region has risen to $3.96 billion, which is still relatively low compared to bonds in other parts of the world, accounting for just 0.4 percent of the global green bond issuance. 

The African Development Bank (AfDB) has launched a green bond strategy aiming for sustainable growth across the continent. It aims to make economic development more sustainable “by helping Africa gradually transition to ‘green growth’ that will protect livelihoods, improve water, energy and food security, promote the sustainable use of natural resources and spur innovation, job creation and economic development”. However, substantially more financial support will be required to support this development. 

As green bonds grow in popularity, significantly more attention should be paid to the potential benefit of expanding the green bond market in the Global South, to support emerging economies in the successful development of sustainable energy industries. Greater market development could help build stronger economies worldwide, encourage the rollout of renewable energy operations, and ensure greater energy security for the future. 

By Felicity Bradstock for Oilprice.com