Green bonds are financial products that support environmental initiatives and provide investors a fixed or recurring dividend. Green bonds have developed into a crucial instrument during the last 14 years for addressing the effects of climate change and associated issues. Approximately one million of the eight million animal and plant species on the planet are in danger of becoming extinct, and clean water and food security are also under jeopardy today.
Communities and economies are at danger, and agriculture, food supply, and water sources are all at risk due to climate change. To overcome these issues, substantial funding is required. Green bonds are a method to build this link, which is essential if we are to direct funds towards sustainable development and connect environmental initiatives with financial markets and investors.
Why were green bonds created?
Let me briefly explain the past. An analysis that connected human activity to global warming was released in 2007 by the Intergovernmental Panel on Climate Change, an organization of the United Nations that provides scientific data on climate change and its political and economic effects. A collection of Swedish pension funds attempted to sponsor climate-friendly initiatives in late 2007. The World Bank was the first organization to issue a green bond less than a year later, in November 2008, generating money from fixed-income investors to support financing for qualified climate-focused projects. In response to investors looking for fixed-income investments with a focus on the environment, IFC released its first batch of green bonds in 2010.
Then, in 2013, IFC issued two $1 billion green bonds, which established a record as the biggest green bonds at the time of issuance and helped to stabilize the market. These bonds were the market’s first global benchmark-sized green bonds issued in U.S. dollars.
How are green bonds expanding?
Investor interest is growing as a result of the spectacular rise of green bonds in the capital markets. For a variety of factors, we have seen views toward sustainable investment change. Investors are starting to report on the dangers that climate change poses to their portfolios via platforms like the Task Force on Climate-related Financial Disclosures (TCFD). Investors are becoming more conscious of the hazards that climate change poses to their investments. Stakeholder pressure on the investing community to adopt stricter environmental, social, and governance (ESG) rules is another factor. Some of these alterations to the new environment are addressed through green bonds.
They provide investors a forum to participate in ethical behavior, affecting the bond issuers’ corporate strategy. They provide a way to protect against the dangers associated with climate change while generating returns on investment that are at least comparable to, if not superior. Thus, the rise of green bonds and green financing also indirectly serves to deter high-carbon project development. According to Climate Bonds, the yearly issuance of green bonds might surpass $1 trillion by 2023, with a growth rate of green bonds of 49% in the five years prior to 2021. Other branded bonds, such social bonds, were developed as a result of the success of green bonds.
How does IFC engage in the market for green bonds?
IFC’s entire financing program, which may reach $14 billion annually, supports loan investments in projects and businesses in developing economies, all of which are required to abide by our Sustainability Framework and strict ESG requirements. A portion of this revenue is distributed via the issuance of green bonds and social bonds, which are used to support particular projects from our portfolio of climate-related businesses as well as initiatives to address social problems. Both products have several options to allocate substantial sums of money toward sustainable development. The IFC Green Bond Program combines an alluring investment opportunity with a chance to fund climate-related initiatives in emerging and developing markets.
As a result of exceptional financial performance and a sustained triple-A credit rating, IFC has developed a considerable and distinctive brand awareness in the industry. IFC has consistently had triple-A ratings from Standard & Poor’s and Moody’s since it was initially rated in 1989. In order to keep our cheap finance costs and capacity to access markets throughout the world, we must retain our strong credit rating. We provide green bonds in a number of different currencies, allowing investors to diversify their holdings and enhancing the appeal of local markets to international green bond investors.
By June 30, 2021, IFC had issued 178 green bonds totaling more than $10.5 billion in 20 different currencies, including emerging market currencies like ZAR, PHP, and INR. In addition to our own green bond issuing operations, IFC also invests in developing market customers and offers advisory services, technical help, and risk mitigation tools to them.
Does IFC support the issuance of green bonds by others?
As an anchor investor in green bonds issued by first-time issuers, IFC plays a crucial role in positioning them for subsequent and repeat issuances. For instance, in August 2021, IFC put $100 million into Egypt’s first green bond issued by the private sector to promote the country’s transition to a greener economy and help unlock financing for climate-smart initiatives. The Commercial International Bank of Egypt, which issued the bond, plans to use the profits to expand lending to companies that wish to engage in environmentally friendly projects like green buildings, renewable energy, and energy efficiency—segments that are still developing in Egypt.
IFC helped Raiffeisen Bank S.A., a financial institution, in Romania issue the nation’s first green bond (RBRO). For projects in the five qualifying areas of green buildings, renewable energy, energy efficiency, clean transportation, and sustainable agriculture, IFC funded the equivalent of $20 million in local currency bonds.
The Amundi Planet EGO Fund, the biggest green bond fund for developing markets that invests in green bonds issued by financial institutions, was also introduced by IFC. We provide trainings and tools via the Green Bond Technical Assistance Program (GB-TAP) to help these financial institutions increase their ability to issue green bonds. With HSBC Global Asset Management, the Real Economy Green Investment Opportunity Fund was established to fund issuances from non-financial enterprises, a significant new class of borrowers on the green bond market. Over $2.5 billion has been raised across these funds to invest in financial institutions and the real estate market.
