GREEN BONDS, LAUNCHED by the World Bank and the European Investment Bank more than a decade ago, blazed a trail for investments that could eventually reach into trillions of dollars in climate-related projects, including renewable energy, energy efficiency, and ecosystem protection and restoration.
Their central, foundational role provides lessons and warnings for the global community as it expands sustainable finance with ever-greater urgency into diverse areas such as complex collateralized loan obligations, loan and local currency guarantees, and subordinated debt.
The initial challenge was far more daunting than developing a bond prototype tied to environmental impact. It was to create a new class of securities that would be credible, replicable, and attractive to institutional investors and environmental organizations alike.
Along those dimensions, the founders of the green bond movement have undoubtedly succeeded. The Climate Bonds Initiative (CBI) stated in its 2018 report that from 2008 to 2018, dozens of institutions and governments issued more than $521 billion in green bonds. In the first half of 2019 alone, new certified green bond issues topped $100 billion globally, and forecasts for the full year are as high as $250 billion, according to Environment + Energy Leader. More than 5,000 green bond issues will have come to market by the end of 2019, estimates CBI. So there is no question that the market for green bonds has proved to be robust, durable, and scalable for a diverse array of market players worldwide.
Kenneth Lay, senior managing director at RockCreek, who as treasurer of the World Bank led the team that developed the first green bonds, says that earmarking bond issue proceeds for specific climate and environment-related projects was a major change “that carried the potential to attract new, impact-oriented investors and boost incentives within the Bank to focus on these key public goods.”
He adds: “That potential is being realized, perhaps not as quickly as we all would like, but the progress has been dramatic in the decade since.”
Another major challenge, which will continue to bedevil all forms of sustainable finance, has been to ensure that the environmental impact of green bond projects is transparent, verifiable, measurable, and compliant with international standards.
From the start, the World Bank developed a rigorous and transparent model for verifying its green bond issues. Several robust and influential frameworks and protocols have emerged to guide investors and issuers. CBI, launched in 2010, published its Climate Bonds Standard and Certification Scheme the same year. The Loan Market Association notes that the International Capital Markets Association (ICMA), founded in 1969 to help guide the emerging Eurobond market, gradually expanded its scope to include a set of green loan principles in 2014. Both voluntary frameworks gain their authority by assembling teams of top scientists and leaders to develop and promote rigorous standards and by winning the endorsement of a critical mass of issuers and investors. Despite competing national standards and the absence of strong compliance mechanisms for bond issuance, ICMA and CBI have tailored most green bond issues to clear metrics and ensured that projects deliver relevant benefits.
Of course, compliance with standards such as those of ICMA and CBI must be independently verified. The internal incentives of asset owners are insufficient. Leading firms such as CICERO and Sustainalytics have conducted external reviews of more than 88 percent of the 5,000 bonds labeled as green by CBI. Such labeling means that at least 95 percent of proceeds go to environmental uses and that underresearched and controversial areas are excluded. These reviews, along with advance vetting of environmentally focused issuers, have ensured that the assets backing bonds meeting ICMA and CBI minimum requirements are indeed green—along with the majority of funds invested in the bonds.