The Rise of Green Bonds

"Investing in clean energy makes economic sense—every additional dollar invested can generate three dollars in future fuel savings by 2050." -- International Energy Agency{1}

Two degrees Celsius. It seems like such a minuscule amount. But if the average global surface temperature rises more than that, say scientists, the worst effects of climate change will be upon us and more importantly, irreversible. At the 2008 G8 summit, world leaders agreed to this sobering assessment, but frustratingly have not arrived at a legally binding climate deal.

The world's political leaders know what they need to do, and so does the green investment community. In order to limit global warming to 2 degrees, according to the International Energy Agency (IEA), "investments in low-carbon energy technologies will need to at least double," reaching USD 500 billion annually by 2020, and then double again to USD 1 trillion by 2030.{2}

In their 2012 Energy Technology Perspectives report, the agency specifies:

"Achieving the 2DS{3} would require USD 36 trillion (35%) more in investments from today to 2050 than under a scenario in which controlling carbon emissions is not a priority. That is the equivalent of an extra USD 130 per person every year. However, investing is not the same as spending: by 2025, the fuel savings realised would outweigh the investments; by 2050, the fuel savings amount to more than USD 100 trillion. Even if these potential future savings are discounted at 10%, there would be a USD 5 trillion net saving between now and 2050. If cautious assumptions of how lower demand for fossil fuels can impact prices are applied, the projected fuel savings jump to USD 150 trillion."{4}

That additional USD 36 trillion through 2050 amounts to an average of USD 1 trillion each year over the next 36 years—compared to a business-as-usual (BAU) scenario. These new investments must be made in the areas of carbon capture, power storage, fuel cells and of course, renewable energy generation such as solar, wind and geothermal, all of which will cut greenhouse gas emissions in half by 2050, save an estimated USD 100 trillion in fuel costs between 2010 and 2050 and create jobs. 


Green ETFs in particular, did very well in 2013. In fact, the top 4 ETF performers represent the alternative energy segment: Guggenheim Solar (NYSE:TAN), Market Vectors Solar (NYSE:KWT), First Trust NASDAQ Clean Edge US (NASDAQ:QCLN) and Market Vectors Global Alternative Energy (NYSE:GEX).{5} 

In December, emerging markets also got a boost when the United Nations launched the Green Climate Fund (GCF), the main climate change investment vehicle for the USD 100 billion pledged by developed countries by 2020 to help developing countries "limit or reduce their greenhouse gas emissions and to adapt to the impacts of climate change, taking into account the needs of those developing countries particularly vulnerable to the adverse effects of climate change."{6}{7} 

But while ETFs and emerging markets may be hot topics in the world of green investing, there has also been an increased interest in green bonds. Like their equity-based cousins, green bonds also help fuel investment and capital-raising for projects that have climate and other environmental sustainability benefits, but are generally less volatile to short-term market fluctuations. It's important to note that while the decline in global renewable energy investment accelerated in 2013, falling 12 percent to USD 254 billion, green bonds fared rather well: More than USD 10 billion of green bonds were issued last year, making 2013 the biggest year yet for this emerging climate investment vehicle.

Some of the headline deals include a record-breaking EUR 1.4 billion (USD 1.9 billion) issue from the French energy group Électricité de France (EPA:EDF), a record-breaking USD 1 billion issue from the International Finance Corporation (IFC), a USD 500 million issue from Bank of America Merrill Lynch (BoAML) (NYSE:BAC) and a SEK 500 million (USD 77.7 million) Climate Awareness Bond launched by the European Investment Bank (EIB). IFC's medium-term green bonds have so far raised an impressive USD 2.2 billion. (Evelyn Hartwick, the head of IFC's Socially Responsible Bond Programs, told me that IFC's green bonds are available for individual as well as institutional investors, with most orders "on the scale of USD 1 million and higher.")


Pointing to the Green Bonds Underwriters League Table, Sean Kidney, CEO and founder of the Climate Bond Initiative (which developed the Climate Bonds Standard, a screening tool to help investors and governments assess the integrity of green bonds' environmental claims), said that BoAML, Morgan Stanley (NYSE:MS), JP Morgan (NYSE:JPM), Credit Agricole (EPA:ACA) and Skandinaviska Enskilda Banken (SEB) (STO:SEB-C) are the five banks that have been the "main drivers of growth in the 'labelled' market in 2013," having been involved in "most of the headline deals in 2013."{8} Since 2007, SEB has led the pack by a significant margin, underwriting well over USD 3.5 billion in green bonds, with JPMorgan in second place at approximately USD 2.3 billion.

And just a few days ago, another eye-popping headline: Export Development Canada (EDC), Canada’s export credit agency, issued its first green bond, receiving USD 300 million of orders within 15 minutes of opening the books, reaching USD 500 million in orders before it ended.{10} According to the EDC, the "current portfolio of green assets includes loans made to companies who are active in fields of preservation, protection or remediation of air, water, and/or soil, or the mitigation of climate change."{9} Some of the companies that will receive loans financed by EDC's green bond include the privately-held Argentine wind farm operator IMPSA (Industrias Metalurgicas Pescarmona); the Connecticut-based, JPMorgan-backed Noble Environmental Power; public ground transport firms GoldLinQ Consortium (Australia) and Angel Trains Limited (United Kingdom); and the Canadian recycling firm Cascades Recovery Inc.


As green bonds get more traction, several questions arise. How can investors access information about the environment impacts of potential green bond investments? How can underwriters facilitate transactions by moving the market towards standard disclosures? How can issuers address the key aspects in launching green bonds and ensure that they are credible? "The main issue holding back investment last year," asserts the United Nations Environment Programme (UNEP), "was instability in the policy regime for renewable energy in important developed-economy markets."{11}

In an effort to answer these questions and provide some measure of market stability, a consortium of investment banks have issued the Green Bond Principles (GBP), voluntary guidelines that promote green bond market integrity through transparency and disclosure in the issuance process. The GBP addresses four specific areas: Use of Proceeds, Process for Project Evaluation and Selection, Management of Proceeds and Reporting.

Drafted by a committee of four investment banks—BoAML, Citi, Crédit Agricole and JPMorgan Chase—the Principles recognize several broad categories of potential green bond-funded projects, including renewable energy, energy efficiency (including efficient buildings), sustainable waste management, sustainable land use (including sustainable forestry and agriculture), biodiversity conservation, clean transportation and clean water and/or drinking water. Published on January 13 via the website of the sustainability advocacy non-profit Ceres, the GBP includes an appendix of established "green project" categories that were developed by non-profits, NGOs, multilaterals and other relevant stakeholders.{12}

"We are very pleased to have co-authored and announced the establishment of the Green Bond Principles," said Tanguy Claquin, Managing Director at Crédit Agricole CIB. "This is an important first step towards a more coherent approach to the market of Green and Sustainability Bonds, which will ultimately increase its attractiveness for investors thus encouraging investments into sustainability projects."{13}

“Underwriters are now fully behind growing this market, not just from a technical perspective in structuring deals but also by pushing the concept of green bonds issuance to clients who may not otherwise have considered issuing," said Kidney. "The recently released Green Bonds Principles, signed by 13 global banks, demonstrates their commitment to growing the market."{14}


For investors seeking a less volatile way to support funding for climate initiatives, green bonds are worth a serious look. And with the Green Bond Principles, there is now a barometer by which to measure green bonds' direct value to green projects. How much will such voluntary principles help fuel green bond investments? Time will tell. For now, the GBP is a step in the right direction that should have advocates of low-carbon economies giving a big green thumbs up.

Two days after the GBP was released, Ceres launched their 2014 Investor Summit on Climate Risk, bringing together more than 500 financial leaders from around the globe at the United Nations to develop solutions to address climate change and the economic risks it entails. In framing the three-day discussion, Ceres was concise: "Tackling climate change and transitioning to clean energy are the greatest economic challenges and opportunities of the 21st century.“{15}

As part of the summit, Ceres released a comprehensive 76-page report, "Investing in the Clean Trillion: Closing the Clean Energy Investment Gap," sounding IEA's clarion call for the USD 1 trillion clean energy investment required by 2030. But as business leaders, investors and financial institutions move the market towards green investing, voters must also pressure elected officials and policymakers to move the world towards a global climate deal. Voluntary principles in the private sector are great, but nothing trumps an international legal agreement between nations.

"If we are to keep temperature rise under 2 degrees Centigrade this century—the minimum level needed to avert the worst climate impacts," warned United Nations Secretary General Ban Ki-Moon last year, "the world needs a universal, legally-binding global climate agreement by 2015."{16} Now that's a green principle that we should all sign.



{1} International Energy Agency. Energy Technology Perspectives 2012. April 24, 2012.  Accessed January 27, 2014. 
{2} Ibid.
{3} According to the IEA's Energy Technology Perspectives 2012 report, "The ETP 2012 2°C Scenario (2DS) explores the technology options needed to realise a sustainable future based on greater energy efficiency and a more balanced energy system, featuring renewable energy sources and lower emissions. Its emissions trajectory is consistent with the IEA World Energy Outlook’s 450 scenario through 2035. The 2DS identifies the technology options and policy pathways that ensure an 80% chance of limiting long-term global temperature increase to 2°C—provided that non-energy related CO2 emissions, as well as other greenhouse gases, are also reduced."
{4} Ibid., 1.
{5} Rudy Martin. "4 Profit Waves That Powered 2013: Green Stocks Won, Gold Lost." Uncommon Wisdom. January 3, 2014. Accessed January 27, 2014.
{6} Green Climate Fund. GCF Mandate and Governance. April 19, 2012. Accessed January 27, 2014.
{7} United Nations Framework Convention on Climate Change. Green Climate Fund Board. August 14, 2012. Accessed January 27, 2014.
{8} Sean Kidney. "Green Bond Underwriters League Table released for 2013." Climate Bonds Initiative. January 24, 2014. Accessed January 27, 2014.
{9} Export Development Canada. "Export Development Canada issues first Green Bond." January 23, 2014. Accessed January 27, 2014. 
{10} Sean Kidney. "Export Dev Canada Issues USD300m AAA green bond." Climate Bond Initiative. January 23, 2014. Accessed January 27, 2014.
{11} United Nations Environment Programme. Global Trends in Renewable Energy Investment 2013. June 12, 2013. Accessed January 27, 2014.
{12} Business Wire. "Green Bond Principles Created to Help Issuers and Investors Deploy Capital for Green Projects. Yahoo! Finance. January 13, 2014. Accessed January 27, 2014.
{13} Ibid.
{14} Ibid., 8.
{15} Ceres. 2014 Investor Summit on Climate Risk. January 15, 2014. Accessed January 23, 2014.
{16} Ibid., 10.

image: View of mountains and new solar panels at Bear River Migratory Bird Refuge in Utah. The Refuge continues to pursue sustainable electricity production with the addition of the solar panels near the James V. Hansen Wildlife Education Center. (credit: Jason St. Sauver/United States Fish & Wildlife Service)