How can green bonds boost green transformation?

As the number of climate extremes continues to rise, the demand for green bonds is also increasing. The world needs urgent investment in climate change mitigation and adaptation and green bonds are one of the tools that may significantly contribute to reaching this goal. Green bonds could not only reduce the indebtedness of the poorest states but also help them to protect the environment and curb climate change.

According to data published by the International Finance Cooperation (IFC), a sister organization of the World Bank and one of the issuers of green bonds, the world will need about US$50 trillion over the next two decades to curb climate change. While green bonds work in the same way as regular bonds, there is one fundamental difference, i.e., the money taken from investors is used exclusively to fund projects that help to protect the environment and prevent climate change such as renewable energy or other green investments.

The size of the green bond market

The first green bonds were issued in 2007 by the European Investment Bank. In 2016, the green bond market was worth less than US$50 billion whereas in 2020 it had reached about US$300 billion and by 2023, it is expected to hit US$1 trillion.

Fig.1 Annual trillion in green bonds possible by 2023

Source: World Economic Forum

As many as 61% of the issuers of green bonds are private and public entities with a credit rating of A or higher and the largest source of green bonds is the United States followed by France, China, and Germany. The euro is the most popular currency for green bonds and the EU is also trying to become a leading issuer of green bonds having issued around US$14 billion in bonds in October 2021 in the largest deal ever. The money will be channeled to finance a research platform for energy transition in Belgium and wind power plants in Lithuania. The EU is planning to issue up to 250 billion euro in green bonds to help member states with green transformation. At present, resources coming from green bonds have mostly been spent on energy as shown below.

Fig.2. Breaking down green bond issuance

Source: Visual Capitalist

Projects financed thanks to green bonds

Green bonds allow many projects to be carried out that focus on environment protection and the adaptation and mitigation of climate changes. Thanks to this, in a project worth US$13 million, Pakistan has constructed a wind energy plant in Jhimpir resulting in the production of 163,700 MWh of energy a year. Lithuania has just ensured 25 million euro in green bonds from the European Bank for Reconstruction and Development to invest in wind energy projects. Canadian Solar, a Canadian company that constructs solar power plants, has also recently issued 30 million green bonds to support the construction of its solar PV and battery storage portfolio.

See also: Financing green economy