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Green bonds: sustainable solutions to climate change

How much will it cost to fight climate change? By some estimates, an impressive number $ 50 trillion. And while that may seem like an incredibly intimidating number, you should know that there is a solution to this funding gap: green bonds.

But having only been around for a little over a decade, they are still a relatively unknown investment to many.

The above infographic from IFC explores the exciting world of green bonds, which are gaining traction in financial markets.

Green bonds 101

For starters, green bonds aren’t that different from regular bonds. Both are debt securities or fixed income securities that pool investors’ capital for a specified project or purpose. But while Fortune 500 companies issue bonds to generally improve their bottom line, green bonds differ in their commitment to environmentally friendly businesses and sustainability.

Here’s a closer look at the anatomy of bonds, including green bonds:

  • Yield: The fixed coupon rate as a% of the market value of the bond price.
  • Maturity: The predetermined length of the link.
  • Credit rating: The rating that bonds receive to determine their risk level and quality.
  • Bond price: The purchase price of the bond (usually starts in denominations of $ 1,000).
  • Coupon: The deposit is generally paid in semi-annual or quarterly installments.

Unlike bonds that have been around for centuries, dating back to Mesopotamian times, green bonds are still relatively new. And in no time, they took modern finance by storm.

Why green bond offerings are accelerating

It has become virtually impossible to ignore the conversation around climate change. And lately there seems to be a new sense of urgency due to the acceleration of natural disasters happening. Thanks to rising global temperatures, rare and extreme weather events are becoming more frequent than ever. For example, compared to 1850-1900, heat waves almost occur 3x more often today.

Here’s a breakdown of extreme weather events, based on future projections of global temperature averages:

Extreme weather event 1850-1900 1 ℃ (Today) 1.5 ℃ (future projections) 2 ℃ (future projections) 4 ℃ (future projections)
Heat wave 1 2.8 4.1 5.6 9.4
Heavy rain storm 1 1.3 1.5 1.7 2.7
Drought 1 1.7 2.0 2.4 4.1

Unfortunately, as it stands, the rise in global temperature shows no signs of slowing down. That said, these risks can also accelerate the growth of the green bond market, especially since it is a worthwhile investment.

The investment case for green bonds

Since 2018, green bonds have outperformed the average yields of the global bond universe. With interest rates at near-century lows and stock valuations at higher levels, investors may see green bonds as an increasingly attractive avenue.

In some cases, the yield on green bonds increases by 6%, which is 4 percentage points higher than the 2% yield on 10-year Treasuries. In addition, 61% of green bonds are assigned a credit rating of “A” or better. This is an important feature given that the number of high quality credit ratings has capitulated since the 1990s.

Breakdown of the green bond issue

Green bonds represent more than half of the ESG investment universe and are mainly used for transport and energy projects, which respectively represent 35% and 29% of revenues. Here is how their total income is distributed:

Type of green bond project Product use (%)
Energy 35%
Transport 29%
The water 11%
Building 9%
Waste seven%
Earth 5%
Other 4%

In addition, the United States is the largest market for outstanding green bonds, followed by France and China. By currency, however, the euro represents almost 60% of all green bonds.

Growth in green bonds: a timeline

In a short time, green bonds have seen a rapid rise in mainstream finance. The table below gives an overview of some of the main milestones achieved:

2010: IFC issues first green bond through $ 200 million private placement and becomes a leading green bond issuer.
2010: IFC Launches Green Bond Program to Unlock Investments in Private Sector Projects in Emerging Markets.
2013: IFC issues a first billion dollar green bond, followed by a second billion dollar green bond in the same year, helping to catalyze the market.
2014: Total green bond issuance more than tripled to $ 37 billion.
2015: The green bond market reaches $ 100 billion in cumulative issuance.
2017: The green bond market reaches $ 250 billion in cumulative issuance.
2019: In September 2019, IFC crossed the threshold of $ 10 billion in cumulative issuance under its own green bond program.
2020: The green bond market reaches the milestone of $ 1 trillion in cumulative issues.
2021: As of June 30, IFC has issued 178 green bonds in 20 currencies for more than $ 10.5 billion.

In just over a decade, green bonds have experienced a monumental ascent, from a market of several million to 1000 billion dollars in cumulative emission.

The next decade: where are green bonds going?

Although emissions are reaching record levels, this is still only the beginning. Green bonds have a substantial expected growth path, especially considering that the regular bond market is worth $ 128 trillion.

Climate change is often touted as humanity’s greatest challenge, ever. Over the next decade, the green bond market can propel into a multi-billion dollar market and equip society with much-needed tools to deal with a changing global climate.