Can Green Bonds Catalyze a Clean Energy Transition?

The growth of the green bond market has been highly touted as the financial bridge needed to address climate change and the transition to clean energy at scale. What scale of investment are we talking about here? According to the International Energy Agency, investments in clean energy technologies will need to reach $500 billion annually by 2020, and then double to $1 trillion annually by 2030 in order to limit global warming to two degrees Celsius and avoid the worst effects of climate change. This amounts to nearly $20 trillion of investment in a transition to clean energy cumulatively through 2035, with additional trillions needed to adapt to the climate change to which we have already committed. The UN Global Energy Assessment exceeds this claim, as they have projected that $1.6 trillion is needed annually to catalyze a transition to clean energy. How much can the green bond market be a vehicle that can allocate capital to the clean energy transition at a meaningful scale?

The green bond market has yet to approach any limit on market size

Projections of how large the green bond market could reach vary from bullish to merely positive. The Climate Bonds Initiative has publicly claimed that the green bond market could reach $1 trillion by 2020, representing a compound annual growth rate of over 60%. Of course, the global bond market currently exceeds $100 trillion, so a $1 trillion green bond market may not be overly optimistic. However, it is fair to cast a skeptical eye towards forecasts offered by a market proponent such as the Climate Bond Initiative.
Nevertheless, it is safe to say that green bond market activity charges forward unabated, with new market entrants, improving liquidity, and well received issuances almost across the board. The maturation of the green bond market, expected to approach $100 billion in 2015, has expanded investor demand beyond that which the green bond market can currently provide. How long can this growth in the green bond market be sustained?

Green bonds can lower financing costs for clean energy and energy efficiency

Just as conventional infrastructure projects have historically been financed through bond issuances, large-scale clean energy and energy efficiency projects can likewise benefit from the lower financing costs that can be obtained through the bond market. The technological maturation, the stability of cash flows, and the long investment horizons offered by clean energy and energy efficiency projects are well suited for bond financing.
A key driver in the growth of the green bond market has been favorable monetary policy and the emergence of historically unprecedented negative yield fixed income instruments. This has led investors to seek alternative fixed income investments, which has partially fueled the interest in the green bond market. Some evidence points towards a weakening of these conditions for the bond market, which could undermine the current value proposition that green bonds offer investors in clean energy and energy efficiency.

Green bonds no longer preferred just by niche investors

The signatories to the UN-supported Principles for Responsible Investing collectively manage $45 trillion of assets, which suggests that environmentally conscious investing is becoming mainstream, both out of ethical mandate and the attractive investment options available to investors. As evidenced by the unmet investor demand for green bonds, the question looms as to how quickly the market can provide investors with the green bond investment opportunities they seem to desire.
This shift in the overarching investment philosophy of many prominent financial institutions and fiduciaries holds promise for continuing interest in the green bond market. Even if the monetary conditions that have underpinned the growth of the green bond wane, there is hope that investor preferences have shifted sufficiently to sustain the growth in financing for the clean energy transition.

We can be your guide to the green bond market.

Who would you look to for guidance in navigating the green bond market? We are serving as expert reviewer and co-publishing a business case for green bonds this summer. We can send you a copy when it comes out. Let us know how else we might help. Contact us at info@g-bit.com.