Climate capital markets. Green bonds can be issued

Topic: FinanceBank
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Last updated: May 23, 2019

Climate change is becoming an increasing threat to development and economic stability. The rising effects of natural disasters are being felt across various region in the world and the most vulnerable are being hit the hardest. Building a resilient global economy is both a challenge and an opportunity for sustainable development.

The global agreement on climate change adopted in Paris could open up an estimated USD23 trillion in investments in emerging markets by 2030. The World Bank and the IFC are well positioned to grow the climate business and engage with the financial sector. They were pioneers in the green bond markets. Green bonds are financial products which proceeds are invested in projects that have positive environmental outcomes. Through their contributions as issuers and standard-setters, they have taken this financial product from niche to mainstream.

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There is still, nevertheless, a lot of potential to grow the green bonds market. This notes highlights some of the actions that could support the growth of this market from USD155 billion in 2017 to USD1 trillion by 2020, with a particular focus on IFC’s role.To meet the growing demand for financing a sustainable economy, the green bond market needs to attract more investors. Deepening local capital markets is key to expand financing for climate investment in emerging markets and the IFC can help the local private sector to meet with global investors. By setting up the largest green-bonds fund dedicated to emerging markets, the IFC is enabling local banks to issue green bonds and is implementing the expansion of the market to new issuers. Another way to boost green financing in emerging markets is by supporting the local capital markets. Green bonds can be issued in local currency, through public or retail formats, which would facilitate the access to financing for private sector companies with sustainable projects by eliminating the currency risk. To attract risk-averse investors in emerging economies, the IFC can also use credit enhancement products by providing first-loss coverage, helping to lower the risk and mobilize financing from the private sector.

Following the same objectives of reducing the risk and cost for investors, the IFC can leverage its AAA credit rating by providing partial credit guarantee to clients willing to access the green bond market.In order to create more markets, the IFC can play a major role in continuously enhancing and updating the framework of the green bond market. Strengthening the Green Bond Principles (GBP) would foster the development of the green bond market by setting international best practices. The GBP would guide the actors of the market through increasing transparency, harmonization of standards to facilitate transactions and the development of a methodology to measure the impact of green finance. The IFC also has a role to play in accompanying first time issuers through the process and management of green bonds by building capacity and promoting knowledge sharing among market participants.Investors are usually keeping a close eye on the secondary performance of their investments. Hence, developing the liquidity of secondary market for green bonds is critical to attract investors as it would reduce the volatility and the market risk of holding the bond.

Also, securitization would offer investors exposure to a diversified pool of assets.As an important actor in the green bond market, the IFC can leverage its expertise and position to further develop the green bond market in emerging countries. By supporting the local capital markets, enhancing the framework of the green bond market, providing credit enhancement, helping develop the secondary market, allowing for the creation of risk diversification products and promoting knowledge sharing, the IFC can help demonstrate the profitability of investment in green bonds and attract more investors to participate to this market.


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