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For all the money that companies and governments are raising in the green-bond market to fund environmental projects globally, there’s still a long way to go to adequately fund the fight against climate change, according to the Climate Bonds Initiative.
Global sales of green bonds – the largest category of sustainable debt by dollar volume – hit a record $513bn last year, according to data compiled by Bloomberg.
According to the London-based Climate Bonds Initiative, sales could hit new highs of $900bn to $1 trillion by the end this year and as high as $5 trillion by 2025.
Borrowers around the world, nonetheless, will have to raise even more money to tackle climate change, with a recent analysis from McKinsey & Co. estimating $9.2 trillion a year annually through 2050 in investment needed to reach net zero. There’s a need to shift more capital to greener initiatives — in addition to raising new debt — to achieve the trillions of dollars needed, according to Sean Kidney, chief executive officer of the non-profit CBI.
“In the green bond market, a lot of which is financing or rethinking what we do, we need to be getting to $5 trillion a year to be making a reasonable contribution,” Kidney said in a Zoom interview on Tuesday.
Robust pipeline
The CBI’s supply projections are based on the continued acceleration of green issuance, strong investor demand that’s expected to spur more debt linked to environmental, social and governance projects – shorthanded as ESG – as well discussions with the underwriters for the bonds, Kidney said. He expects that more corporations will offer new deals and that the Chinese market will grow by 100 percent.
BNP Paribas is one of the largest underwriters of ESG linked bonds and projects $880bn in global green bond sales in 2018, including $265bn from emerging market countries in 2022.
Morgan Stanley expects to make between $750bn and $950bn in the European Union. That would include EUR238bn equivalent from the EU’s NextGeneration Green Bond programme.
‘Gold dust’
Saudi Arabia, the world’s number one oil exporter, is readying its first-ever green bond in what is seen as a watershed moment. Qatar’s government is also eyeing the market. The US government, meanwhile, hasn’t tapped the market yet but it’s the obvious thing to do because of the price advantage that comes with the bonds, added Kidney.
Green bonds have a higher demand and perform better in secondary markets than equivalent debt without the tag. Green bonds are considered less risky than regular bonds by investors. They are also expected to last longer in a downturn which is why they are called greenium.
“If you are a defensive investor, something that performs better in the secondary market and doesn’t lose its value in a downturn, that’s gold dust and that’s what we’ve got,” said Kidney.
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