Green Bonds: A Year in Review

This post is part of an EDF+Business ongoing series on sustainable finance, highlighting market mechanisms and strategies that drive environmental performance by engaging private capital. EDF is actively engaging leaders with the capital and expertise needed to catalyze sector-wide changes—from accelerating investment in energy efficiency and clean energy, to protecting tropical forests, restoring depleted fisheries and saving habitats of endangered species.

Green bonds were a glimmer in the eye for investors when we first reported on them two years ago, but since then these sustainability-oriented debt financing instruments have exploded onto the investment scene. In fact green bonds were held up as a key instrument to keeping warming below the global high-end target of 2°C at COP21.

career-544952_640-300x211In the past year, the market to buy these bonds — which, by design, are linked to an environmental benefit — has significantly grown and matured. Over the course of 2015, the green bond market expanded from $37 billion to $42.4 billion, with much of this growth due to diversification — both in who is issuing them and for what wider types of projects.

While expansion of this market is encouraging, its growth is much slower than most experts had originally anticipated. Early predictions for 2015 had the green bond market booming to $80 billion, or even $100 billion. Instead, numbers seem to have stagnated. What does the future hold for this market, especially in the wake of COP21?

At COP21, green bonds were seen as a promising new source of climate financing for cities and regions to use for low-carbon infrastructure projects to help meet the emission reduction targets set in the Paris Agreement.

Namrita KapurAlready, both India and China issued their first green bonds in 2015, with Yes Bank in India issuing a bond to fund low-carbon power plants and a wind energy firm issuing the first in China. Over the past year, the Agricultural Bank of China has also raised around $1 billion in green bonds that will help finance renewable energy and energy efficiency projects. Furthermore, both countries have separately issued a set of regulatory standards for these bonds, which will help pave the way for further market growth in coming years. Additionally, during COP21 the African Development Bank issued a $500 million, 3-year green bond to show its commitment to growing the green economy on that continent. Building on these efforts, developing nations are now positioning themselves to lead in the growth of green bonds.

Despite lower growth than expected, as the examples above indicate, 2015 was still an exciting year for the green bond market, and we look forward to seeing how the Paris Agreement further fuels the sector.

In future posts, we’ll be delving into the key trends we’ve observed in this market. Those trends include a move towards strengthening standards to prevent greenwashing, debates around whether pureplay green companies should be exempt from burdensome documentation, and the continuing diversification of the green bond marketplace. Watch this space over the next few months as we explore many of these developments, and explain what they mean for the future of these sustainability-oriented debt instruments.