If Finance Rules The World, Green Bonds May Be Planet's Only Hope
The finance mechanism for sustainable infrastructure, energy and industry may be the ultimate key to curbing, and partly reversing, the harms of climate change.
SANTIAGO — Is there a plausible way to reverse global warming ? We must do things very differently, sure. We must devote a wholly different level of investment in time, money and effort. But how exactly? Invest to reverse — that is really the only way. We must create investment mechanisms to change production processes and models that have accompanied us for centuries, and replace them with less energy-intensive and resilient alternatives.
As the United Nations recalled recently, time is running out in the fight against climate change. Countries must multiply by five their efforts to reverse the current trend, which would raise the planet's temperatures 3.2 points above pre-industrial levels and not below the 2 °C set in the Paris Climate Pact. In recent years, so-called " Green bonds " have emerged to reverse this trend, as an investment formula to finance environmental projects. Today they have become the star asset of sustainable financing. The total outstanding balance is $520 billion according to figures from the Climate Bonds Initiative (CBI). And while emissions faltered in the last part of 2018, this year they have resumed briskly. CBI expects record emissions of green bonds this year, perhaps worth up to $250 billion, and total emissions of up to $400 billion in 2020. Green bonds have seen quantitative and qualitative growth, with a constant arrival of new emitters and sectors beside a high degree of innovation.
Last year was a highly positive one for green bonds in the region.
Last June, Chile dived into the market with the first emission in Latin America of sovereign green bonds, which additionally found considerable takers — with demand exceeding offer by 12.8 times. The emission occurred in two stages, first in U.S. dollars, then in euros, for a total $2.4 billion. The bonds have helped improve energy efficiency, helped create cleaner public transportation and more sustainable public buildings, generated renewables and financed more efficient management of natural resources.
The Chilean emission is helping expand the green bonds market in Latin America and the Caribbean, dominated thus far by Brazil and Mexico. Last year was a highly positive one for green bonds in the region, with $4.6 billion's worth of emissions from January to September, or three times the figures for 2018. Their accumulated value was $13.6 billion from eight countries: Mexico, Costa Rica, Colombia , Brazil, Peru, Argentina , Chile and Uruguay. Colombia and Peru hope to emit bonds in 2020. Most bonds have so far been for the energy sector, particularly renewables like solar and wind. The infrastructures sector is expected to take the lead in the future.
UN Climate Change Conference in Madrid, Spain on Dec. 15 — Photo: Lu Yang/Xinhua/ZUMA
Returning to the global market, we may consider certain innovations and discernible trends. One novelty is variable returns for investors or lenders dependent on attaining set sustainable objectives. This was the formula adopted by the Italian energy firm Enel in its emission last September, worth $1.5 billion. The firm is to pay bondholders a higher rate unless it attains its goal of renewables constituting more than 55% of its generation capacities in 2021. We can expect more such clauses in the future.
There is no lacking innovation here.
Another interesting trend is of so-called transition bonds, which seek to finance transition toward decarbonized firms and economies. There is increasing specialization in niche products, like the blue bonds issued by the Seychelles to protect and safeguard the surrounding seas, or forest bonds issued by Mexico City. We also have innovative financial structures and products, like Freddie Mac mortgage titles financing energy and water-efficient construction, or bonds to finance solar projects like El Naranjal and Del Literal in Uruguay, structured by the Inter-American Development Bank (BID Invest ). There is also innovation in placements, as in emissions by the Austrian firm Verdund and more recently by BBVA for insurers Mapfre, executed entirely with blockchain technology.
There is no lacking innovation here, as fighting climate change does not just concern polluting industries. One way or another, we are all involved. From the demand perspective, we need only observe the growing appetite of investors for assets that are proving both profitable and helping build a more sustainable planet. These are all the ingredients we need so that, together, we may all reverse what is still reversible.
*Gema Sacristán is the Director-General for Business at BID Invest.