Investment in sustainable infrastructure is growing, as governments worldwide push companies to support climate targets, with new policies offering incentives to firms that are attempting to decarbonize and go green. The private sector will play a pivotal role in the green transition, with one estimate suggesting that the annual investment needed to achieve a global net-zero carbon economy by 2050 is around $9.4 trillion. New investment opportunities, with policy support from governments around the world, are expected to help the world decarbonize.
What are Green Bonds?
One form of climate-friendly investment that is growing in popularity is green bonds. A green bond, or climate bond, is a fixed-income instrument that can be used to raise money for environmentally-friendly projects. They are typically used to fund the construction of infrastructure that supports a country’s climate goals, such as fabricating a building that runs on renewable electricity, collects and recycles rainwater, and incorporates low-carbon technologies.
The structure, risk, and return on green bonds are much like those of traditional bonds. However, these types of bonds are aimed at promoting energy efficiency, pollution prevention, sustainable agriculture, fishery and forestry, the protection of aquatic and terrestrial ecosystems, clean transportation, clean water, and sustainable water management.
The first green bond was issued by the EU’s European Investment Bank (EIB) in 2007, for projects in renewable energy and energy efficiency that supported the region’s climate change strategy. The green bond market has expanded significantly in recent years, by more than 90% between 2016 and 2022, with a current market value of around $1.6 trillion. As such, we believe global green bond issuance could total more than $500 billion in 2023 as the market continues to grow.
The Evolution of Green Bonds
The EIB and the World Bank have dominated the green bond market over the last decade. By June 2021, the World Bank’s International Finance Corporation (IFC) had issued 178 green bonds in 20 currencies, totaling over $10.5 billion, under its Green Bond Program. The EIB grew the share of green bonds it lends compared to its total issuance from 7% to 27% between 2019 and 2022. This has been supported by EU climate policies that encourage and incentivize green investments.
Having already gained significant momentum in recent years, we expect the growth in green bond investments to continue increasing rapidly over the coming decades, in line with the global transition to green. Climate policies like U.S. President Biden’s Inflation Reduction Act (IRA) and the EU’s European Green Deal is expected to further promote the financing of green bonds by offering companies incentives to cut their greenhouse gas emissions.
Out Outlook Remains Positive
We expect the global bond market to drive the green transition, with investments in green bonds supporting the development of sustainable projects worldwide. While green bonds are not well known in many countries at present, we see significant potential for the market to grow in line with a shift to climate-friendly construction, as investors are encouraged to finance projects with a positive environmental impact.