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Green Bonds - Fueling Clean Energy Revolution

Green Bonds - Fueling Clean Energy Revolution

The effort to negate the ill effects of global warming requires trillions of dollars of expenditure on renewable energy projects in the near future. In other words, climate change is an infrastructure issue. Therefore, according to projections by the IEA, investments have to be made in low-carbon projects - wind farms, solar panels, nuclear power, and carbon capture among others by 2050.

The moot point is - how would the Oil & Gas sector generate the funds? The answer could be in the form of green bonds. Green bonds are also called climate bonds. They are fixed-income investments that are used to fund environmentally sensitive projects. They are the brainchild of the international development banks - the European Investment Bank released the pioneering climate bond (2007) followed by the World Bank (2008). Currently, they are also being issued by state/regional governments.

The utilization of the bonds earnings differ. The World Bank released green bonds to generate funds for projects - geothermal energy in Indonesia and provision of free compact fluorescent bulbs for the people below the poverty line in Mexico. The state of Massachusetts in the US raised funds to remove waste from a superfund site. Energy major EDF’s green bond funded wind farms in France.

Considering any given scenario, the demand for green bonds is increasing. As per the Climate Bonds Initiative (CBI), a London-based nonprofit that monitors the market, $11 billion green bonds were issued in 2013, $34 billion were issued in 2014. Industry experts forecast nearly $100 billion of green bonds would be sold in 2015.

Increasingly, the demand is from institutional investors - with a stake in safeguarding environmental/social impact of the portfolios. According to Rachel Kyte, a World Bank Vice President and a champion of green bonds, “green bonds have opened a new finance flow that will be essential to confronting climate change”.

However, there are still stumbling blocks in the growth of green bonds:

• Firstly, the stakeholders are yet to arrive at a consensus on the constituents of a green bond - Is railway infrastructure part of a green investment?

• Secondly, it is difficult to ascertain if green bond are funding projects that would have taken place without the bonds.

• Finally, if green bonds don’t secure investment in low-carbon projects, they would have no intrinsic value.

A group of investment bankers in January 2014 launched the Green Bond Principles, “encourage transparency, disclosure, and integrity.” The guidelines provided by them take into consideration a wide array of entitled projects – from renewable energy to effective construction. According to Marilyn Ceci, a Managing Director at JPMorgan Chase, “it’s up to the market to determine how green an issuer’s green bond is”. In the coming years, those issuing green bonds would be required to report on the environmental impact of the projects funded by them – How many units of renewable energy has been created, the percentage of land being afforested.

According to environmentalists, the buzz associated with green bonds is creating awareness on green initiatives.

- Jess Potts
Published on:
May 6, 2015
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