Climate change might be the most complex issue the humans have ever encountered. Apart from the physical destruction worldwide, there is now growing possibility, as Governor Carney warned, for a climate “Minsky” moment – where assets’ values collapse globally.
Facing this unprecedented challenge, the power of government alone is not enough: their capacities to raise spending are limited. A more powerful force would be the investors in the biggest market in the world that worth around $ 100 trillion – the bond market. As the major investment banks like Goldman Sachs pulling out from coal industries, the bond market for fossil fuels is drying up: According to Bloomberg, nearly 80% of funding for coal plants in Asia now comes from the public sector. With the investors looking for new markets to invest in, Green Bonds present an excellent opportunity to direct their money to fight climate change.
Bonds are financial instruments used by firms to borrow money from investors. It compels the firms to pay the holders back, with interest at an agreed time. Working like regular bonds, but Green Bonds are dedicated to raise finance for climate related issues. By purchasing them, the investors essentially help the firm to become more environmentally friendly, and mitigating their transition risks into a less-carbon economy.
Green bonds are already making a difference in China. The funds raised by the largest issuer there, the Industrial Bank, has helped save 30 million tonnes of coal and reduced CO2 emission by 84.39 million tonnes by the end of 2019.
It can certainly have a global impact: The Green Bond market worldwide has grown by 48% in 2019. Less risky than many others, Green Bonds usually achieve higher credit ratings by the three prominent rating agencies – Moody’s, S&P and Fitch. The high credit ratings show that a default is highly unlikely, making the investors more confident in holding them. What is also appealing, would be the stable profit it makes – for example the one Pepsi issued in October 2019 (30-year green bond that worth $10 billion), is estimated to yield about 92 basis points over a Treasury bond – the benchmark for bonds profit comparison. That’s why green bonds are attractive to mainstream investors such as pension funds, who look for low risk and stable returns. With more and more investors entering the market, green bonds give firms easier access to funding for their green projects, hence better adapt to a low-carbon economy. Often having longer terms to maturity, green bonds also help reduce the risk of funding shortage, protecting jobs and mitigating firms’ transition risks.
The market is also working to make them more reliable. Over 140 of the world’s largest banks and asset managers have signed up to the Green Bond Principles – broad guidelines that provide a common definition of “greenness”. And as only external reviewers can declare bonds “green”, green bonds are certainly becoming a trustworthy tool to combat climate change.