What do a wind farm in Indonesia, a public transit system in Egypt, and plans for clean energy and biodiversity in Colombia have in common?
All are being supported by green or sustainable bonds – an increasingly popular way of reaching investors interested in financing sustainable development and the fight against climate change through their investments. Since 2016,19 emerging market governments from Chile to Uzbekistan have issued green, social, and sustainability bonds to help fund climate action, promote a just transition from fossil fuels, and deliver on their Sustainable Development Goals (SDGs), including goal #7 – clean energy.
India joined this group in early 2023, launching its first green bond to raise about $2 billion for projects that contribute to climate change mitigation, adaptation, environmental protection, resource and biodiversity conservation, and net zero objectives.
“Emerging markets are not just trend followers. They are leading innovation,” said Farah Imrana Hussain, who heads the World Bank Sustainable Finance and ESG (environmental, social and governance) Advisory Services. “India’s green bond will have a huge impact, not only contributing to its nationally determined contribution (NDC) to the Paris Agreement, but also encouraging other countries to raise private capital for environmental priorities.”
Financing Climate Action and the SDGs
Countries began turning to green and sustainable bonds to fund sustainable development after both the Sustainable Development Goals (SDGs) and the Paris Agreement on climate change were adopted in 2015. In 2016, Fiji became the first emerging market to issue a green bond, raising $50 million for climate resilience.
In 2016,Fijibecame the first emerging market to issue a green bond, raising$50 million for climate resilience.
In 2020, Egypt’s $750 million sovereign green bond was the first in the Middle East and North Africa. It also raised funds for investments in clean transportation and sustainable water management. A key project is the Cairo Monorail, which will have the capacity to carry more than a million passengers a day. The system will reduce carbon emissions and road traffic while cutting traffic deaths and injuries and is projected to create up to 4,000 jobs during construction and 450 permanent jobs. The bond also financed investments in sustainable water and wastewater management projects benefiting 16.9 million people.
In 2021, a sustainability bond in Indonesia is supporting the Sidrap Wind Farm in South Sulawesi – one of the largest islands in the Indonesian Archipelago. The project, which runs through 2028, will install 30 wind turbines and send enough renewable energy to the South Sulawesi national grid to power over 70,000 homes. The bond was issued by a non-bank financial institution, PT Indonesia Infrastructure Finance, established by the Government of Indonesia, the World Bank Group, Asian Development Bank and other multilateral institutions. The project is part of a plan to increase the amount of renewable energy in Indonesia’s power grid while reducing coal and diesel.
Colombia, recognized for its efforts to green its economy, issued Latin America’s first green bond in a local currency (Colombian pesos) in 2021. The $511.4 million-equivalent bond was named sovereign green bond of the year by Environmental Finance's Bond Awards 2022 and supports 27 investment projects in sustainable water management; ecosystem services and biodiversity protection; renewable energy; and clean and sustainable transport, including funding for the first line of the Bogotá metro.
Colombia, recognized for its efforts togreen its economy, issued Latin America’s first green bond in a local currency (Colombian pesos) in 2021.
Green bonds are also helping to finance green projects in the Islamic world. A $481.9 construction project in Kuala Lumpur, Malaysia, is funded in part by a green sukuk, an interest-free bond that generates returns to investors without infringing the principles of Shari’ah (Islamic law). The project backs energy-efficient construction of 83 floors of office space and is the first in Malaysia to qualify for triple platinum green building accreditation.
All these transactions were facilitated by technical assistance from the World Bank’s Sustainable Finance and ESG Advisory Services.
Green Bonds Have Raised $2.5 Trillion Globally
As of January 2023, green bonds have raised $2.5 trillion globally to support green and sustainable projects. Emerging market governments have raised $74 billion, representing 2% of total green, social and sustainability bonds issued globally.
The potential for growth is significant. By way of context, green bonds were developed in 2008 in response to growing concern about climate change and sustainability. A group of Swedish pension funds approached the World Bank seeking a liquid, tradeable, fixed income product that would support climate-friendly solutions. That moment paved the way for the first green bond issued by an institution – the World Bank -- and today’s green bond market. The processes used by the World Bank to issue more than 200 green bonds in 25 currencies are now international best practices, known as the Green Bond Principles, and have been adopted by the financial markets.
As of January 2023, green bonds have raised $2.5 trillion globally to support green and sustainable projects.
As the market for these bonds has grown, investors have become more conscious of the overall impact of their investments.
“Investors are not going to buy a green bond that has a negative impact on the community -- or they’re not going to buy a social bond that is going to harm the environment,” said Hussain. “These are really great instruments because they give the issuer the opportunity to make sure they are financing things that have a positive impact on the environment plus in the surrounding communities.”
Lupin Rahman, global head of sovereign markets at Pacific Investment Management Company (PIMCO), explained the advantages of these bonds this way: “Emerging market green bonds are an attractive and growing opportunity for fixed income investors, as issuers are distinguishing their sustainability credentials with enhanced targets and clear frameworks to tackle climate transition and climate risks, as well as broader sustainability goals.”
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Green Bonds and Sustainable Development
Green bonds and sustainable bonds are financial instruments used to raise funds for projects that promote sustainable development and combat climate change. These bonds are designed to attract investors interested in financing projects aligned with environmental, social, and governance (ESG) goals. The funds raised through green bonds are specifically used for projects that have a positive impact on the environment, such as renewable energy, clean transportation, sustainable water management, and biodiversity conservation.
Examples of Green Bond Projects
The article mentions several examples of projects funded through green bonds:
Wind Farm in Indonesia: The Sidrap Wind Farm in South Sulawesi, Indonesia, is supported by a sustainability bond. This project aims to increase the amount of renewable energy in Indonesia's power grid while reducing reliance on coal and diesel. The wind farm consists of 30 turbines and is expected to provide renewable energy to power over 70,000 homes.
Public Transit System in Egypt: Egypt issued a sovereign green bond, raising $750 million, to fund investments in clean transportation and sustainable water management. One of the key projects funded by this bond is the Cairo Monorail, which aims to reduce carbon emissions, road traffic, and traffic-related accidents. The monorail system is projected to create jobs during construction and permanent jobs once operational.
Clean Energy and Biodiversity in Colombia: Colombia issued Latin America's first green bond in its local currency, Colombian pesos. The $511.4 million-equivalent bond supports 27 investment projects, including sustainable water management, ecosystem services, biodiversity protection, renewable energy, and clean and sustainable transport. The bond also provides funding for the first line of the Bogotá metro, contributing to Colombia's efforts to green its economy.
Green Projects in the Islamic World: Green sukuk, which are interest-free bonds compliant with Islamic law, are being used to finance green projects in the Islamic world. For example, a green sukuk is funding a construction project in Kuala Lumpur, Malaysia, which involves the energy-efficient construction of 83 floors of office space.
Growth and Impact of Green Bonds
Green bonds have gained significant traction since their development in 2008. As of January 2023, green bonds have raised $2.5 trillion globally to support green and sustainable projects. Emerging market governments have raised $74 billion through green, social, and sustainability bonds, representing 2% of the total issuance. The market for green bonds continues to grow, and investors are increasingly conscious of the overall impact of their investments, ensuring that the projects financed have positive environmental and social impacts.
World Bank's Role and Best Practices
The World Bank has played a significant role in facilitating the issuance of green bonds and providing technical assistance. The World Bank's Sustainable Finance and ESG Advisory Services have helped countries and institutions navigate the process of issuing green bonds. The World Bank's experience in issuing over 200 green bonds in 25 currencies has led to the development of international best practices known as the Green Bond Principles. These principles guide the issuance of green bonds and have been adopted by financial markets.
In conclusion, green and sustainable bonds have become popular financial instruments for raising funds to support sustainable development and combat climate change. These bonds have been used to finance various projects worldwide, including wind farms, public transit systems, clean energy initiatives, and biodiversity conservation efforts. The market for green bonds continues to grow, and the World Bank has played a significant role in facilitating their issuance and establishing best practices.
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