How will a $90tn green bond boom shape the wind sector?

The number of companies issuing green bonds to finance – or re-finance – renewable energy projects including wind farms has grown steadily in the last few years.

Ilaria Valtimora
May 7, 2019
How will a $90tn green bond boom shape the wind sector?

The number of companies issuing green bonds to finance – or re-finance – renewable energy projects including wind farms has grown steadily in the last few years. Recent examples include utilities EnBW and Alliant, asset manager Aquila Capital and Indian developer ReNew Power.

Green bonds work like regular bonds, except their proceeds are earmarked for funding projects which would have positive effects on the environment and the climate. For example, countries including Poland, France and Ireland have issued them to support renewable energy projects.

In 2018, $52bn of green bonds were used for the energy sector, out of a total of $168bn. This represents 16.2% of last year’s total global clean energy investment of $332.1bn.

Monica Filkova, head of market intelligence at London-based organisation Climate Bonds Initiative, talked us through how green bonds are issued.

“Issuers need to identify eligible categories. Most now publish a framework, which is externally reviewed. We use this, the bond prospectus and other bond-related information to determine if the assets and projects would comply with our screening methodology”, she said.

One issue here is that issuers self-label bonds as “green”. In fact, the lack of a clear definition for a green bond represents a risk for investors. Filkova told us that the “Green Bond Principles”, endorsed by the International Capital Market Association in 2014, have been key to increasing the level of disclosure and transparency in the market.

“While these are voluntary, the majority of issuers follow them, particularly with respect to the recommendation to get an external review. In 2018, 89% of green bonds (by amount) obtained an external review”, she said.

To provide more transparency to investors, issuers can commission an external review on the green credentials of the use of the proceeds. In addition, the CBI has had a taxonomy in place since 2013, which does define what sectors and types of assets can be considered "green".

However, once the green bond has been issued, it is difficult for investors to verify the use of proceeds, as reporting on this is voluntary. Filkova has said that the CBI periodically checks post-issuance reporting to see what the actual allocations were. A study published by the organisation in March showed that more than two-thirds of issuers (68%) have provided post-issuance use of proceeds reporting so far.

The lack of a clear regulatory framework represents a major hurdle for ongoing growth in green bond issuance. The European Union is creating a Green Bond Standard document, which will build on current market practices, such as the ICMA Green Bond Principles. However, again the new standards will be voluntary, rather than legally binding. Policy intervention would be key to speeding up this process and guaranteeing a favourable risk-return ratio for investors.

However, we can see why the number of green bonds issuers is increasing. When governments or corporates issue green bonds, it is a clear signal that they are taking climate and sustainability goals seriously. Green bonds are an excellent tool for using finance to drive policy.

This is also a good thing for companies seeking financing for their wind and solar projects. As bond buyers increasingly look to demonstrate their climate commitments, green bonds will become a more prominent alternative source of funding for wind and solar companies.

There is a real opportunity here, since the market is projected to grow. A report published by credit agency Moody’s in January says that factors including a growing emphasis on sustainability, an increase in recurring green bond issuers and increased harmonisation of global green bond standards are set to boost the market’s growth.

The CBI report estimates that $90tn of investment in climate projects is needed by 2030 to fight climate change. Of this, $1tn would need to be achieved by the end of 2020, and this figure will need to grow each year of the next decade. With these numbers, there is plenty of room for expansion in the green bond market, providing it gets adequate policy support.

The number of companies issuing green bonds to finance – or re-finance – renewable energy projects including wind farms has grown steadily in the last few years. Recent examples include utilities EnBW and Alliant, asset manager Aquila Capital and Indian developer ReNew Power.

Green bonds work like regular bonds, except their proceeds are earmarked for funding projects which would have positive effects on the environment and the climate. For example, countries including Poland, France and Ireland have issued them to support renewable energy projects.

In 2018, $52bn of green bonds were used for the energy sector, out of a total of $168bn. This represents 16.2% of last year’s total global clean energy investment of $332.1bn.

Monica Filkova, head of market intelligence at London-based organisation Climate Bonds Initiative, talked us through how green bonds are issued.

“Issuers need to identify eligible categories. Most now publish a framework, which is externally reviewed. We use this, the bond prospectus and other bond-related information to determine if the assets and projects would comply with our screening methodology”, she said.

One issue here is that issuers self-label bonds as “green”. In fact, the lack of a clear definition for a green bond represents a risk for investors. Filkova told us that the “Green Bond Principles”, endorsed by the International Capital Market Association in 2014, have been key to increasing the level of disclosure and transparency in the market.

“While these are voluntary, the majority of issuers follow them, particularly with respect to the recommendation to get an external review. In 2018, 89% of green bonds (by amount) obtained an external review”, she said.

To provide more transparency to investors, issuers can commission an external review on the green credentials of the use of the proceeds. In addition, the CBI has had a taxonomy in place since 2013, which does define what sectors and types of assets can be considered "green".

However, once the green bond has been issued, it is difficult for investors to verify the use of proceeds, as reporting on this is voluntary. Filkova has said that the CBI periodically checks post-issuance reporting to see what the actual allocations were. A study published by the organisation in March showed that more than two-thirds of issuers (68%) have provided post-issuance use of proceeds reporting so far.

The lack of a clear regulatory framework represents a major hurdle for ongoing growth in green bond issuance. The European Union is creating a Green Bond Standard document, which will build on current market practices, such as the ICMA Green Bond Principles. However, again the new standards will be voluntary, rather than legally binding. Policy intervention would be key to speeding up this process and guaranteeing a favourable risk-return ratio for investors.

However, we can see why the number of green bonds issuers is increasing. When governments or corporates issue green bonds, it is a clear signal that they are taking climate and sustainability goals seriously. Green bonds are an excellent tool for using finance to drive policy.

This is also a good thing for companies seeking financing for their wind and solar projects. As bond buyers increasingly look to demonstrate their climate commitments, green bonds will become a more prominent alternative source of funding for wind and solar companies.

There is a real opportunity here, since the market is projected to grow. A report published by credit agency Moody’s in January says that factors including a growing emphasis on sustainability, an increase in recurring green bond issuers and increased harmonisation of global green bond standards are set to boost the market’s growth.

The CBI report estimates that $90tn of investment in climate projects is needed by 2030 to fight climate change. Of this, $1tn would need to be achieved by the end of 2020, and this figure will need to grow each year of the next decade. With these numbers, there is plenty of room for expansion in the green bond market, providing it gets adequate policy support.

The number of companies issuing green bonds to finance – or re-finance – renewable energy projects including wind farms has grown steadily in the last few years. Recent examples include utilities EnBW and Alliant, asset manager Aquila Capital and Indian developer ReNew Power.

Green bonds work like regular bonds, except their proceeds are earmarked for funding projects which would have positive effects on the environment and the climate. For example, countries including Poland, France and Ireland have issued them to support renewable energy projects.

In 2018, $52bn of green bonds were used for the energy sector, out of a total of $168bn. This represents 16.2% of last year’s total global clean energy investment of $332.1bn.

Monica Filkova, head of market intelligence at London-based organisation Climate Bonds Initiative, talked us through how green bonds are issued.

“Issuers need to identify eligible categories. Most now publish a framework, which is externally reviewed. We use this, the bond prospectus and other bond-related information to determine if the assets and projects would comply with our screening methodology”, she said.

One issue here is that issuers self-label bonds as “green”. In fact, the lack of a clear definition for a green bond represents a risk for investors. Filkova told us that the “Green Bond Principles”, endorsed by the International Capital Market Association in 2014, have been key to increasing the level of disclosure and transparency in the market.

“While these are voluntary, the majority of issuers follow them, particularly with respect to the recommendation to get an external review. In 2018, 89% of green bonds (by amount) obtained an external review”, she said.

To provide more transparency to investors, issuers can commission an external review on the green credentials of the use of the proceeds. In addition, the CBI has had a taxonomy in place since 2013, which does define what sectors and types of assets can be considered "green".

However, once the green bond has been issued, it is difficult for investors to verify the use of proceeds, as reporting on this is voluntary. Filkova has said that the CBI periodically checks post-issuance reporting to see what the actual allocations were. A study published by the organisation in March showed that more than two-thirds of issuers (68%) have provided post-issuance use of proceeds reporting so far.

The lack of a clear regulatory framework represents a major hurdle for ongoing growth in green bond issuance. The European Union is creating a Green Bond Standard document, which will build on current market practices, such as the ICMA Green Bond Principles. However, again the new standards will be voluntary, rather than legally binding. Policy intervention would be key to speeding up this process and guaranteeing a favourable risk-return ratio for investors.

However, we can see why the number of green bonds issuers is increasing. When governments or corporates issue green bonds, it is a clear signal that they are taking climate and sustainability goals seriously. Green bonds are an excellent tool for using finance to drive policy.

This is also a good thing for companies seeking financing for their wind and solar projects. As bond buyers increasingly look to demonstrate their climate commitments, green bonds will become a more prominent alternative source of funding for wind and solar companies.

There is a real opportunity here, since the market is projected to grow. A report published by credit agency Moody’s in January says that factors including a growing emphasis on sustainability, an increase in recurring green bond issuers and increased harmonisation of global green bond standards are set to boost the market’s growth.

The CBI report estimates that $90tn of investment in climate projects is needed by 2030 to fight climate change. Of this, $1tn would need to be achieved by the end of 2020, and this figure will need to grow each year of the next decade. With these numbers, there is plenty of room for expansion in the green bond market, providing it gets adequate policy support.

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