Beijing sees green bonds as part of its transition towards a more sustainable economy
Asia needs to invest heavily in infrastructure to sustain growth. But unless we design sustainable projects, we risk running up an environmental bill for future generations.
The cities and the power, sanitation and transport systems we build to support them have the potential to help or harm the communities in which we and our children live. As demonstrated by China’s recent shift of focus from the quantity to the quality of economic growth, emerging Asia is beginning to embrace development that emphasises environmental protection.
One way to promote sustainable growth is to unleash market forces that promote environmentally responsible development. Global issuance of so-called “green bonds”, which are like normal bonds but come with a pledge that the funds raised will be used for environmentally beneficial projects, exceeded USD36 billion last year, according to data assembled by the Climate Bonds Initiative.
That represents a tripling of investment year-on-year, and a twelve-fold increase on the USD3 billion of green bonds that were sold in 2012.
We expect total green bond issuance in 2015 to reach USD100 billion, with significant growth coming from China
We expect total green bond issuance in 2015 to reach USD100 billion, with significant growth coming from China. Beijing has called for the use of bond markets as it begins the transition towards a more sustainable economy.
Globally, green bonds are going mainstream. Early issuers were development institutions such as the World Bank, but last year a third of all green bonds were issued by corporates. Also, issuers have moved into new currencies including offshore renminbi and Australian and Canadian dollars.
The exact definition of a green bond still requires some work. Many of the world’s biggest banks - including HSBC - have signed up to the voluntary Green Bond Principles, which set guidelines on transparency and external assurance evaluation but leave the investor to judge whether a project is environmentally acceptable.
The World Bank, one of the most prolific issuers in the green bond market, focuses on climate change; it says eligible projects must “seek to mitigate climate change or help affected people adapt to it”. Most of the capital raised so far has been used to help the transition to a low-carbon economy.
But some issues remain unclear: the net cost or benefit of nuclear power, for instance, is disputed because it would cut carbon emissions but create nuclear waste.
Issuers are finding no shortage of take-up for their offerings. Investors are keen to diversify into real assets with long-term growth prospects, and green bonds provide an opportunity for pension funds and other investors to invest not just for, but also in, the future.
For Asia, green bonds offer a double opportunity. As well as promoting environmentally responsible development, they can accelerate the creation of deeper and more effective capital markets in the region. Asian investment is currently largely funded by bank loans, but the next wave of growth will require more sources of capital.
For China specifically, the country’s huge pool of savings and limited investment opportunities are perfect for the development of a corporate green bond market. It would help finance China’s growing urbanisation while at the same time ensuring that the public infrastructure built would provide clean air and water, and help the move towards a sustainable low-carbon economy.
Green bonds recognise the need for infrastructure improvements that protect the environment, and thus the long-term well-being of the people who will be the ultimate drivers of growth in Asia and elsewhere.