In 2022 significant political efforts propelled the energy transition, leading to a record-breaking year in green finance. Governments, international institutions and lenders actively backed the shift to renewables. In tandem, projections indicated that renewable energy capacity would reach a record 440 GW in 2023. Notably, green bond issuance reached $351bn in the first half of the year. This marks a 22% increase on figures for the same period of 2022 and outstrips the previous record set for the first half of 2021.
The EU’s $14bn green bond issuance in October 2021, the largest to date, reflects a growing interest in sustainable finance. The money raised is being distributed among member states for clean energy projects and developments to help governments achieve carbon neutrality by 2050. While Europe is a leader in the issuance of green bonds, a number of emerging markets have made significant progress on this front.
For example, in April 2021 Saudi tourism project developer The Red Sea Development Company secured a SR14.1bn ($3.8bn) green bond from four Saudi banks, with the funds to go towards building 16 renewable energy-powered hotels across the country. Meanwhile, in a sign of the green potential of Islamic finance, in June 2021 Indonesia raised a $3bn sovereign sukuk (Islamic bond) to fund sustainable projects. In September 2023 Standard & Poor’s Global Ratings predicted that green and sustainability-linked bond issuances would total between $900bn by the end of that year.
Sustainability & Blue Finance
Although green bonds are the most prominent form of climate-focused finance, the development and expansion of a number of other innovative financial instruments have also supported the shift towards decarbonisation. For example, social bonds, which raise money for projects with positive social outcomes, and sustainability bonds – a mix of green and social bonds – have grown dramatically since 2020 on the back of attempts to build a sustainable platform for post-pandemic economic growth.
Elsewhere, blue bonds have gained traction, albeit a smaller portion of market share. These debt instruments are issued to support investment in marinefriendly initiatives and the blue economy. Following the launch of the world’s first sovereign blue bond in 2018, when the Seychelles raised $15m from international investors to help fund the expansion of marine areas and improved governance of the fisheries industry, several institutions have launched their own. For instance, in September 2021 the Asian Development Bank issued its first-ever blue bond, a $151m, 15-year issue that will finance ocean-related projects in Asia Pacific.
Meanwhile, in September 2021 Belize launched a debt-for-nature swap as part of a strategy to restructure its sole sovereign bond. Under the proposal, Belize offered to buy back its debt at a discount in exchange for increasing efforts to protect its marine environment. While it was not the world’s first debt-for-nature swap – Bolivia made the first such deal in 1987 – the development could set a precedent for emerging markets looking to raise funds, given the increasing focus on environmental, social and governance metrics. These tools are likely to appeal to island or coastal emerging markets, many of which suffered economically as Covid-19 pandemic triggered declines in tourism.
Funding the Transition
Global financial markets have turned to tools designed to ensure a responsible transition towards low-carbon sources of energy. One such instrument is the relatively new transition bond, which is used to fund a company’s transition towards reduced environmental impact or lower carbon emissions. They are issued in fields that would not normally qualify for green bonds, such as large, carbon-emitting industries like oil and gas, iron and steel, chemicals, aviation and shipping. Although still a nascent segment, there were 14 transition bond issuances worth a total of $5bn in the first nine months of 2021, according to the Climate Bonds Initiative, accounting for more than half of the $9.9bn issued since their inception in 2018.
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