Alongside significant political efforts to speed up the energy transition, green finance has been a key tool in financing growth, as governments, international institutions and lenders alike seek to support the shift towards renewables. The issuance of green bonds – financial instruments that fund environmentally sustainable projects – hit a new record of $596.3bn in 2021, according to the Climate Bonds Initiative (CBI). While this figured ticked down to $443.7bn in 2022, the UK-based organisation reported that cumulative aligned green bond volumes reached $2.6trn in the third quarter of 2023. It attributed much of this to pent-up demand and premium associated with the sustainability-focused financial instrument.
The EU’s $14bn issuance of green bonds in October 2021, the largest of its kind to date, was emblematic of the increased appetite for sustainable finance. The money raised is being distributed among member states for clean energy projects 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.
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 development projects.
Sustainability & Blue Finance
Although green bonds are the most prominent form of climate-focused finance, a number of financial instruments have also supported the shift towards decarbonisation. 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 establish a sustainable platform for post-Covid-19 pandemic economic growth.
Elsewhere, blue bonds have continued to gain traction in recent years, even though they account for a considerably smaller portion of market share. Blue bonds are debt instruments issued to support investment in marine-friendly 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. In September 2021 the Asian Development Bank issued its first-ever blue bond, a $151m, 15-year issue to finance ocean-related projects in Asia and the 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 significant discount in exchange for increasing efforts to protect its marine environment. The development could set a precedent for emerging markets looking to raise funds, particularly given the increasing focus on environmental, social and governance metrics. These tools are especially likely to appeal to island or coastal emerging markets, such as those in Asia Pacific, many of which suffered economically as the pandemic triggered declines in tourism.
Funding the Transition
In addition to funding new, environmentally friendly projects, global financial markets have turned to specific tools designed to ensure a responsible transition towards low-carbon sources of energy. One such instrument is the transition bond. A relatively new class of debt instrument, transition bonds are used to fund a company’s transition towards reduced environmental impact or lower carbon emissions. They are often 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 this is still a nascent segment, there were 14 transition bond issuances worth $5bn in the first nine months of 2021, according to the CBI, accounting for more than half of the $9.9bn issued since their inception in 2018.
The COP26 UN Conference on Climate Change, held in Glasgow in November 2021, provided a boost to other transition-related solutions. Amid other emissions-based pledges, world leaders agreed to reform global carbon markets, as well as to a universal set of rules for carbon trading, key tools in the transition towards decarbonisation. A year later, at COP27 in Sharm El Sheikh, Egypt, the agreement signed by leaders stated that $4trn-6trn would need to be invested annually in renewable energy through 2030 if the target of reaching net-zero emissions by 2050 is to be met.
Fossil Fuel Finance
The increase in demand for sustainable finance has coincided with a broader move away from funding fossil fuel projects. On the sidelines of COP26 – where signatories agreed to phase down the use of coal, among a range of other climate-focused policy commitments – 34 countries and four international finance institutions pledged to end financing for “unabated” fossil fuel projects in overseas countries by the end of 2022. This followed similar large-scale commitments that were made by China, Japan and South Korea, and in May 2021 the Asian Development Bank announced that it would no longer fund coal mining or oil and natural gas production and exploration.
Major financial services companies – including HSBC, Fidelity International and Ethos – also agreed to end the funding of unabated coal at the Glasgow conference. In doing so, they joined global lenders like Citi, which announced in April 2021 that it would stop financing thermal coal mining, with a view to eliminating its credit exposure entirely by 2030. The insurance industry also has the potential to exercise considerable influence in the global shift towards decarbonisation: in July 2021, 20 of the world’s largest insurers and reinsurers – including AXA, Allianz, Aviva, Generali, Munich Re, SCOR, Swiss Re and Zurich – established the Net-Zero Insurance Alliance. Representing more than 11% of world premium volume globally, the alliance, which is a UN-convened body, has the goal of transitioning its members’ underwriting portfolios to net-zero greenhouse gas emissions by 2050.
Combatting Greenwashing
This shift towards green finance has increased calls for updated and more stringent rules on what constitutes sustainable finance. As many countries, institutions and stock exchanges have their own rules, there are concerns that a lack of universal guidelines could lead to greenwashing from governments and private corporations alike, particularly in light of the rapid growth in green finance. To help address the situation and ensure international best practices, in recent years China and the EU have collaborated on developing joint green investment standards, releasing a report in November 2021 that outlined how green investment guidelines could be aligned. While still at an early stage, this type of cooperation is seen as key to facilitating future green finance expansion.
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