Authors
Beijia Ma, Sarbjit Nahal, Phil Galdi and Felix Tran
2015 will be the hottest year since records began in 1880. Global average temperatures are entering uncharted territory, with +1°C of warming (vs pre-industrial levels) by the end of 2015. Extreme weather is now recognized as the #2 risk worldwide and affects 10% of the globe (vs. 0.1-0.2% in 1951-80). Without action, the cost of climate change could rise to 1-5% of GDP pa, while global investment portfolios could lose up to 45% of their value to 2020E. We require around US$93tn of investment in low-carbon infrastructure through 2030E, or US$6.2tn annually to achieve global growth expectations. 60% of this will take place in EMs, and countries, such as India and China, up to 85% will need to come from private capital.
Green Bonds, fixed income instruments where proceeds are earmarked for environmental solutions, are key to mobilizing private capital for environmental needs. They provide de-risking, scale and liquidity for climate finance in both developed and emerging economies. Green Bonds and other innovations could enable around US$120bn of incremental annual investment by 2020E.
2015 has been the 4th consecutive record year for Green Bond issuance. We saw US$42.3bn issued through November 27, surpassing US$38bn of issuance in 2014, the year Green Bonds took off. The universe now includes 600+ bonds, from 24 countries, in 23 currencies, spanning both the IG and HY sides of the spectrum. Issuers range from multilateral banks and supranationals, to banks, property companies, car makers, food producers, conglomerates, and to traditional cleantech companies.
Development banks are first movers in the space and continue to drive innovation. However, corporates are now the #1 source of Green Bonds, making up around 45% of 2015 issuance. The authors expect issuance of US$50-60bn of Green Bonds in 2016, implying a CAGR of 10-30%. They believe incremental growth will be driven by 1) increased issuance by corporations in investment grade and high yield; 2) emerging markets issuers, primarily China and India; 3) market innovations including green ABS, project bonds, guarantees, mortgages, and 4) increased standardization in guidelines and impact reporting.