Green bond issuance could reach US$1 trillion annually, says report
China predicted to be largest driver of renewable investment
GREEN bond issuance could reach US$1 trillion annually, according to a Bank of America Merrill Lynch (BAML) report released on December 21.
“In the long run, green bonds help drive the reallocation of financial resources to meet climate goals, rather than funding as pure philanthropy,” the report says. “As such, green bonds have the potential to reach US$1 trillion of annual issuance by 2020 and could have profound impact on steering the trajectory of the world.”
The projection assumes significant growth from emerging areas such as sovereign green bonds, green municipal bonds and green asset-backed securities bonds, all of which could rise by between 10% and 25%. This also assumes China resumes a growth trajectory versus remaining flat in 2017. Issuance in 2018 could reach up to US$160 billion in a bull-case scenario, according to the report.
The size of the green bond market stood at US$282.5 billion as of October 31 2017 – augmented by another record issuance of close to US$106.5 billion year-to-date. There were 135 new issuers that entered the market in 2017 through October, bringing the issuer base to over 550 from 45 countries in 29 currencies.
A wide range of issuers accessed the green bond market in the past 12 months, including national governments, mortgage providers, energy conglomerates, banks, airports and real estate companies.
BAML says green bonds have matured to be an asset class in its own right, providing de-risking, scale and liquidity for climate finance. Green bond developments from ratings agencies, exchanges, benchmark indices and exchange traded funds are helping to harmonizing standards while pushing for greater transparency as the market grows.
In terms of projects that green bonds are funding, renewable energy comprises nearly half of the total proceeds at 47%, followed by green buildings at 22%, transport 9% to 15%, and water and waste 15%. The use of proceeds continues to diversify, where the allocation to transport and water projects has seen the largest percentage increase versus previous years.
China continued to be the largest green bond issuer in the world in 2017, with over US$23 billion in the first 10 months, or about 22% of the total issuance. However, this was lower than the US$30 billion (or 33% of the total) volume in 2016.
BAML notes the Chinese green bonds have been maturing and gaining credibility with third-party verification and ratings, as well as indices growing rapidly. Golden Credit Rating International has developed China’s first green bond credit rating system that quantifies the impact of the bonds. There are several Chinese green bond indices such as China Green Bond, Climate Aligned Bond Index, CUFE-CNI Green Bond Index Series and the Shanghai Stock Exchange Green Bond Index, which help create investor benchmarks to help drive the growth of the market.
China requires between two trillion renminbi and four trillion renminbi (US$315 billion and US$630 billion) in green investments, of which the public sector could only provide for a maximum of 15%. The majority of investment must come from green financing and the private sector, with green bonds as important tools.
BAML says China will be the largest driver of renewable investment – projected at US$100 billion annually – with wind and solar capacity increasing eight-fold to 2040.
Green bonds also remain a major opportunity for India given the long-term need for climate investment. Although the country’s issuance pales in comparison with China, with a volume of just over US$3 billion to date, the market is witnessing increasing innovation and diversification.
At present, India is the world’s third-largest greenhouse gas emitter and needs up to US$200 billion to meet its renewables installation targets alone. The government plans to build 175GW of renewable energy facilities by 2022, consisting of 100GW of solar power, 60GW of wind power, 10GW of biomass and 5GW from small hydro.
India has aimed to cut carbon intensity by 33% to 35% by 2030 (estimates) from the 2005 levels, and aims to grow to 40% the share of power generated from renewables. This would require US$2.5 trillion to achieve, BAML says, much of which will need to come from private capital and assistance from developed markets.
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