Greening Financial Markets: Country Experiences, Challenges and Opportunities




The 2008 global financial crisis not only resulted in a turning point for regulation and practices of capital market participants, but also changed the behaviour of financial players. Investors and financial institutions are currently more concerned about allocation of funds. This paper discusses green project bonds as an alternative way of financing projects along with presenting its scope and challenges on a global level. As compared to mainstream bonds, green bonds require the issuer to provide a guarantee of repayment of capital over the tenure of the bond and investors receive either fixed or variable coupon rate of interest. Green bonds can be categorized as asset-backed securities tied to specific green infrastructure projects.


The International Capital Market Association defines a green bond as: “any type of bond instrument where proceeds are exclusively applied to finance or re-finance partially or completely on new and/or existing eligible Green Projects.” Green bonds are debt instruments that are used to finance green projects that deliver environmental benefits. They can be categorised as asset-backed securities tied to specific green infrastructure projects, but have most commonly been issued in the form of “use-of-proceeds” bonds that raise capital to be allocated across a portfolio of green projects. The momentum of continued issuance and market demand has led to growing consensus on what constitutes a green bond and progress has been made on standards and criteria for what constitutes a green project or activity. The narrow definition includes only “labelled” green bonds, including self-labelled and those labelled by independent reviewers. The broader definition also includes
unlabelled “pure play” bonds in sectors that are considered as “green” without controversies. The broadest definition is “climate-aligned bonds” as defined by CBI (Climate Bond Initiative) which includes many unlabelled bonds that are assessed by CBI to be “green”. The GBP (Green Bond Principles) suggests that the term “green bonds” be used only for GBP-aligned bonds while the wider universe should be referred to as climate or environmental themed bonds. For the statistics cited in this report, the definition used for “green bond” is cited as well.

Green bonds are becoming an increasingly popular financial instrument used by a number of development banks, state and municipal entities, as well as private companies to raise capital for green investments that alleviate climate change thereby accelerating the global transformation towards resource-efficient and low-carbon sustainable economies. Since the first issue of a green bond in 2007, its market has grown rapidly in OECD countries. Facing a particularly high exposure to climate and environmental risks as well as limited public funds, emerging market economies in the Americas and Asia are increasingly turning towards green bonds as well, viewing them as a promising instrument to mobilize private capital for the green investments urgently needed.

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