Tdworld 20620 Bonds Green Getty

Europe Leads in Financing Green Energy Projects

Nov. 26, 2019
Green bonds now stand as a key private sector solution helping finance the world’s transition to a low-carbon future.

A new Dutch green bond (officially known as the Sovereign Green Bond) will fund a wide range of low-carbon projects undertaken by governments. This includes three categories: renewables (including onshore solar energy and offshore wind energy); energy efficiency (including residential energy efficiency upgrades); clean transportation initiatives and infrastructure.

The Netherlands Ministry of Finance’s Dutch State Treasury Agency (DSTA) launched this inaugural 20-year green bond on 21 May of this year. Prior to the auction, a total of 32 investors were registered by the DSTA as “green investors,” with a special allocation set aside for them. Bids from those 32 investors and others arrived into the DSTA quickly, and it occurred at the start of the auction. After about seven minutes into the auction, the book (logging the total orders) was already larger than 10 billion euros (US$11.01 billion). In just 18 minutes the order book reached a volume in excess of 15 billion euros (US$16.5 billion). Around 45 minutes later, the spread guidance was narrowed to +18.0 to +19.0 basis points. The order book was closed with a total bid volume of 21.2 billion euros (US$23.3 billion). An amount of almost 6 billion euros (US$6.6 billion) was allocated at a uniform cut-off spread of +18.0 basis points over the reference bond. The allocated amount went to a wide variety of investors. The bond will be reopened to investors several times in the coming years, with the goal of reaching an outstanding amount of approximately 10 billion euros (US$11.01 billion).

This May bond established the government of the Netherlands as the first country with a triple-A rating to issue a green bond (known as a DSL). By issuing the bond, the Dutch aim to support the establishment of a robust green capital market that can provide financing to utilities and others who have bankable projects.

The green-bond market has seen explosive growth in the past decade, presenting an unrivaled opportunity in climate finance. Annual issuance has now risen from zero a few years ago to more than US$155 billion globally, with more growth ahead. But in emerging markets, the green bond era is just beginning.

Combating climate change is now seen to be one of the greatest challenges facing utilities and governments. It will require far more financing than national and local governments alone can provide.

Yet, there is some good news. Climate change is increasingly viewed as a top-tier business opportunity, opening many profitable ways for investors to help protect the planet while returning value to customers.

Almost unknown a decade ago, green bonds now stand as a key private sector solution helping finance the world’s transition to a low-carbon future.

Green bonds generate financing for projects in all of the key categories where utilities are focused: renewable energy, energy efficiency, eco-friendly industries. They tap the vast pools of financing — the trillions of dollars held by institutional investors such as pension funds, insurance companies, and sovereign wealth funds — available in global capital markets. These investors are looking for climate-smart initiatives that make good business sense: opportunities that carry the right risk-reward profiles and meet investor-specific criteria for rating, tenor, yield, and geographic diversity.

But, as green bond volumes inevitably continue to increase, the leading green bond advocates have come to recognize one crucial fact: it will become ever more important to agree to common guidelines that promote integrity and standards governing transparency, responsible investor behavior, and impact evaluation.

Over the course of just one crucial year — 2017 — new green-bond issuance grew by 78%, to more than US$155 billion worldwide. The total in 2018 was more than US$250 billion, according to the Climate Bonds Initiative, an international nonprofit with an important certifying role.

The global market for green bonds began with a climate awareness bond issued by the European Investment Bank in 2007. Since then the World Bank Group has created a notable supply of investable green bonds.

Since 2010, the International Finance Corporation (IFC) has issued more than US$7 billion in green bonds to private investors in its own name — proceeds that have been used in solar power in Mozambique, wind power in Panama, climate-smart public transit in Turkey, and a host of other projects.

At the same time, the IFC has helped client banks in Colombia, the Philippines, Morocco, and other countries to begin to do the same. The most recent: subscribing to a US$100 million, seven-year issue from Argentina’s Banco Galicia to finance projects in energy efficiency, renewable energy, and sustainable construction, among others. These projects are expected to reduce greenhouse emissions in Argentina by about 157,500 metric tons of carbon dioxide (CO2) per annum, which is roughly the equivalent to taking 33,700 cars off the roads.

Sovereign issuers are also becoming important players, beginning with issues by Poland, France, and Belgium. To protect its 900,000 citizens and their livelihoods, in 2017 Fiji worked with the IFC and its parent organization, the World Bank, to become the first developing-country government to launch its own sovereign green bond. With the aim of raising 100 million Fijian dollars (US$50 million), the first two tranches drew unprecedented demand from investors and were heavily oversubscribed. Through the green bond, Fiji created a new way to mobilize finance for development — and a market for private capital seeking climate-smart investment opportunities. Since the Fiji bond, Nigeria has also issued a green bond.

Yet in the developing world, the market is still in its nascent stage. And that certainly represents a major opportunity for European investors, and for others.

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