Green bonds have emerged as a powerful financing tool to fund renewable energy and other environmentally friendly projects around the world. Since the establishment of the Green Bond Principles (GBP) in 2014 by a consortium of major investment banks, issuance of labeled green bonds has skyrocketed from $11 billion to over $250 billion in 2019. The continued growth of the green bond market promises to provide the capital needed to transition global energy systems away from fossil fuels and toward renewable sources like solar and wind power.
The Rise of Green Bonds
A green bond is similar to a standard bond, but the proceeds are earmarked exclusively for projects that provide environmental and climate change mitigation benefits. Common examples include renewable energy generation, energy efficiency, clean transportation, and pollution prevention projects. Issuing a green bond allows corporations, banks, municipalities and other entities to tap into growing investor demand for socially responsible investments while raising large sums of low-cost capital for green infrastructure and assets.
The Green Bond Principles introduced standardized criteria for verifying the “greenness” of bonds and providing transparency to investors. They include requirements for:
- detailing precisely what projects bond proceeds will fund
- providing assurance that funded projects deliver real environmental sustainability benefits
- tracking and reporting on allocation of funds and project impacts
By leveraging the credibility of institutions like the International Capital Market Association, the GBPs quickly became the dominant framework used by global markets to evaluate green credentials. Their widespread adoption helped drive remarkable growth in annual issuance of labeled green bonds from less than $11 billion in 2013 to new heights each year, expected to top $350+ billion by the end of 2021.
Financing the Renewable Energy Transition
The principles-based approach and flexibility of the GBP framework has made green bonds a versatile tool for financing renewable energy projects specifically. Wind, solar, small hydroelectric, geothermal and other renewable generation assets are clear candidates for green bond funding under the climate change mitigation criteria.
Major multilateral development banks like the European Investment Bank were the first big issuers of labeled green bonds starting in 2007. Their initial focus was climate financing in emerging economies, including funds for renewable power installations. Corporate issuers in the power sector also began tapping green bonds for financing on- and off-shore wind farms, solar arrays and hydroelectric facilities.
More recently, green project bonds and green securitized bonds have evolved as specialized products to refinance large portfolios of operational renewable energy assets, as well as raise lower-cost financing for construction of new facilities. This alignment of the green bond concept with the sector’s needs helped make renewable energy the top target sector, with over a quarter of green bond volumes directed to climate-friendly power generation as of early 2020.
The Role of Verification
As the green bond market grows into the trillions, the rigor of the verification processes outlined under the Green Bond Principles becomes increasingly crucial. Clear and consistent standards for confirming the environmental sustainability of funded projects builds investor confidence in the credibility of green bonds.
For renewable energy projects, verification often relies on external reviews assessing factors like emissions levels and projected power generation against eligibility criteria. Some issuers also pursue more stringent certifications in tandem like the Climate Bonds Standard for wind and solar bonds. Robust verification procedures upfront ensure transparency, while follow-up reporting allows investors to track the realized impacts and green progress.
Standardizing what constitutes robust verification remains a challenge however, as expectations and practices still vary greatly. The EU’s recently launched Green Bond Standard aims to bolster verification requirements around use and management of proceeds, reporting and assurance. But voluntary principles-based frameworks still dominate most markets. Striking the right balance between flexibility and rigor across jurisdictions will shape confidence in renewable energy investments made via green bonds.
Accelerating Innovation for Green Technology
The renewable energy transition requires major leaps in supporting technologies too, not just wind and solar generation alone. Green bonds that follow the principles offer an innovative financing avenue to accelerate breakthroughs.
Areas like battery storage, smart grid management, and electric mobility are all crucial to optimizing renewable power capacity. Green bonds can drive growth by backing development or commercialization across the spectrum of next-gen climate technologies. Eligibility for projects that support the mainstreaming of renewables-friendly infrastructure, even indirectly, opens possibilities under principles that are often sector-agnostic by design.
Corporate green bond issuers are already tapping funds for cleantech R&D, while project bonds finance construction of integrated storage solutions and EV charging networks. With technology costs still a barrier to systems-level transformation, green bonds can strategically mobilize private investment to unlock the innovations that will supercharge renewable energy penetration. Impact-oriented investors can target bonds financing the complementary green tech that will ultimately maximize sustainability gains.
The intentional flexibility built into principles-based green bond frameworks stimulates creativity on uses of proceeds like this and will accelerate adjacent progress.
Driving Future Growth of Renewables
All signs point to sustained rapid growth in green bonds backing renewable energy projects in the coming decade. Falling costs have already made wind and solar power cost-competitive with fossil fuel sources in the markets. Continued technological improvements and economies of scale will reinforce this trend.
However, realizing the full potential for renewable energy to displace carbon-intensive power on the grid globally requires massive capital investment, in the order of trillions of dollars. As the second largest bond market, growing interest in green bonds is poised to provide a significant share of that capital and accelerate the expansion of renewable energy.
The proliferation of initiatives related to the Green Bond Principle reflects this momentum. The newly launched Green Bond Pledge challenges major corporations to scale up issuance, while the Green Infrastructure Investment Coalition is working to address renewables investment barriers in emerging economies. Proposals to standardize designation of renewable energy project bonds as green by default could also boost volumes.
With these drivers in place, the Climate Bonds Initiative has projected over $1 trillion in annual green bond issuance by 2023. Of this, up to half is forecast to directly back renewable energy assets – guaranteeing greener power worldwide for decades to come thanks to the transformation catalyzed by the Green Bond Principles.
