Green bonds: Financing the transition to a new economy (BMO)


“A systematic and efficient green finance system can attract private investment and enable China to achieve growth in financial sector and economic and green development.” — Wang Yao, Deputy Secretary General, China Green Finance Committee, October 23, 2015

  • Green bonds have grown rapidly in recent years and emerged as an effective investment tool to finance the transition to a low-carbon economy.
  • The Green Bond Principles have played a critical role in establishing an industry-wide definition for green bonds; BMO Global Asset Management became member of the Green Bond Principles in 2015.
  • A key challenge remains on how to harmonize the measuring and reporting of environmental impact.

Green bonds are a type of fixed income instrument where the proceeds raised are used to finance clearly defined projects that have environmental benefits. Projects financed include renewable energy, water conservation, energy efficiency, green buildings, clean transport and sustainable land use.

- Promotion -

The potential for green bonds to raise billions, and even trillions, in capital to tackle climate change by funding the transition to a low-carbon economy is generating excitement. The International Energy Agency estimates that $53 trillion of energy investments are needed between now and 2035, or nearly $1 trillion of additional investments a year, to put the world on a two-degree path and avoid climate change. Bank loans and government funding alone will not be sufficient in providing all the necessary financing and the expectation is for the capital markets — including green bonds — to fill much of this shortfall.

The green bonds market has grown rapidly in recent years as major issuers and leading institutional investors have both acknowledged opportunities from participating in this space. At BMO Global Asset Management, we consider that green bonds could develop into a critical transition financing instrument and are playing a part in supporting the successful growth of the market. We are starting to see the signs of the market maturing and we now believe that green bonds can become an increasingly attractive asset for investors seeking to incorporate climate change considerations into their investment strategies.

The history of green bonds is short. The first issuance was as recently as 2007 when supranational agencies pioneered green bonds as a way to assist governments in meeting their climate change related policy goals. AAA-investment grade issuances from European Investment Bank and the World Bank started the market. A major turning point was in 2013 when the first sizeable corporate green bonds were issued by Électricité De France and Bank of America. 2014 was a landmark year with $36.6 billion of issuance — more than tripling the year before.

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The coronavirus epidemic has further accelerated the rise of ESG into the investment mainstream. As deficits skyrocket, bond investors have an opportunity to engage with governments on climate change, argues Thomas Dillon, Senior Macro ESG Analyst at Aviva Investors.

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