Green Bonds Still Have Long Way to Go to Dent Climate Crisis

(Bloomberg) -- For all the money that companies and governments are raising in the green-bond market to fund environmental projects globally, there's still a long way to go to adequately fund the fight against climate change, according to the Climate Bonds Initiative.

Global sales of green bonds -- the largest category of sustainable debt by dollar volume -- hit a record $513 billion last year, according to data compiled by Bloomberg. Sales could reach fresh highs of between $900 billion and $1 trillion by the end of this year and up to $5 trillion by 2025, the London-based Climate Bonds Initiative estimates.

Borrowers around the world, nonetheless, will have to raise even more money to tackle climate change, with a recent analysis from McKinsey & Co. estimating $9.2 trillion a year annually through 2050 in investment needed to reach net zero. There's a need to shift more capital to greener initiatives -- in addition to raising new debt -- to achieve the trillions of dollars needed, according to Sean Kidney, chief executive officer of the non-profit CBI.

“In the green bond market, a lot of which is financing or rethinking what we do, we need to be getting to $5 trillion a year to be making a reasonable contribution,” Kidney said in a Zoom interview Tuesday.

Robust Pipeline

The CBI's supply projections are based on the continued acceleration of green issuance, strong investor demand that's expected to spur more debt linked to environmental, social and governance projects -- shorthanded as ESG -- as well discussions with the underwriters for the bonds, Kidney said. He expects more corporations to bring new deals and the Chinese market to surge by 100% this year.

BNP Paribas SA, one of the biggest underwriters of ESG-linked bonds, is projecting $880 billion in global green bond sales this year, including $265 billion from emerging markets in 2022. Morgan Stanley is forecasting $750 billion to $950 billion, driven by the European Union. That would include 238 billion euro equivalent from the EU's NextGeneration Green Bond program.

‘Gold Dust'

The next few years could witness a “sea change” in the global green-bond market as more countries commit to net-zero carbon targets, according to new research by Pictet Asset Management and the Institute for International Finance. The report projects annual green bond issuance to top $1.2 trillion by 2025.

Saudi Arabia, the world's number one oil exporter, is readying its first-ever green bond in what is seen as a watershed moment. Qatar's government is also eyeing the market. The U.S. government, meanwhile, hasn't tapped the market yet but it's the obvious thing to do because of the price advantage that comes with the bonds, added Kidney.

Green bonds on average see more demand and perform better in the secondary market than equivalent debt without the tag. Investors also consider green bonds a lower risk compared with regular bonds and the bonds are expected to hold better in a downturn, which justifies a so-called greenium, he added.

“If you are a defensive investor, something that performs better in the secondary market and doesn't lose its value in a downturn, that's gold dust and that's what we've got,” said Kidney.