Green bonds: New study shows potential in financing Europe's climate and environment goals

Green bonds have enjoyed enormous growth since their first issue in 2007. However, a recent study identifies the lack of green project pipelines and the absence of a green bonds definition and framework as holding back development. Good practices in the EU could help to overcome these limitations.

The study on the potential and functioning of green bond markets identifies key bottlenecks hampering the further development and scaling of the green bond market. It also suggests measures to overcome these barriers so that the market can fulfil its enormous potential. The study was written for the European Commission by adelphi together with its partners COWI and Eunomia Research & Consulting and EnergyPro (read the whole study here). The study came out two days after the Commission launched its "Clean Energy for All Europeans" package which finds that an extra EUR 177 billion is needed annually from 2021 onwards to reach the 2030 climate and energy goals. New innovative funding and investment mechanisms such as green bonds will be essential to achieve this. Green bonds are also on the agenda of the High Level Expert Group on sustainable finance that the Commission established on 28 Oct 2016.

Study unveils challenges and innovative solutions

In 2012 USD 2.6 billion of green bonds were issued globally. By 2015 total issuance had multiplied to USD 41.8 billion. It rose to USD 74.3 billion by end of November 2016. European and Chinese issuers make up largest share of the climate-aligned bonds market globally. In Europe, France and UK are the biggest issuers. In light of the global commitment to shift to a low carbon economy, the green bond market is likely to continue to grow, attracting more diverse issuers and investors. It can be an additional source of long-term green financing next to bank lending and equity financing.

The study identifies the lack of green project pipelines as well as the absence of a green bonds definition and framework as holding back market development. But there are many good practices in EU Member States and beyond to overcome these and other limitations. Examples of public sector measures range from ‘soft measures’ such as raising awareness and capacity building to stricter approaches such as mandatory disclosure of green indicators for bond issuances and investments.

Green bonds are an important financing instrument to deliver on “Clean Energy for all Europeans”

The study also looked into standardization. Many stakeholders stress the importance of standards to ensure that the proceeds from green bonds are used for genuinely green projects with clear and measurable environmental objectives. Market-led initiatives are developing strongly in this area. The study advises supporting a common European Green Bonds Standard that builds on existing market-led initiatives.

Today, green bonds mainly finance projects in renewable energy (45.8% of the issuance globally in 2015), energy efficiency (19.6%), low carbon transport (13.4%), sustainable water (9.3%), and waste & pollution (5.6%). Green bonds are thus one important financing instrument to deliver on the ambitions of the European Union Package “Clean Energy for all Europeans”, published on 30 November 2016.

Background on green bonds

A green bond is differentiated from a regular bond by its label, which shows a commitment to exclusively use the funds raised to finance or re-finance "green" projects, assets or business activities. Green projects are projects that promote environmentally sustainable activities. Green bonds provide an opportunity to mobilize capital for green investments helping investors to make informed investment decisions. Green bonds are a means of attracting new investors and hence mobilizing liquidity for green investments.