In the space of barely a decade, green bonds have gone from the periphery of the capital markets to being one of its fastest-growing segments. Green bonds are now used globally as a financing source for a wide range of issuers including green renewable energy companies, sovereigns and supranationals, and brown corporate issuers seeking to transition some or all of their business operations.
Global green bond issuance in 2019 is projected to hit $200 billion (against $167.3 billion in 2018). Green features have also expanded across the asset class from vanilla corporate bonds to project bonds, asset-backed bonds and covered bonds, with 2018 witnessing the first green commercial paper programme. With the Paris Agreement and UN Sustainable Development Goals as the compelling double catalyst, and the UN stating that the world needs $90 trillion in climate investment by 2030 to achieve these, there should be no limit on the rise and use of green bonds.
However, there remain significant challenges and risks to the continued use and growth of the green bond market. These include inadequate green contractual protection for investors, the quality of reporting metrics and transparency, issuer confusion and fatigue, greenwashing, and pricing. We describe these challenges below, and suggest ways in which the green bond market can evolve to safeguard the integrity of the asset class, make the instrument more robust from an investor perspective, and enhance product transparency and discipline for all market participants.