Green bonds - promoting environmentally responsible development
ASIA NEEDS to invest heavily in infrastructure to sustain growth. But unless we design sustainable projects, we risk running up an environmental bill for future generations.
The cities and the power, sanitation and transport systems we build to support them have the potential to help or harm the communities in which we and our children live. As demonstrated by China’s recent shift of focus from the quantity to the quality of economic growth, emerging Asia is beginning to embrace development that emphasises environmental protection.
One way to promote sustainable growth is to unleash market forces that promote environmentally responsible development. Global issuance of “green bonds”, which are like normal bonds but come with a pledge to use the funds raised for environmentally beneficial projects, exceeded US$36 billion (Bt1.17 trillion) last year, according to the Climate Bonds Initiative.
That represents a tripling of investment on year and a 12-fold increase on the $3 billion of green bonds that were sold in 2012.
We expect total green-bond issuance in 2015 to reach $100 billion, with significant growth coming from China. Beijing has called for the use of bond markets as it begins the transition to a more sustainable economy.
Globally, green bonds are going mainstream. Early issuers were development institutions such as the World Bank, but last year a third of all green bonds was issued by corporations. Also, issuers have moved into new currencies including offshore yuan and Australian and Canadian dollars.
The exact definition of a green bond still requires some work. Many of the world’s biggest banks – including ours – have signed up to the voluntary green-bond principles, which set guidelines on transparency and external assurance evaluation, but leave the investor to judge whether a project is environmentally acceptable.
The World Bank, one of the most prolific green-bond issuers, focuses on climate change. It says eligible projects must “seek to mitigate climate change or help affected people adapt to it”. Most of the capital raised so far has been used to help the transition to a low-carbon economy.
But some issues remain unclear. The net cost or benefit of nuclear power, for instance, is disputed because it would cut carbon emissions but create nuclear waste.
Issuers are finding no shortage of take-up for their offerings. Investors are keen to diversify into real assets with long-term growth prospects, and green bonds provide an opportunity for pension funds and other investors to invest not just for, but also in, the future.
For Asia, green bonds offer a double opportunity. Besides promoting environmentally responsible development, they can accelerate the creation of deeper and more effective capital markets. Asian investment is largely funded by bank loans, but the next wave of growth will require more sources of capital.
China’s huge pool of savings and limited investment opportunities are perfect for the development of a corporate green-bond market. It would help finance China’s growing urbanisation while ensuring that the public infrastructure built would provide clean air and water, and help the move towards a sustainable, low-carbon economy.
Green bonds recognise the need for infrastructure improvements that protect the environment and the long-term wellbeing of the people who will be the ultimate drivers of growth in Asia and elsewhere.
STEPHEN WILLIAMS, head of Asia-Pacific capital financing at HSBC
