Abstract

Green finance is coming of age. It’s being propelled by a variety of forces led by the 2015 Paris Climate Agreement and the need it created to finance $1 trillion per year in investments for renewable energy and other initiatives to limit global warming.

At the same time, long-term investors also are recognizing the threat from greenhouse gases and have begun, albeit cautiously, to diversify portfolios away from climate risk and carbon-based investment. The final push is coming from corporations as they start to contend with the consequences of increasingly extreme and violent weather and flooding. Gradually, many are starting to see that aggressively managing environmental exposure may be more than risk management; it may be good for business.

In the midst of some of these environmental epiphanies, green bonds are finding their place in the market. Recognized as a contributor to overall economic growth, this relatively new instrument is finding a following—most significantly in China among government officials who see the potential that these bonds have to shift growth to the real economy. For the rest of the globe, they represent a path to escape the slow-growth, low interest rate trap of the past decade.

Last year was a turning point for green bonds. After the Paris agreement, China and other economies began to fund major investments in climate-friendly energy and infrastructure. The green bond market doubled to almost $83 billion; China went from virtually nowhere to becoming the No. 1 issuer, with nearly $37 billion worth of green bonds. Growth also accelerated among corporates, with issuance tripling to $28 billion as energy companies, auto makers, and even tech companies tapped the green bond market.

For green finance to fulfill its potential for China and the rest of the world, green bonds need to be fully accepted by mainstream investors. With a concerted push by the world’s largest institutions, including major pension funds, the finance industry is responding with ratings, evaluation tools, and processes to give green finance the reliable metrics and transparency needed for comparison with other investments and greater acceptance. Standard ratings on sustainability can also help investors evaluate issues that are not labeled green but have positive climate impact. Next steps can include extending mandates for disclosure of environmental, social, and governance performance by issuers and by investment managers.