Can green bonds fuel the low-carbon transition?


Hideki Takada and Rob Youngman, OECD Environment Directorate

We know decarbonisation will require a massive shift of investment away from fossil fuel and into such areas as renewable energy, energy efficiency in buildings and industry, electric vehicles and public transport. A key challenge for policy makers is to understand how to make best use of available policy levers to help accelerate this shift towards low-carbon investment. This includes facilitating the financing of low-carbon investment, including financing through equity investment or – on the debt side – through bank loans and bonds.

Green bonds have gained considerable prominence in recent years as one way to finance the transition to a low-carbon economy. These bonds are an instrument which is used to finance green projects that deliver environmental benefits. The green bond market is still young – it got started only ten years ago – but has experienced rapid growth.  With growing market appetite for such bonds, annual issuance rose from just USD 3 billion in 2011 to USD 95 billion in 2016. Many initial green bond issuances were made by public finance institutions such as the European Investment Bank and the World Bank.

Green bonds have become increasingly popular amongst banks, corporates, and national and local governments to finance green projects. In 2016 Apple issued a USD 1.5 billion green bond backing renewable energy for data centres, energy efficiency and green materials, becoming the first technology company to issue a green bond. Other landmark issuances in 2016 included Poland’s sovereign issuance – making it the first country to issue green bonds to fund projects that address climate change.  Last year also saw the first municipal green bond issuance in Latin America (Mexico City), which raised USD 50 million to pay for energy-efficient lighting, transit upgrades and water infrastructure.  This year, in January, the French government announced the largest sovereign green bond issuance to date – EUR 7 billion – to fund the energy transition.

Why do green bonds trigger such interest?

Bond finance is a natural fit for low-carbon investments such as renewable energy infrastructure, which is characterised by high up-front capital costs and long-dated income streams. They also can offer several benefits to both bond issuers and investors. For example, by issuing green bonds, bond issuers diversify and expand their funding sources by attracting investors who would not normally purchase their bonds. “Over-subscription” of green bonds – i.e. cases where demand exceeds the amount of bonds being issued – can also provide benefits.  For example, excess demand for the French sovereign green bond issuance (EUR 23 billion versus the EUR 7 billion actually issued) allowed the government to raise several times more capital than initially targeted.  Issuers can also gain reputational benefits by highlighting their green activities. At the same time, green bonds can help investors satisfy ESG (environment, social and governance) objectives while also securing risk adjusted returns.

The new OECD report Mobilising Bond Markets for a Low-Carbon Transition, published today, takes a closer look at the importance of green bonds and policy actions to promote further growth of this market. The report also provides a unique quantitative framework for analysing potential bond market evolution and the contribution it can make to financing key low-carbon sectors: renewable energy, energy efficiency and low-emission vehicles. The analysis provides a projection of the four major markets (China, the European Union, Japan and the United States) between 2015 and 2035 under a two degree scenario identified by the International Energy Agency. The results of the analysis suggest that by 2035 green bonds have the potential to scale to USD 4.7-5.6 trillion in outstanding securities and USD 620-720 billion in annual issuance for these key three sectors in the four markets.

While these figures may seem large on an absolute basis, they are small (approximately 4%) relative to the scale of debt securities markets in general – in 2014 USD 19 trillion of bonds were issued in the four markets and USD 97 trillion of outstanding debt securities were held globally. In these deep pools of capital, there is plenty of room for the green bond market to grow.

The OECD report finds that bond markets have the potential to play a significant role in the transition to a low-carbon economy. Nevertheless, as the green bond market evolves, it faces a range of challenges and barriers. Greater transparency may be needed to avoid confusion, inefficiency and the risk of “greenwashing” where bonds are sold as “green bonds” but projects financed by those bonds do not deliver expected green benefits.  Policy makers are faced with the challenge of developing green guidelines and standards and, in particular, defining international rules without imposing overly stringent requirements that could raise issuance costs. Striking a balance between securing market confidence and reducing green transaction costs will be critical and the right set of policies will be crucial.  In addition, while the green bond market can facilitate the financing of projects, it cannot itself create a pipeline of bankable projects.  Governments will need to set ambitious policies to ensure low-carbon investment needs are met. Ultimately, credible and consistent energy and climate policy and attractiveness of low-carbon projects will be the drivers of investment.

For a closer look at the potential contribution of the green bond market to the low-carbon transition and policy options see: Mobilising Bond Markets for a Low-Carbon Transition just released today.

Join us on 28 April at 13:30 CEST to discuss Green Finance and Investment at our next free OECD Green Talks LIVE webinar.  For more information and to register:


Useful links

Mobilising Bond Markets for a Low-Carbon Transition

Green Talks Live: Green finance and investment

Growth, Investment and the Low-Carbon Transition

Centre on Green Finance and Investment

Financing Climate Change Action

Green bonds: Country experiences, barriers and options

COP21 was decades in the making, so how do we make future decades work for climate?

OECD-COP21Shayne MacLachlan, OECD Environment Directorate

Following the hand-wringing, relief-sighing and back-slapping in Paris after nailing the landmark agreement on climate change in December, I took myself off to a farm in rural England to enjoy the new year driving tractors and herding small children (not with tractors). Conversations with friends typically started with remarks about the unseasonably mild weather and often ended on climate change, and unsurprisingly, COP21. As a soundbite buff, I quickly got my lines sorted: “COP21 gave governments a giant shove in the right direction, an emotional rollercoaster ride of hope, expectation and promise”.

Given the years of preparation – and for some OECD colleagues, a life’s work – my hope (which later proved false) was for an enduring, ambitious text, helping us to avoid climate catastrophe. My expectation was far less grand, more closely aligned to the reality of getting 195 countries to adopt an agreement with legal force. The result and attendant promise, which far exceeded my modest expectations, can be described as historically significant and not only provides a mechanism for getting us onto a zero-carbon pathway, but also new approaches to the way we use the planet. So now back at the office and with winter finally arriving with a frosty thud, our attention moves to action on the agreement, or initially at least, a fuller digestion of it and the setting out of a working plan.

  • The reaffirming of the 2°C objective in the Paris Agreement is an accomplishment but presents a huge challenge. The implementation of current Intended Nationally Determined Contributions (INDCs) would deliver an outcome of close to 3°C warming and won’t be sufficient to avoid climate risk, particularly for the most vulnerable. The ambition in 1.5°C is significant but achieving that would require the remaining carbon budget for the 21st century to be reduced by almost half that of the 2°C scenario and we would have to become carbon neutral some 10-20 years earlier. We need a rapid switch to low-carbon energy everywhere, requiring technology, innovation, capacity building and (obviously) finance. To make the transition to a low-carbon, climate-resilient world, the fundamental changes needed will be challenging for even the most developed economies. Developing economies will require support to achieve low-GHG and climate-resilient development pathways. Building on the work in 2015 on aligning policies, the OECD could support policy alignment and cost-effective action to implement countries’ own emissions reduction commitments.
  • The 5-year review cycle of country’s contributions to cutting emissions will inform future NDCs. This is an important element, allowing countries’ commitments to be updated and rolled forward. This “Global Stocktake” of progress sees the first report being undertaken in 2023 and every 5 years thereafter, ahead of setting each successive round of NDCs. This will be a key mechanism for attempting to make bottom-up NDCs consistent with the long-term goal. Common methodologies need to be developed for NDCs, each demonstrating a progression on the previous one. Support is needed for developing country parties for implementation of the review cycle. The OECD/IEA Climate Change Expert Group (CCXG) has undertaken work on mitigation goals, baselines and accounting that could support countries in preparing their NDCs.
  • Undertaking and strengthening adaptation action is in many of the INDCs submitted to date and governments agreed in Paris to provide continued and enhanced international support for adaptation to developing countries. Many countries pushed for the idea of “political parity” which means putting as much effort in terms of political momentum and financial resources into adaptation as to mitigation. Adaptation remains the activity for which a large number of developing countries require assistance, particularly the poorest (LDCs) and most vulnerable (Small Island Developing States – SIDS). Closing the climate finance gap for adaptation compared to mitigation and mobilising new funding sources is essential. The OECD is the ideal forum for the sharing of experiences between the public and private sectors and the work linking policy and economics could help governments move from planning to implementing smart adaptation.
  • The single framework to track progress has built-in flexibility which takes into account the different capacities of each of the parties. Countries will regularly report on emissions and progress toward their NDCs, adaptation actions and on the means of implementation supported including finance, technology and capacity building. However, significant gaps remain in terms of improving the transparency of information on climate finance, technology transfer and capacity building, both on the side of those who provide such support and those who receive it. Following on from the work on Climate Change Mitigation: Policies and Progress, the OECD’s data and policy analysis can support transparency. Additionally, the OECD engages directly with parties on technical policy issues within the UNFCCC process. This is a key component of the work of the joint IEA-OECD Climate Change Expert Group, which will be meeting in March 2016 to discuss key aspects of transparency of support and adaptation action.
  • The COP will set a new finance goal before 2025, with the existing commitment of USD 100 billion per year acting as a floor until then. The OECD-CPI report on climate finance provided an update on progress by developed countries in meeting their finance commitments ahead of COP21 and informed the debate within the negotiations themselves. Climate finance issues will now be addressed by the UNFCCC’s Subsidiary Body on Scientific and Technological Advice (SBSTA) with recommendations to COP24 in 2018. The OECD development statistics system

Instead of a climate march in Paris, thousands of silent but symbolic shoes found their way to Place de la République during COP21. There’s an old Italian proverb that says “between saying and doing, many a pair of shoes is worn out”. Indeed, we are in that period of reflecting on what’s been said and pursuing actions that make a difference. Paris matters tremendously – we got an agreement with legal force after all – but getting our actions to work to reduce the risks of climate change in future decades will probably matter even more.

Useful links

Post-COP21, what’s next? Conference with Richard Baron of the OECD Round Table on Sustainable Development, Tuesday 26 January 2016, 19:30 at The American Library in Paris

COP21 on the Insights blog

COP21 agreement: A decisive turning point


Angel Gurría, OECD Secretary-General

The Paris Agreement at COP21 marks a decisive turning point in our response to climate change. I strongly applaud this historic commitment and the robustness of a deal that includes an ambitious target for limiting the global temperature rise, a five-year review cycle, clear rules on transparency, a global goal for resilience and reducing vulnerability and a framework for supporting developing countries.

Countries’ nationally determined contributions to emissions reductions post-2020 lay a pathway to a low-carbon, climate-resilient future that could safeguard the future health and prosperity of billions of people. But this is just the beginning of the road. The agreement is a framework for action, and governments now need to act.

Each country must spell out a credible roadmap for action consistent with the goal of holding the average temperature increase to well below 2 °C above pre-industrial levels and pursuing efforts to limit the increase to 1.5 °C. The timescale and sequencing of actions will vary across countries, reflecting their different circumstances, but this goal requires the full engagement of all major economies. Sustainable development and climate goals must be mutually reinforcing and advanced economies must fulfil their promises to support developing countries in addressing climate change with finance, technology and capacity building.

Strong and coherent domestic policy is essential to drive the changes we need, including putting a meaningful price on carbon, eliminating fossil fuel subsidies, spurring investment in green technologies and innovation and tackling the policy misalignments that impede climate action. Effective policies will unleash the transformational capacities and capital of the private sector and will allow investors, and other actors such as cities and regions, to plan with confidence. The low carbon transition requires little more money than the trillions already being invested today. But it requires a massive shift towards low-carbon, energy efficient and climate-resilient systems. We welcome the recognition that Article 2 of the Agreement gives to making finance flows consistent with this goal.

A key role of the UNFCCC will be to monitor and review country performance against commitments, not only in emissions reductions but also in climate finance. The Agreement provides mechanisms for regular reporting, review and updating to check whether national targets and pathways are consistent with our collective climate goals. International organisations like the OECD can provide data and analysis to support transparency and accountability in many of these areas and we stand ready to support all countries in this process. The OECD will continue to work with governments to help remove the barriers to climate action that are built into existing policies from the fossil fuel age in everything from investment, taxation, electricity land use and transport.

This is a watershed day for the world and especially heartening for the OECD as one of the first international bodies to call for zero net emissions in the second half of the century, for a price on carbon and for greater efforts to channel finance into the low carbon economy.

I would personally like to congratulate the French President François Hollande, the COP President Minister Laurent Fabius, French Environment and Energy Minister Ségolène Royal, Ambassador Laurence Tubiana and their team on helping steer us to a successful outcome. The Paris Agreement builds on the considerable efforts by previous COP Presidencies, notably the Peruvians who laid the groundwork for this agreement in Lima a year ago and made subtle, inclusive and tireless efforts to support an agreement over the subsequent year. We owe a great debt of thanks to Christiana Figueres, the Executive Secretary of the UNFCCC, and her team for their exceptional commitment, energy and leadership over the past many years.

Useful links

A clearer picture of climate-related development finance

Climate finance
Climate-related development  finance totals $37 bn

Today’s post is by Stephanie Ockenden of the OECD Development Co-operation Directorate

The world will need more and better targeted financing to meet the challenges of global development post-2015. This means taking important decisions not only on what qualifies as official development assistance (ODA), but also on how those flows can be most strategically used. The Ministers of the OECD Development Assistance Committee (DAC) are in discussions today and tomorrow at the DAC High Level Meeting to redefine the terms for determining what qualifies as ODA.

But these terms are just part of that package of what the DAC is putting together to contribute to successful outcomes at the Third International Conference on Financing for Development in Addis Ababa, 13-16 July 2015, the UN General Assembly Post-Millennium Development Goals (MDG) Review Summit in New York in September 2015, and the United Nations Climate Conference (COP21) in Paris in December 2015.

An equally important objective is to provide a better picture of the total resources available for global sustainable development, including for action on climate change. It is now widely understood that climate change and development are intrinsically linked. Achieving an efficient and effective allocation of public finance to simultaneously support good development and climate change outcomes will be critical to ensuring that the most vulnerable get the targeted attention they need.

Robust statistics on climate-related development finance can facilitate better decision making, in part through improved co-ordination and priority setting. Consistent, comparable and transparent statistics on climate-related development finance will, in turn, support parties in their monitoring and reporting to deliver greater accountability and help build trust under the UN Framework Convention on Climate Change.

As an important step in this direction, the DAC, in collaboration with the multilateral development banks and other international organisations, has presented – for the first time ever – an integrated picture of bilateral and multilateral development finance flows targeting climate change objectives in 2013.

By adding data on the multilateral flows, the DAC promotes transparency and makes a wealth of data publically available online, including information on over 7,000 development finance activities in 2013, contributing to over USD 37 billion of climate-related development finance.

Energy, transport and water received over two-thirds of climate-related development finance, according to the statistics. On the regional level, Asia is the largest recipient of climate-related development flows, at around 40%, and Africa is the second largest, at 30%. The data show that in 2013, adaptation receives a significant share of total climate-related flows (39% when activities that are designed to tackle both mitigation and adaptation are included). Measured in the same way, mitigation receives 74% of the total flows (with 13% also targeting adaptation). A larger share of the bilateral development assistance portfolio is dedicated to adaptation, as compared to the multilateral portfolio.

Among other advantages, this integrated dataset avoids double counting and provides consistency across countries using standardized definitions and measurements. Going forward, the DAC will continue to work in collaboration with other partners to further improve the quality, coverage, communication and use of environmental development data.

This video explains the treatment of multilateral climate-related flows in DAC statistics:

Useful links

OECD DAC Climate Change External Development Finance Statistics

OECD Statistics on External Development Finance Targeting Environmental Objectives Including the Rio Conventions

Increasing the transparency of climate-related development finance flows: publishing detail on over 7,000 projects in 2013 Stephanie Ockenden on the Climate Funds Update blog

The climate is changing, so should we

UN climate summitThe UN Climate Summit opens today at UN headquarters in New York. The OECD’s Secretary-General, Angel Gurría, will be chairing the session on “The Economic Case for Climate Action,” where global leaders and world renowned experts, from China, India, Mexico and the United States will be discussing The New Climate Economy Report: Better Growth, Better Climate, by the Global Commission on the Economy and Climate.

The OECD Environment Directorate has produced two videos to explain key issues.

In this first one, Simon Upton, head of the Environment Directorate, discusses three things you need to know about climate change.

And this one looks at how to finance climate change action.

Useful links

OECD participation in the UN Climate Summit

OECD work on climate change

Climate: The Doha Round

Bob Dylan’s new album gets released. Another Star Trek film gets released. Lindsay Lohan gets released. All major events at one time, in certain media anyway, but now nobody really cares that much. I get the impression it’s the same with the COP climate conference. Who can remember what it did after the Kyoto Protocol? Where and when was the last one? Where and when is the next one? The answers to the last two questions are Durban last year and Doha today.  Any media coverage tends to be about the fact that it’s in Qatar which, as even the state-sponsored Al Jazeera admits, has the worst CO2 emissions rate per person in the world: 53.4 tonnes a year, three times more than the US.

So what is COP 18 hoping to achieve? At COP 16 in Cancun two years ago, governments agreed that emissions needed to be reduced so that global temperature increases could be limited to below 2 degrees Celsius. Fans of treaty talk will have noticed that they agreed that emissions “needed to be reduced”, not “agreed to reduce emissions”.  As we wrote here a couple of weeks ago when the International Energy Agency’s new World Energy Outlook was published, there’s no chance of hitting the 2 degrees target the way things are going.  Global energy demand is expected to grow by more than one-third by 2035 in the IEA’s central scenario, with emissions corresponding to a long-term average global temperature increase of 3.6 degrees C. Even the “Efficient World” scenario talks about a rise of “under 3 degrees” rather than 2.

The OECD Environmental Outlook to 2050 is even more pessimistic, projecting that without a significant change in policies, global greenhouse gas emissions will increase by 50%, primarily due to a 70% growth in energy-related CO2 emissions. Global average temperature would then be 3 to 6 degrees C above pre-industrial levels by the end of the century according to the Environmental Outlook.

Nobody expects the world to wake up and take action as a result of the Doha meeting, but the OECD will be presenting ideas and analyses on issues that have to be addressed. An event on November 30 will showcase new work by the OECD/IEA Climate Change Expert Group on the design and governance of carbon market mechanisms. The Environmental Outlook suggests that curbing GHG emissions by putting a price on carbon through carbon taxes or emission trading schemes can help raise significant revenues. For example, if industrialised countries implement the emission reduction actions they pledged at COP 2009 in Copenhagen through a carbon tax or a cap-and-trade scheme with fully auctioned permits, they could generate more than $250 billion extra revenue.

On December 4 the spotlight will be on other forms of “climate finance”. Transitioning to a low carbon and climate-resilient economy, and more broadly, “greening growth”, takes money, but public finance and traditional sources of private capital such as banks are unlikely to have the means, or the will, to finance the investment needed because of the impacts of the crisis on budgets and financial sector performance. The OECD has launched a project on long-term investment focusing on the role of institutional investors as a source of direct financing for green infrastructure projects. This builds on numerous networks of experts in financial markets, insurance, pensions and environment and ongoing work on institutional investors and long-term investment.

The COP event will emphasise the need to scale-up and shift infrastructure finance, to avoid lock-in of carbon-intensive and climate vulnerable development pathways in developed and developing countries alike. A major part of the infrastructure required to meet development goals is still to be built in areas where climate change mitigation and adaption action is needed, such as transportation, energy, water, or urban development.

Maybe COP 18 will surprise us all. After all, Lindsay Lohan has just made a film.

Useful links

OECD work on climate change

OECD work on green growth and sustainable development

UN Framework Convention on Climate Change