New research has revealed the climate bond market is far larger than previously thought, currently offering investors $174bn in issuances, but with the potential to more than treble this figure.
A report published by HSBC and the Climate Bonds Initiative today identifies over 1,000 climate-themed bonds outstanding from 207 issuers in seven main sectors: energy, transport, building and industry, climate finance, water, waste and pollution controls, agriculture and forestry.
It adds there is another $204bn of outstanding bonds from issuers with more than half of their revenues and activities linked to the climate economy and a further $373bn of “conditionally-aligned” bonds that could be included with greater transparency from issuers on what constitutes climate-aligned activities in those sectors.
Over 80 per cent of issuers are corporates, followed by development banks, project bonds and municipal bonds. UK institutions have issued the largest amount of climate-themed bond with 23 per cent of the global total.
Climate bonds are seen by proponents as an effective and well understood mechanism for attracting private finance into expensive low-carbon infrastructure projects as public purses cannot stump up the $1tr per year the International Energy Agency estimates is needed to fund the transition to a low-carbon, climate resilient economy.
The report says climate bonds are well suited to financing of long-payback energy projects and provide steady and secure returns, which should attract institutional investors, such as pension funds and insurance companies, looking for a “safe haven” in a turbulent economy.
“Institutional investors, with their $1tr in assets … potentially have an important role to play in financing clean energy programmes,” said Sean Kidney, chair of the Climate Bonds Initiative. “They have also realised that high returns in equity can be illusory and have been busily shifting across to the bond market, which is now worth $99tr compared to $55tr for equities – a reversal of where we were a few years ago”.
Nick Robins, director at the HSBC Climate Change Centre of Excellence, added that this trend was likely to continue as markets and technologies mature and investor attention increasingly focuses on climate investment.
“The market size is much broader and deeper than previously thought,” he said. “This re-framing of the investable universe should help to overcome the perception among mainstream investors of climate-themed bonds as a niche market and allow them to signal to fund managers the desire for greater diversification.”
