International Finance Corporation (IFC) has played a key role in launching and building the world’s green bond market, moving from operating as an issuer of green bonds to also being an investor. To learn more about IFC green bonds, we discussed with Denise Odaro, IFC Head of Investor Relations.
What are green bonds, and why are they important?
Green bonds are financial instruments that finance green projects and provide investors with regular or fixed income payments. Over the last 14 years, green bonds have become an important tool to address the impacts of climate change and related challenges. Clean water and food security are at risk in the world today and about 1 million of the world’s 8 million animal and plant species face extinction. Climate change threatens communities and economies, and it poses risks for agriculture, food, and water supplies. A lot of financing is needed to address these challenges. It’s critical to connect environmental projects with capital markets and investors and channel capital towards sustainable development – and green bonds are a way to make that connection.
What inspired green bonds?
Let me give you a brief history. In 2007, the Intergovernmental Panel for Climate Change—a United Nations agency that provides scientific data on climate change and its political and economic impacts—published a report that linked human action to global warming. In late 2007, a group of Swedish pension funds sought to invest in projects that help the climate. Less than a year later, in November 2008, the World Bank became the first institution to issue a green bond, raising funds from fixed-income investors to support lending for eligible climate-focused projects. In 2010, IFC issued its inaugural green bonds in response to investors seeking climate-related investments with a fixed income.
Then, in 2013, IFC issued the market’s first global U.S. dollar benchmark-sized green bonds, with two $1 billion issuances in that year; this set a precedent as the largest green bonds at the time of issuance and helped to solidify the market.
How have green bonds grown?
The growth of green bonds in the capital markets has been explosive and is increasingly attracting attention from investors. We have been witnessing changing attitudes toward sustainable investing for a number of reasons. Investors have increasingly become aware of the risks of climate change to their portfolios and, through mechanisms such as the Task Force on Climate-related Financial Disclosures (TCFD), they are also beginning to report on such risks. Additionally, stakeholders are pressuring the investment community to employ heighted environmental, social, and governance (ESG) policies. Green bonds address some of these changes to the new landscape. They offer investors a platform to engage in good practices, influencing the business strategy of bond issuers. They provide a means to hedge against climate change risks while achieving at least similar, if not better, returns on their investment. In this way, the growth in green bonds and green finance also indirectly works to disincentivize high carbon-emitting projects. Green bonds enjoyed a 49% growth rate in the five years before 2021, according to Climate Bonds, whose analysis suggests the green bond market annual issuance could exceed the $1 trillion mark by 2023. The success of green bonds has inspired the creation of other labelled bonds, such as social bonds.
“The growth of green bonds in the capital markets has been explosive and is increasingly attracting attention from investors.“
Denise Odaro
Head of Investor Relations, IFC
How does IFC participate in the green bond market?
IFC’s overall funding program amounts to as much as $14 billion a year and finances loan investments in projects and companies in emerging markets – all of which must all adhere to stringent ESG standards and our Sustainability Framework. A subset of this funding is issued through green bonds and social bonds that finance select eligible projects from our climate business portfolio and projects that aim to alleviate social issues. Both products offer vast opportunities to channel significant amounts of capital towards sustainable development. IFC’s Green Bond Program combines an attractive investment proposition with an opportunity to support climate-related projects in developing and emerging economies. A consistent triple-A credit rating based on excellent financial performance has assisted in building significant and distinct name recognition in the marketplace for IFC. Since first being rated in 1989, IFC has been rated triple-A every year by Standard and Poor’s and by Moody’s. Our high credit rating is essential for maintaining our ability to access markets globally and to maintain our low cost of funding. We issue green bonds in several currencies, enabling investors to diversify their investments while helping to improve the visibility of domestic markets to global green bond investors. As of June 30, 2021, IFC had issued 178 green bonds in 20 currencies — including emerging market currencies such as ZAR, PHP, and INR — amounting to over $10.5 billion. In addition to our own green bond issuance activities, IFC is an investor and provider of advisory services, technical assistance, and risk mitigation instruments to our clients in emerging markets.
Does IFC help others to issue green bonds?
IFC plays an important role as anchor investor in green bonds issued by first-time issuers, preparing them for future and repeat issuances. For example, in August 2021, IFC invested $100 million in Egypt’s first private sector green bond to help unlock finance for climate-smart projects and support the country’s transition to a greener economy. The bond was issued by Egypt’s Commercial International Bank, which will use the proceeds to increase lending to businesses that want to invest in eco-friendly initiatives, including green buildings, renewable energy, and energy efficiency—sectors which are still nascent in Egypt. In Romania, IFC supported the first green bond to be issued in the country by a financial institution, Raiffeisen Bank S.A. (RBRO). IFC invested the equivalent of $20 million in local currency bonds to finance projects in five eligible categories: green buildings, renewable energy, energy efficiency, clean transportation and sustainable agriculture. Additionally, IFC launched the Amundi Planet EGO Fund—the world’s largest green bond fund in emerging markets that invests in emerging market green bonds issued by financial institutions. Through the Green Bond Technical Assistance Program (GB-TAP) we provide trainings and resources to expand the capacity of such financial institutions to issue green bonds. The Real Economy Green Investment Opportunity Fund was launched with HSBC Global Asset Management to finance issuances from non-financial companies, an important new class of borrowers to the green bond market. Together, these funds have raised over $2.5 billion for investments in financial institutions and the real sector.
How does IFC ensure proceeds from green bonds go to green projects?
IFC selects projects for green bond financing from its climate-related loan portfolio and reports annually on the IFC Green Bond Program’s impact. As of June 30, 2021, green bond proceeds have supported 236 green bond-eligible projects since 2014, with financing commitments totaling $9.4 billion. Since 2015, IFC has published its annual Green Bond Impact Report based on the International Financial Institutions (IFI) Harmonized Framework Template for Impact Reporting. IFC is also a founding member of the International Capital Market Association whose Green Bond Principles encourage transparency, disclosure, and integrity in the development of the green bond market. ICMA set voluntary guidelines framing the issuance of green bonds and recognized several broad categories of potential eligible projects including but not limited to:
- Renewable energy
- Energy efficiency (including energy-efficient buildings)
- Sustainable waste management
- Sustainable land use (including sustainable forestry and agriculture)
- Biodiversity conservation
- Clean transportation
- Sustainable water management (including clean and/or drinking water)
- Climate change adaptation
Learn more about visit www.ifc.org
