Since the World Bank issued its first green bonds in 2008, institutional investors have shown increasing willingness to put their money to work on projects that address climate change. “The question has shifted from ‘Why should we do this?’ to ‘Why wouldn’t we do this?’” says Christopher Flensborg, head of sustainable products at Skandinaviska Enskilda Banken (SEB) in Sweden, who worked with the World Bank to develop the green bond instrument.
“We went from no one having heard of green bonds in 2008 to $7.5 billion now invested worldwide. That’s a big achievement,” says Flensborg, while acknowledging that there’s still far to go. The International Energy Agency estimates it will take trillions to adequately fund lowcarbon initiatives worldwide.
Funds raised from green bonds are invested in developing world projects focusing on hydropower, solar, and other renewable energy projects, while guaranteeing investors a fixed return. Projects also help communities adapt to a changing climate through reforestation and other efforts. “These are projects that reduce risk and adapt to change caused by climate stress,” Flensborg explains.
As a sign of the times, the International Finance Corporation (IFC), a member of the World Bank Group, made its first green bond offering in the United States in May, raising $500 million from investors such as BlackRock, TIAA-CREF, the California State Teachers’ Retirement System, and the United Nations Joint Staff Pension Fund.
“The US dollar market is an integral part of our strategy to support the development of the private sector,” said Jingdong Hua, IFC vice president and treasurer, in a prepared statement. “Green bond issues in the US market have been rare, compared to Europe and Asia. IFC green bonds are an alternative investment opportunity for this market, offering both development impact and a safe investment vehicle of a top triple-A issuer.”
Although IFC’s recent offering was the first to originate in the United States, American investors have already shown their willingness to invest in green bonds. The California State Treasury and TIAA-CREF were some of the first institutional investors to buy World Bank green bonds.
Stephen Liberatore, who manages the cref Social Choice Account for TIAA-CREF, says the IFC/World Bank green bonds “fit into what we were looking for,” in a double bottom line. “Number one is security, but we are also looking for opportunities within fixed income to provide a direct social benefit.” Institutional investors want assurance that funded projects are certifiably green. Liberatore says he was reassured that the IFC/World Bank asks for environmental screening by cicero, the Center for International Climate and Environmental Research in Oslo. “Validation from a respected third party gave us a higher level of comfort.”
Green bonds are starting to appeal to a more diverse pool of investors. “We’re seeing pension funds, life insurance companies, NGOs, churches, and private family foundations all getting into green bonds,” Flensborg says. “It’s gone mainstream.”
US investors may have been slower than their European counterparts to get into green bonds, “but this is definitely a growth market now,” Liberatore adds.
The low-carbon projects funded by green bonds “would likely have happened anyway,” Flensborg says. “We need to get to the point where this money is pushing new projects. It’s going to happen,” he predicts, “as more and more investors see that they can gain the same return, but with a purpose.”