Green bonds grow – but challenges remain

Q1 2021 was the first time quarterly global green bond issuance volumes surpassed USD 120bn, according to Refinitiv data. Volumes for the full period between January and September topped USD 362bn, more than double the volume in the same period in 2020 (USD 176bn) and accounting for 4.6% of all global bond issuance volume (vs. 2.1% for the same period 2020).

A shift in investor sentiment is behind the rapid growth in the green bond market. As part of the bid to reallocate investment capital to environmentally-positive outcomes, proceeds raised from green bond issues must be earmarked for financing projects deemed ”green”, unlike conventional bonds, whose proceeds may be used as the issuer prefers. “Greening” the financial sector could be pivotal in driving the transition to lower-carbon, less-polluting economic output.

(A broader category of “sustainable bonds” comprises green bonds and others, including “social bonds”, whose proceeds are earmarked for positive social outcomes. This now accounts for almost 10% of all global bonds as part of the wider shift towards ESG – or environmental, social, and governance – financing.)

Investor sentiment will continue to drive growth in the green bond market, but challenges remain. In particular, there is a need for a broader international alignment on common standards and certification methodologies – notably around third-party verification of green bonds and quantifiable impact assessments of such financial instruments. Whether green bonds are greening the economy remains to be seen.

See also: Centre on Green Finance and Investment