In 2010 world governments agreed to limit the increase in global temperature to two degrees Celsius (2 °C) above pre-industrial levels to avoid the worst impacts of climate change.
To have an 80 percent chance of maintaining this 2 °C limit, the IEA estimates an additional $36 trillion in clean energy investment is needed through 2050—or an average of $1 trillion more per year compared to a “business as usual” scenario over the next 36 years.
A new Ceres report has provided recommendations for investors, companies and policymakers to increase the annual global investment in clean energy to at least $1 trillion by 2030—roughly a four-fold jump from current investment levels.
Banks, businesses and policymakers can all take key steps to promote the flow of private capital into clean energy. Key focus areas include
(1) development banks and other state-affiliated financial institutions issuing “climate bonds” linked to clean energy projects (with use of proceeds satisfying recognized criteria such as the Climate Bonds Standard or World Bank green bonds criteria);
(2) using public funds to provide loan-loss reserve funds, subordinated debt and other measures to enhance the creditworthiness of clean energy asset-backed securities; and
(3) passing legislation authorizing banks to finance clean energy projects through the use of covered bonds.
With a value of $78 trillion and a 33-73 percent share of institutional investor portfolios, 99 the global bond market offers the greatest opportunity to raise large amounts of capital for clean energy investment. The most common route to accessing the bond market is issuance of project bonds and asset-backed securities.
Through at least 2020, however, an equally important route is through national or international financial institutions like the World Bank, IFC and EBRD issuing “climate bonds” whose proceeds go to projects that help mitigate climate change. Unlike asset-backed securities, these bonds are not tied to the cash flows from specific projects, but instead can benefit from the AAA ratings of the issuing institutions, enabling them to be immediately put into institutional investor portfolios.
Since 2008, the World Bank has issued about $4 billion in green bonds to support solar and wind installations, construction of energy-efficient buildings and other low-carbon development projects. 100 Other multilateral development banks have followed suit, including the International Finance Corporation (IFC), the Export-Import Bank of Korea (Kexim), and the African Development Bank (AfDB), 101 bringing the total amount of outstanding green bonds/climate bonds from multilateral development banks to roughly $10 billion.
Given strong investor demand for recent offerings, which were oversubscribed in a matter of hours and included significant demand from mainstream U.S. and European investors, multilateral and government-affiliated banks should substantially increase issuances of climate bonds.
Issuances from multilateral banks will help prime the market for climate bond offerings from traditional commercial and investment banks. This latter development has already begun, with Bank of America in November 2013 issuing a $500 million three-year bond to finance renewable energy and energy efficiency projects. 104 Adopting a common standard for the use of funds from climate bonds will further stimulate investor demand and help build a credible global green bonds market.