Green bonds are called “green” because they direct finance to environment or climate-related projects. They are issued by corporations, investment banks, local authorities and multilateral development banks (MDBs). Bonds are a form of debt investment where an investor lends money to an entity (corporate or government) that borrows the funds for a defined period of time at a fixed interest rate to finance projects and activities. Types of green bonds include: green infrastructure bonds, multilateral development bank green bonds, green corporate bonds, green sectoral bonds, rainforest bonds and index-linked carbon bonds. In total $18.3 billion (approx. £10.7 billion) worth of green bonds were issued in the first half of 2014. They are projected to double by the end of 2014 raising the overall issuance to $40 billion. Companies issued $10.2 billion (55 per cent) in 2014 as compared to $3 billion (27 per cent) last year.

There is no single standard to define green bonds, resulting in organisations following their own definitions and internal rules to issue green bonds and guide lending. Several issuers, including the IFC, use guidance from research agencies such as the Norway-based organisation, the Center for International Climate and Environmental Research (CICERO). Civil society organisations have questioned whether all of the energy types financed via green bonds are green given the emissions of greenhouse gases associated with, for example, large dams and hydropower projects, and other consequent negative environmental impacts (see Observer Spring 2014).

The World Bank Group issues green bonds through its middle income country arm the International Bank for Reconstruction and Development (IBRD) and its private sector arm, the International Finance Corporation (IFC). The Bank has been issuing bonds in the international capital markets for over 60 years to fund its activities.  It has raised up to $6.7 billion in green bonds through 70 transactions in 17 different currencies. It is in an advantageous position to issue green bonds as it is a publicly-backed lender with a triple-A credit rating. The Bank defines green bonds as “fixed-income bonds that are liquid financial instruments to fund climate-mitigation, adaptation and other environment-friendly projects.” Its green bond projects aim to support the transition to low carbon and climate resilient development in client countries. In addition, the projects also undergo a review and approval process to meet client countries’ development priorities, which includes early screening to identify potential environmental or social impacts and designing policies and concrete actions to mitigate such impacts in line with the Bank’s environmental and social safeguard policies. Mitigation projects include:

• solar and wind installations,
• support for the expansion of technologies aiming to reduce greenhouse gas emissions,
• increased efficiency in transportation and waste management,
• construction of energy-efficient buildings, and
• carbon reduction through reforestation and avoided deforestation.

Examples of adaptation projects include:-

• protection against flooding,
• food security improvement,
• implementation of stress-resilient agricultural systems and
• sustainable forest management and avoided deforestation.

The Bank states that the benefits through green bond projects can be measured both in terms of “benefits to society” and “reduction of carbon dioxide and other greenhouse gases.”

The IFC issues green bonds for “investing exclusively in renewable energy, energy efficiency and other climate-friendly projects in developing countries”. These are being used to finance projects which fall under the Bank’s definition of “low-carbon”, rather than “renewable”, a category that includes energy projects whose climate and environmental impacts have been questioned (see Update 77). Currently the IFC is in the process of launching a new programme in the USA that allows individual investors to buy IFC bonds that support renewable energy and energy efficiency investments in developing countries.

As mentioned above, the World Bank group supports the growth of the green bond market through IBRD and the IFC, both of which “catalyse the market through strategic issuances of green bonds based on their triple-A ratings.” A majority of the green bonds projects appear to be carried out in middle-income countries (see table below). According to the Bank’s website, the highest number of projects financed by its green bonds are implemented in China, with a focus on urban areas including urban transportation, waste management and energy efficiency in industrial units. There appears to be less focus on promoting development in rural regions. This is also replicated in other countries.

The Bank’s green bond projects (IBRD funded)

Source: http://treasury.worldbank.org/cmd/htm/MoreGreenProjects.html (See link for latest updates on projects)

According to the Bank, its green bond projects are “designed to reduce poverty and improve local economies” but they also have a specific focus on “tackling climate change issues that directly impact developing countries.” In promoting energy efficient projects in China, for example, the stated purpose is “to mainstream investment in energy conservation in China’s industrial sector.” Here the objective is to improve the energy efficiency of medium and large-sized industrial enterprises in China, and thereby reduce negative environmental impacts. However, poverty reduction, the achievement of developmental outcomes and the improvement of local economies are not outlined as desired outcomes in the project document. Moreover, the beneficial outcomes on the population and their livelihoods are not explicitly accounted for.