Produits et Solutions Emerging market green bonds can unlock much needed climate-related investment

Emerging markets are the most exposed regions to climate change risks, but they face an unprecedented challenge to decarbonize their economies, while maintaining a sustainable economic development path. Meeting the financing requirements to build new infrastructure compatible with these challenges requires capital from both the public and private sectors.

An estimated $147.4 trillion^[1] of private institutional investor capital is available today in developed markets. However, transferring this capital through appropriate investment opportunities into emerging markets remains challenging. Untapped investment opportunities are estimated to total $29 trillion covering six key sectors (waste, renewable energy, public transport, water, electric vehicles, and green buildings) in emerging market cities up to 2030^[2]. The opportunity in renewable energy should be larger than this estimate, if we include non-urban areas.

Green bonds remain the most viable way for emerging markets to finance projects that allow them to continue to grow in a sustainable way. From 2012 to 2018, there was cumulative issuance of green bonds totaling $140 billion across 28 markets, which, based on available data, the IFC estimates could increase to between $210 billion and $250 billion by 2021. Financial institutions have a prominent role to play in the development of EM green bonds, where they account for more than 50% of issuances, but the challenge remains to diversify the range of issuers, which may open the door for private non-financial companies to use green bonds.

The earliest EM green bond issuance came in 2012 in South Africa, but global EM green bond growth is being driven by China, with the East Asia and the Pacific region responsible for 81% of the market. Despite a downturn in global bond issuance in 2018, EM green bonds continued to be issued at a steady rate - $43 billion of green bonds were issued, with debut issuers recorded in six countries.

While financial institutions in developed markets have accounted for 18% of total green bond issuances, they are the largest issuing sector in emerging markets, making up 57% of cumulative green bond issuances, followed by non-financial corporates at 25%, government agencies at 14%, sovereigns at 2% and municipals at 1%. In emerging markets, renewable energy makes up the largest sector for use of proceeds, while low-carbon transport, water, green buildings, and waste are the next largest sectors.

The size of EM green bond issues ranges from $1.5 million to $4.4 billion, with an average issue size of $385 million. Some 34% are in hard currency, and excluding China, local currency bond issues make up 6% of cumulative EM green bond issuance. About half of the bonds have a credit rating—of those, some 90% are investment grade.

While green bond markets in emerging countries have initially been growing at a slower pace than developed countries, there has been a noticeable “catch-up” by emerging markets in terms of their share of issuance. Green bond issuance in developed markets totaled some 2.4% of developed market bond issuance in 2018—with green bonds in EM tracking at 3% of EM bond issuance.