#SRI — 02.03.2018


Kanol Pal - Head of SRI, Asia

Climate change is one of the biggest challenges in our world today. Extreme weather events and temperatures, natural disasters, biodiversity losses, pollution of air, water and soil have become not only frequent topics of discussion but frequent real events.


Ranked as one of the biggest global risks, as highlighted in the Global Risks reports by the World Economic Forum over the recent years1, we need greater action to tackle climate change. The 2015 Paris climate agreement (COP 21) has been a major milestone. Signatory countries are committed to keeping a global temperature rise to below 2° Celsius (2°C) this century. Even though the Trump administration has withdrawn from the agreement, this is unlikely to impact the efforts of US states and US corporates to fight climate change. Other countries are also stepping up on the leadership role. China is committed to becoming a global leader in green finance and has been the largest green bond issuer in 2017 (US$38.6 billion, mostly in the domestic market).2

How do we fund climate change?

Public and private capitals are important as funding needs are estimated to run into several trillions of US dollars (US$5.7 trillion per year according to World Economic Forum in the 2°C scenario). The Green Climate Fund was established by 194 governments in 2010 to limit or reduce greenhouse gas emissions and will play an important role following the Paris climate agreement. But that is not enough.

Supranationals, sovereign countries, corporates and financial institutions will have to do their part to help combat climate change. Green bonds have now become an important tool to mobilise private capital as a funding source  for climate change.

What are Green Bonds?

Green bonds are any type of fixed income instrument that are issued to finance or re-finance new or existing projects that have environmental or climate benefits. Examples of such green projects include renewable energy, energy efficiency, pollution prevention and control, sustainable water management, etc.

Issuers, investors and underwriters abide by the Green Bond Principles3 which provide guidelines on the key components involved in launching a green bond and reporting to evaluate the environmental impact.

Multilateral agencies and sovereigns have been the first to issue green bonds, and  it now includes financial institutions and corporates from a broader geography. Europe, US and China are the largest issuers. In Asia, many issuers are banks (e.g. China Development Bank, ICBC, Bank of China, Mitsubishi UFJ, Korea Development Bank, Export Import Bank of India) as they are the main conduits to finance green projects. There are also a few corporates financing green projects such as Power Finance, Azure Power Energy, China Longyuan or MTR.

Green bonds offer two key benefits:

(1) Environmental benefits - in the form of funding CO2 emission reduction, climate change adaptation or other environmental benefits.

(2) Conventional bond benefits – in the form of yield at a similar level as a traditional bond. Pricing depends on the issuer credit rating and maturity of the bond. There is no conclusive evidence that green bonds trade systematically tighter than non-green bonds. End investors in green bonds are mostly institutions so they tend to be less traded and less volatile in times of stress.

The main risks for investing in green bonds are the same as for a traditional bond: issuer’s credit risk and interest rate risk.

Growth of the Green Bonds market

The green bonds market is growing rapidly. It is estimated to reach US$250-300billion in 2018 from US$155billion in 20174.

Investment in renewable energy accounts for 33% of the proceeds (US$51 billion) followed by low carbon buildings and energy efficiency (29%), clean transport (15%) and sustainable water management (13%).

However, investors have raised concerns about whether the proceeds are allocated to assets with a genuine environmental value.

To address the “greenwashing” concerns5, many initiatives have been taken to improve standards of the green bond market and to build the “green” market infrastructure.

a) The High Level Expert Group of the European Commission has published a 2018 report setting out strategic recommendations for a financial system that supports sustainable investments. This will include a European standard for green bonds.6

b) The European Investment Bank and China’s Green Finance Committee have published a white paper comparing the European and Chinese standards on green bonds with the aim of converging them (The need for a common language in green finance – 11 Nov 2017).

c) The ASEAN Capital Markets Forum has also published the ASEAN green bond standards.

Green bonds are generally certified by the Climate Bonds Standards and Certification Scheme of the Climate Bond Initiative.

d) Rating agencies such as S&P or Moodys have also come out with evaluation tools and a rating methodology for green bonds. Other specialized agencies (e.g. Vigeo Eiris) are also able to carry out a third party opinion or review for the same. The assessment and verification market are key factors to ensure a healthy development of the green bonds market.

Despite all the progress in the current climate action and investment, we still may not be on track to limit the rise of global warming to below 2°C.

More needs to be done.

According to the Climate Bond Initiative, the green bond market needs to reach US$1 trillion by 2020 to meet the 2°C trajectory7.

BNP Paribas is one of the top 5 Green Bond underwriters in 20178. The bank has also signed with the United Nations Environment Programme (UNEP) a global agreement for sustainable finance facilities with measurable environmental and social impact, with a target of capital funding of US$10 billion by 2025 in developing countries.   The first corporate sustainability bond in Asia was issued in February 2018 by the Tropical Landscape Financing Facility (TLFF) in Indonesia, where the proceeds were to be used to finance both green and social projects.9

1 Alison Martin, World Economic Forum (2018, Jan 17). Climate and tech pose the biggest risks to our world in 2018. Retrieved from https://www.weforum.org/agenda/2018/01/the-biggest-risks-in-2018-will-be-environmental-and-technological

2 Wang Yao & Mathias Lund Larsen, Eco-Business – Policy & Finance (2018, Feb 8). International investors eye China’s green bonds. Retrieved from http://www.eco-business.com/news/international-investors-eye-chinas-green-bonds/

3 Green Bond Principles by International Capital Market Association (ICMA) – (2017, June 2)

4 Green Bond Highlights 2017 by Climate Bonds Initiative (2018, Jan)

Greenwashing refers to the publicizing and marketing of a company's products, activities or policies as environmentally friendly when they are not

6 Press release European Commission – 31 Jan 2018

7 Remarks by Christiana Figueres, former UN Climate Chief: “Banks and corporates need to commence large scale green bond programs. Funding clean energy and green infrastructure to meet NDC goals is the objective. $1 trillion in green finance by 2020 is the performance measure.” Source: Reuters 15 Nov 2017

8 Green Bonds Underwriters League Table, published by the Climate Bonds Initiative

9 Press release from the Secretariat of the Tropical Landscapes Finance Facility, Jakarta, 2018, Feb 26

Risk Disclosure

Sector investments have narrower focus and tend to be more volatile than investments that diversify across many sectors and companies. Investment returns will fluctuate. An investment when realised may be worth more or less than the original investment amount. Investors should carefully consider the investment objectives and risks as well as charges and expenses of an instrument before investing.



The contents of this article are produced for general information only and shall not be used as reference for entering into any specific transaction, and the information and opinions contained herein are not to be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient or the seeking of independent professional advice (such as financial, legal, accounting, tax or other advice) by any recipient. This article is not intended to be an offer or a solicitation to buy or to sell or to enter into any transaction, nor shall it form the basis of or be relied upon in connection with any contract or commitment whatsoever. BNP Paribas reserves the right (but is not obliged) to vary the information in this article at any time without notice. Save to the extent provided otherwise in Clause 6.5 of the Terms and Conditions applicable to your account, BNP Paribas shall not be responsible for any consequences arising from such variation, and no BNP Paribas group company or entity accepts any liability whatsoever for any loss arising, whether direct or indirect, from the use of or reliance on this article or any part of the information provided.