Green bonds can be a powerful tool for attracting investment in environmental projects, but reforms are needed to promote further growth of the market, argues Colin Purdie, Aviva Investors’ Chief Investor Officer, Credit.
Where the world’s biggest pension fund leads, others follow. So global markets paid close attention when Hiro Mizuno, chief investment officer of Japan’s US$1.4 trillion Government Pension Investment Fund (GPIF), expressed scepticism about green bonds. In an interview with the Financial Times in early July, Mizuno said without key reforms the asset class risks becoming “a passing fad”.1
On the face of it, green bonds – debt instruments designed to raise capital for specific, environmentally friendly projects – look like much more than a fad. Since the first green bonds were issued by the World Bank in the late 2000s, the market has grown exponentially. According to estimates from the Climate Bonds Initiative, a not-for-profit organisation, total issuance in 2019 is likely to hit US$250 billion, up from US$3.5 billion in 2012.2
The case for green bonds is easily made. They provide a way for companies and governments to finance projects to combat climate change. They are also a good fit for investors looking to bolster their environmental, social and governance (ESG) credentials. Nevertheless, Mizuno was right to point to fundamental problems that are preventing these bonds from breaking into the mainstream.
References
- World’s top pension fund warns against risk of green-bond ‘fad’, Financial Times, July 2019
- Green bonds: the state of the market 2018, Climate Bonds Initiative, December 2018
