How to turbocharge green bonds
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How to turbocharge green bonds

For the green bond market to flourish, it must be fully viable and survive without public sector support. But governments in developed countries have a clear deadline by which they have to make serious cuts to emissions and raise serious funds to help developing countries do the same — so any support to the burgeoning market in that time should be palatable.

The world’s leaders signed up to a lot when they put their signatures to the Copenhagen Agreement back in December 2009. Even though the document was not legally binding, it will certainly put them under political pressure. That was before the green bond market really took off — and while growth has been startling in the last 18 months, there is still plenty policymakers and regulators could do to help it go further.

The Agreement set a goal for the world to raise $100bn a year by 2020 to help developing countries reduce their carbon emissions. Given that there has only been $27.57bn of green bond issuance so far this year and $40bn expected next year — according to the Climate Bonds Initiative — that target is a long way from being met by the green bond market as it stands, especially as many green bond proceeds are for projects in developed countries.

Many buyers, issuers and bankers of green bonds are confident that the pace of the market’s growth will be consistent and in the next few years we could be talking about numbers that could more than meet the Copenhagen requirements.

But when talking about something as vital and pressing as climate change, the market needs every possible push.

For instance, governments could bring green projects to market faster by offering to guarantee the bonds issued to fund them — something that has already begun, but has plenty more scope for growth. There could also be room for offering tax incentives to investors that buy green bonds, helping to bridge the price disparity gap between issuers that want to pay less for taking the trouble to develop green bond documentation and investors that feel they deserve extra return for the lack of liquidity.

By the time the market reaches its potential, that liquidity question will be out the window, and so will the pricing problems, meaning governments should be able to phase out the tax breaks with few complaints.

The ultimate goal of the green bond market should be to resemble its conventional cousin, being able to stand on its own without government support.

But raising funds to fight climate change is not like normal financial markets — the future of the planet is at stake. If the targets set for 2020 at the Copenhagen Accord need to be achieved, and green bonds can help, then governments and regulators should do everything to help grow the market in that time.

Anyone calling foul on public sector support has a point, but the Copenhagen Agreement, with its 2020 deadline, gives the perfect window for a time-bounded push to turbocharge the market.

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