Strong growth forecasted in the global green bonds market in 2019

Despite the changes in the credit cycles and global recession trends, it is predicted that the green bonds market will continue to grow in 2019.

According to a research published by a global consultancy firm, in 2019 there will be an acceleration in the transition to lower carbon economy especially with the efforts of financial institutions to increase the green bond issuance. Green bond issuance, which was 167 billion USD in 2018, is expected to reach 180 billion USD with an increase of approximately 8% in 2019. Besides the increase in this area, bond markets in other sustainability-related areas such as environmental, social and governance (ESG) bonds, may grow similarly.

Impact of financial institutions

The predicted course in 2019 may be similar to the change of market dynamics which witnessed an increase of 4 billion USD in 2017. Europe is expected to lead the green bond issuance as it did in the last two years and bonds are expected to increase in energy, transportation and buildings sectors, whereas the market diversity is also expected to rise with the involvement of new countries and financial instruments. The finance sector is expected to play a role in this year’s growth as a new factor. According to the research, with the transition process to low-carbon economy and increase in investment expectations in this area, the share of green bond issuance at financial institutions will increase accordingly. According to the report of Organization of Economic Co-operation and Development (OECD), the annual investment necessary for realizing the scenarios to keep climate change under control is approximately 4.3 trillion USD and financial institutions need to do their best to respond to this necessity. Even though 40% of the financial institutions that entered green bond markets in 2018 are China based, majority of the growth in the market took place at institutions in North America and Europe.

Political incentives continue

In addition to the efforts of institutions, policy incentives of governments on public, private and multilateral financial practices support the growth of green bond market. A starting point for the incentives was the participation goals of states defined in Paris Agreement regarding reducing the emissions and adaptation to climate change. As a result, green bonds are becoming a financial instrument in order to realize environmental strategies followed by countries. Governmental incentives are also supported by some regulatory authorities. The European Commission mentioned initiative paths in the Action Plan on Sustainable Growth published in March 2018 that the finance sector can follow for long term sustainable investments. In 2019, the Commission is expected to publish some measures that are both legislation-oriented and independent includes, covering environmental activities, green financial markets and ESG investments.

Environmental risks and opportunities are becoming more important

Political incentives are not the only factors leading towards green financing. Increased awareness in risks related to the climate change, water shortage and decrease in biodiversity ensure these threats to be considered in strategic decisions. Severe climate events such as fires in California, heat waves in Europe and massive floods in China bring risks into view and together with the advancement of climate science these are pioneering the environmental risks to be taken seriously. As the approach of sectors to these risks changes, the direction of investments shaped accordingly, and this may create new job opportunities in some sectors.

Sustainable Finance Beyond Green

Even though the green market is still relatively new, environmental and social benefits-oriented sustainability practices have accelerated in the last two years. With the concrete focus points created by Sustainable Development Goals, an understanding aiming to meet today’s needs without compromising the future generations’ rights to meet their needs has been demonstrated and this was a turning point in the rise of this market. Recently, the sustainable bond guidelines published by International Capital Market Association supported the bond issuance aimed to maintain the market transparency and consistency. The guidelines are expected to reduce some challenges such as the lack of transparency in understanding the environmental impact in financial matters in the market.

The research concludes that the sustainability-oriented financial markets will grow along with the request from investors and increase in the existing supply. Businesses have a wider perspective on sustainability, however increased social and ESG-linked financing may decrease the green bonds issuance to some extent. Beyond the market is green-oriented, it may still benefit from the projects, sectors and investors related to these matters because it is progressing along with other sustainability goals. Despite the positive developments, the growth in the market may create some challenges because it is not clear how the development of sustainability goals can be measured, and which indicators will be used for this measurement. Despite the challenges, it is indicated that the future for innovation is open in sustainable finance.

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