Bank of England pushes for mainstream investment in green bonds

By Marisa Wong

Morgantown, W.Va., Sept. 22 – The Bank of England is proposing international collaboration to facilitate cross-border investment in green bonds in an effort to mainstream green finance, according to a speech delivered Thursday by bank governor Mike Carney.

The bank pointed out that financing the de-carbonization of the world’s economies implies a substantial reallocation of resources and a technological revolution. With investment in long-term infrastructure assets needing to quadruple, green investment represents a major opportunity for both long-term investors and macroeconomic policymakers seeking to jumpstart growth, Carney said.

“For this to happen, however, green finance cannot conceivably remain a niche interest over the medium term,” Carney stressed.

“The development of this new global asset class is an opportunity to advance a low carbon future while raising global investment and spurring growth.

“For investors, green bond markets offer a stable, rated and liquid investment with long duration. For issuers, green bonds are a way to tap the huge $100 trillion pool of patient private capital managed by global institutional fixed-income investors. The shift to the capital markets from banks will also free up limited bank balance sheet capacity for early stage project financing and other important infrastructure lending,” Carney said.

The green bond market is picking up gradually. Annual issuance of green bonds rose to $42 billion in 2015 from just $3 billion in 2012, Carney cited. It could double this year with issuers like U.S. regional authorities raising funds domestically to invest in water projects, as well as Chinese and Indian corporates issuing in a range of currencies in major financial centers like London to finance renewable energy projects.

Despite this progress, total issuance still accounts for less than 1% of holdings by global institutional investors, the bank pointed out.

“To reach escape velocity, market participants and public authorities will need to coordinate to deliver common green bond frameworks and definitions, and other necessary supporting infrastructure, to build local and cross-border markets,” Carney suggested.

Measures could include, among other things, developing a term sheet of internationally recognized and standardized terms and conditions for a green bond; creating frameworks to give certainty to issuers and investors that the project being financed is in fact green; integrating environmental risk and green certification into credit ratings; and developing green bond indexes.

Authorities are working with the private sector to develop a green bond term sheet with standardized terms and conditions, the bank said.

“This should significantly improve the ease and efficiency of green bond issuance and simplify investor access to green bond markets in multiple currencies, thereby moving them into the mainstream of finance,” Carney concluded.

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