Growing the Climate Finance Market: From Green to Transition

As we move closer to a trillion dollars of annual green issuance, the ambition grows. We are expecting to reach this long-awaited milestone in green finance in the year ahead. But what does an increase in capital being allocated to green projects mean and what does it look like?

The green bond market has had an impressive growth rate of over 50 percent in the last five years, shifting capital at scale toward climate solutions. International green definitions provide investors the power to allocate money to the “green” label without the risk of compromising their capital with greenwashing. Labeled bonds have entered the market, offering similar risks and benefits to vanilla bonds; there is no need to sacrifice a return while having a positive environmental impact.

Moving beyond green finance being a trend the market would grow out of, the green debt market has gradually snowballed, reaching new targets of mobilizing capital toward climate change solutions. The power lies in the sustainable finance agenda driving forward innovation and policy together, with the aim of reaching the issuance of US$5 trillion in climate bonds per year by 2025.

Climate change solutions can be found in all economic sectors, although the criteria for green have focused on those that have climate integrity, either through their contribution to climate mitigation and/or to adaptation and resilience to climate change. As bond issuers seek to roll out and finance projects to mitigate greenhouse gas emissions; high-emitting sectors are also starting to enter the green financial market. Even though most of these projects that reduce emissions cannot be labeled as green, new labels — transition, in this case — are being added to the bond mix.

There has now been substantial growth across social, sustainability, sustainability-linked bonds (SLBs), and transition labels. In 2021, there was a push across these themes, totaling US$646.5 billion. Transition is a nascent label, with 13 global issuances totaling US$4.4 billion, according to Climate Bonds’ latest data. The label is being utilized for sectors and activities that have green components but are harder to define.

These labels are an opportunity for issuers and investors, as having more variety of classification systems as well as utilizing financial instruments outside of bonds helps diversify the market. Corporates and governments are strategizing to integrate clearer strategies into their practices to achieve net-zero greenhouse gas emissions.

Comprehending that technology and science are always changing and advancing, new sector criteria have been identified as green. In 2021, new criteria were set for the Grids and Storage, Hydropower, Bioenergy, Geothermal, and Shipping sectors. This has been true for sectors identified as “transition” too. Even though there are no clear definitions put forward yet, as there are for green bonds, international institutions, such as the International Capital Markets Association (ICMA) and the Climate Bonds Initiative, have put some points forward because progressively rolling out new criteria for specific hard-to-abate sectors can standardize the market for transition bonds too. High-emitter sectors that are being provided with definitions are basic chemicals, cement, and steel for now.

Industry sectors are important globally to support green infrastructure and a low carbon economy, as we cannot achieve full incorporation to net zero in 2050 if every economic activity is not integrated into green definitions.

Latin America as a region has the potential to utilize this label as well. Transition-labeled bonds are starting to be explored in the region. To be recognized in the market as a conscientious transition debt issuer, there needs to be a clear strategy and an ambition. Climate Bonds has set key guidelines or principles for a credible transition. These include meeting the Paris Agreement goals of reaching the 1.5-degree trajectory, as established by science, not including offsets, aiming for technological viability over economic competitivity and demonstrating actions and not just pledges to transition.

Advancing sustainability is reached by understanding how best to commit to budgets and targets; when it comes to figures, a total of US$9 trillion in green investment is needed each year to reach net zero by 2050. Supporting transition as a climate finance label can support the milestone of US$5 trillion to reach the necessary contribution to achieve our climate goals. 

Growing the market entails involving entities and stakeholders in the green finance market, from regulators to governments to investors, project holders, and issuers. Mobilizing global capital and leveraging investment means improving climate policy measures and supporting the green finance market growth into it being regarded as conventional, to support investor’s demand.

Decision-makers need to understand the latest developments in climate finance and gain a strategic advantage. Events such as the Climate Bonds International annual conference seek to bring executives and government decision-makers together to better understand their possibilities and opportunities. We are still a long way behind global investment being sufficient to address the climate crisis but capital allocated into these sectors is rippling through both developed and emerging economies.