Source: Global Infrastructure Hub based on IJGlobal data.
Green bonds are financial instruments that finance green projects and provide investors with regular or fixed income payments. Created in 2007, green bonds have the same deal structure as a traditional bond, but fund projects that encourage environmental sustainability. However, it wasn’t until 2014 that their usage began to accelerate. Since then, the green bond market has grown significantly including the infrastructure sector.
On average from 2015 to 2020, 13% of private investment in primary infrastructure was financed though bonds, of which 44% were green, making up 5% of the total private investment in primary infrastructure during this period. This has increased in recent years. In 2015, green bonds represented 24% of bond issuances for private investment in primary infrastructure, and by 2020 they represented 60%.
Green bonds are mostly used to finance infrastructure projects in developed regions, notably in Western Europe which has attracted 55% of all green bond issuances since 2015. Its share of green bond issuance has also increased over time – from 46% in 2015 to 60% in 2020.
Issuance of green bonds for private investment in infrastructure projects in North America and Asia have also increased in the most recent years, and in 2020 represented 6% and 7% of the financing of their respective private investment in infrastructure. This means they represented 24% and 14% respectively of all green bond issuances in 2020.
Unfortunately, the picture is different for middle- and low-income countries, where financing through green bonds remains quite limited. On average from 2015 to 2020, green bonds have accounted for only 2% of all private investment in infrastructure. This reflects the fact that middle- and low-income countries have less developed capital markets. Bond markets are still small for middle- and low-income countries, with bonds representing only 8% of private investment in infrastructure since 2015, compared with 16% in high-income countries.
While the mainstreaming of green bonds represents significant progress when it comes to mobilising more capital for sustainable infrastructure, there are challenges to the market’s continued growth, particularly in emerging economies. The lack of a clear, universally accepted definition of what constitutes ‘green’ is a key challenge that increases the risk of greenwashing and fosters a growing scepticism of the green bond market. Another challenge is the lack of transparency around the actual use of proceeds, with often limited and opaque post-issuance reporting by the issuer.
One option to address these challenges are sustainability-linked bonds, which are bonds linked to the achievement of a sustainability target or targets by the issuer. Usually, an issuer agrees to pay a higher coupon to the investor if they fail to achieve the linked sustainability target. Unlike traditional green bonds, sustainability-linked bonds have no restrictions on how the proceeds will be used. While the market is still nascent, there is encouraging growth with sustainability-linked bond issuance increasing to USD189billion in 2021 – an almost tenfold increase from that shows the potential to mobilise more capital to finance sustainable infrastructure.