Green Bonds for Infrastructure Development in Asia

In a year characterized by uncertainty, green bonds issuance rebounded in the second half of 2020 to reach a record-breaking US $290.1bn by the end of Dec’20, compared to the prior record of US $266.8 bn set in 2019. Though growth was subdued due to the Covid-19 pandemic, but increased focus on climate change and environment and support of low- and middle-income countries would increase the development of this market.

Green Bonds refer to instruments where the proceeds are used to finance or refinance, in part or in full, new and/or existing eligible Green Projects. They can be issued by central and local governments, banks, or corporations. The green bond label can be applied to any debt format, including private placement, securitization, covered bond and labelled green loans which comply with the Green Bond Principles (“GBP”) or the Green Loan Principles (“GLP”).

Green Bonds - Basic Principles

A green bond is a fixed-income financial instrument for raising capital from investors through the debt capital market. Typically, the bond issuer raises a fixed amount of capital from investors over a set period (the “maturity”), repaying the capital (the “principal”) when the bond matures and paying an agreed amount of interest (“coupons”) along the way.

A green bond is differentiated from a regular bond by being “labelled”, i.e., designated as “green” by the issuer or another entity, whereby a commitment is made to use the proceeds of green bonds (i.e., the principal) in a transparent manner, and exclusively to finance or refinance “green” projects, assets, or business activities with an environmental benefit.

Several different organizations – including Cicero, Climate Bonds Initiative, Sustainalytics, Moody’s and S&P – review and designate green bonds across industries and asset classes using various rating methodologies and criteria.

Green Bonds are commonly used to finance below types of projects:

Types of Green Bonds

The below table provides an overview of various types of Green Bond issuances for infrastructure sector globally.

Green bond issuance process has in built reporting and monitoring principles.

Benefits of Green Bonds

  • Green Bonds enhances issuer's reputation and showcases its commitment to sustainable development.

  • Typically have a lower interest rate than the loans offered by the commercial banks.

  • Investors are focusing more on green investments which in turn may help in reducing the cost of raising capital.

  • Investors can better support their investment strategies with additional information on issuers’ sustainability plans and increase their exposure to less volatile instruments

  • Crucial in increasing financing to sunrise sectors such as renewable energy, thereby contributing to sustainable growth.

Global Market of Green Bonds

The green bond finance market has reached its most substantial milestone yet, with around US $1 trillion in cumulative issuance since market inception in 2007.

Europe is leading issuance of green bonds with US $432.5bn in issuance, followed by North America with US $237.6bn. US $219.3bn has been issued in the Asia-Pacific region, placing it third. US $20.0bn has been issued in Latin America and the Caribbean (LAC), and US $3.5bn of green issuance is from Africa.

In regards with issuer type for green bonds, Corporates are the largest source of issuance at US $205.6bn, with Non-Financial Corporates next on US $205.0bn, followed then by Development Banks at US $158.8bn.