On November 16, 2018, the World Bank commemorated the 10-year anniversary of the first labeled green bond in the world. The World Bank’s first green bond, developed in partnership with investors and the Swedish investment bank in SEB, was issued in November 2008, and started the revolution that has developed into a $500 billion market. Although still a fraction of the size of the overall global bond market, green bonds, which only finance projects with specific environmental benefits and follow internationally-accepted standards such as the Green Bond Principles, have managed to shift many investors’ focus on making positive impact while obtaining financial return. Green bonds have also paved the way for other types of sustainable debt securities such as socially oriented “social bonds” and the recently issued “blue bond” by Seychelles.
On November 16, leading investors, issuers, bankers and development practitioners convened in Washington DC to discuss how green bonds are influencing issuer and investor behavior more broadly; and to challenge each other to ensure that the green bond revolution is harnessed to achieve the Sustainable Development Goals. Delivering the keynote address, Mindy Lubber, CEO and President of Ceres, spoke about the urgency for action for change. “We are facing an existential crisis,” she said, referring to the 2018 report issued by the Intergovernmental Panel on Climate Change. The report warns that if greenhouse gas emissions continue at the current rate the earth will reach the crucial threshold of 1.5 degrees Celsius (2.7 degrees Fahrenheit) above pre-industrial levels by 2040, inundating coastlines and intensifying droughts and poverty.
Lubber added that finance will be key to addressing climate change by supporting less carbon-intensive technologies and infrastructure.
Datuk Zainal Izlan Zainal Abidin, Deputy Chief Executive, Securities Commission Malaysia (SC), represented emerging markets at the event. The World Bank Treasurer and Vice President Arunma Oteh welcomed Datuk Izlan and commended the SC’s partnership with the World Bank to develop the green sukuk market and promote sustainable investments in the ASEAN region. Ms Oteh was formerly the Director General of the Securities and Exchange Commission of Nigeria.
Datuk Zainal participated in a panel discussion on what’s next for sustainable capital markets. Other participants in the panel included Chrissa Pagitsas, Director of Green Financing at Fannie Mae; Roger J. Beauchemin, President and Chief Executive Officer, Addenda Capital; and Anna Pot, Manager, Responsible Investments, APG Asset Management. Bringing in both the emerging markets and Islamic finance perspectives, Datuk Izlan described how Malaysia had embarked on its journey towards sustainable investments. “In 2013, when the SRI agenda was gaining significant traction in developed countries, the management of the SC Malaysia saw clearly that Islamic Finance could contribute significantly to the global sustainability agenda given the significant alignment between the underlying principles of Shariah and sustainability. That led us to develop the five I approach for the SRI ecosystem in Malaysia.”
The five I are issuers, investors, instruments, internal compliance (governance) and information architecture (sustainability and integrated reporting. The four categories identified to encourage the issuance of the SRI sukuk were: projects that manage natural resources; energy projects; social impact bonds; and projects that develop waqaf assets or Islamic endowments. Out of this emerged the first SRI sukuk on education (Sukuk Ihsan issued by Khazanah Nasional Berhad in 2015) and the first green sukuk in the world (Green SRI Sukuk issued by Tadau Energy Sdn Bhd in 2017) followed by four other green sukuk and a green bond.
SC Malaysia worked closely with the issuers, the World Bank and Bank Negara Malaysia to facilitate the green sukuk issuances.
Malaysian regulators have also played an important role in promoting the growth of sustainable investments in the ASEAN region by championing the development of green and social bond standards for the region; encouraging institutional investors to consider ESG issues in investment decision-making; developing local green bond certifiers (RAM, MARC), providing a grant for issuers to offset the costs of a second opinion report for green projects and developing value-based intermediation guidelines and score cards for local Islamic banks.
Speakers and participants alike agreed that green bond champions cannot rest on their laurels. There is a lot of work to be done in Malaysia, in the ASEAN region and the rest of the world. Financial institutions need to recognize the importance of understanding and addressing climate risks in their portfolios and operations. Cities and municipalities have the opportunity to finance actions to reduce their carbon footprints with green bonds. Green Bonds can form part of a government’s broader policy toolkit to help stimulate green sustainable finance and importantly provide leadership to the broader market.
Laura Tuck, Vice President of Sustainable Development at the World bank said, “We have to be sure that the rate at which we use resources to generate income to build assets doesn’t exceed the rate of replenishment or their caring capacity. So when we put together programs to increase food production, we have to make sure we are not depleting the water, the forest, the land. When we increase energy access, we are not increasing carbon emission. When we build more city housing, we are not doing it in a flood plane, and even when we do things in the name of climate such as pushing for electric vehicles, we have to be sure we are not pulling from fossil-fuel generated electricity. That’s the sustainable development challenge.”
Green bonds have an important role to play in financing sustainable development. We look forward to the deepening of the market and continued cooperation between stakeholders to tackle the world’s most complex challenges, including the impacts and costs of 1.5 degrees Celsius (2.7 degrees Fahrenheit) of global warming.