Climate Bonds Struggle in Early 2015

Jordan Sabin

May 11, 2015

 

At the beginning of the year, analysts predicted green bonds would enjoy continued growth, and estimated an issuance of USD100 billion in 2015. However, according to the Climate Bonds Initiative, the market has only seen USD11.1 billion worth of bonds issued year to date. This has left many wondering about the staying power of climate bonds.

Despite the weak green bond market so far this year, there are at least two reasons to believe the market will show strong growth in the second half of 2015. First, India is beginning to issue green bonds in earnest. Second, State Street launched the first bond indexed fund last week, expanding the variety of instruments available to investors.

Given the lackluster strength of the green bond market in the first quarter of 2015, India’s foray into the green bond market is significant. Prime Minister Modi’s government has an ambitious goal of increasing India’s renewable power from 35 to 100 gigawatts by 2022. To do so will require enormous capital outlays, and green bonds offer one way to finance this expansion.

The Indian government seems to have recognized the ability of green bonds to bring its capital markets in line with its push towards sustainability – already this year, the Indian Export-Import Bank raised USD500 million through a green bond offering. Furthermore, the government is asking businesses to raise capital through green bonds, and businesses are responding, with a USD500 million offering expected in the coming weeks.

In addition to India’s growth in climate bonds issuance, another promising sign for the market is State Street’s new bond index fund. Linked to the Barclays MSCI Green Bond Index, the fund allows investors a passive way to engage the green bond market. Given the rising demand for passive funds, signaled by Vanguard’s eclipse of Pimco as the world’s largest bond fund, we can expect State Street’s new fund to do well. As the green bond market continues to diversify, it will continue to grow.

Experts predicted that 2015 would be the ‘Year of the Green Bond.’ While initial offerings have been limited, recent developments give hope that the second half of 2015 will bring the climate bonds market closer to USD100 billion.