On 9 May, the Climate Parliament organised a parliamentary roundtable on climate finance and green bonds, in collaboration with the United Nations Industrial Development Organization (UNIDO) and with the support of the European Commission (DG INTPA). MPs from Ghana, Liberia, Malawi, Sierra Leone, South Africa, Uganda, Zambia and Zimbabwe participated in this session which featured Sean Kidney, co-founder and CEO of the Climate Bonds Initiative, an international organisation working to mobilise global capital for climate action.
70% of the greenhouse gas emissions responsible for climate change are coming from fossil fuels, mainly oil, coal and gas. To solve the climate problem, put a stop to global warming and stay within a safe carbon budget, we need to replace fossil fuels with clean energy on a large scale and as fast as possible. Renewable energy sources like solar, wind, hydro or geothermal are virtually free and unlimited, and the only cost of generating clean electricity, apart from operation and maintenance, is mostly the cost of installing equipment to harness this energy. For that reason, mobilising financing with the cheapest possible interest rate is a critical step towards building the infrastructure we need to advance the energy transition.
Approximately 130 trillion dollars are available in the bond market, and represent a huge potential to drive a fast and radical change in climate finance. In simple economic terms, a bond is a promise by a borrower to pay a lender his money back after a certain period of time, with a certain amount of interest. The borrower uses the money to fund its operations, and the investor receives interest on the investment. Green bonds raise funds for initiatives that deliver environmental benefits, such as projects aimed at building clean energy generation, improving energy efficiency, preventing pollution or helping the mitigation of climate change in other ways. They can be issued by public authorities like municipalities and states, but also by private entities such as companies building green infrastructure and grids. Since green bonds are associated with lower interest rates, issuers of bonds, even from polluting companies or industries, often strive to label their investments as green. For that reason, green bonds need to be assessed based on a set of independent criteria. Under the Climate Bonds Initiative principles, bonds can only be certified as being green if they are compatible with the goals of the Paris Agreement and deliver projects that will help us transition to a low carbon economy.
African parliamentarians asked our expert questions on how to design more attractive projects for investors, and how to promote the growth of a green bond market in their country. Sean Kidney emphasised that, since a majority of bonds are issued by public entities, it is essential that governments show a strong political commitment to follow the path of clean energy. Developing a culture of planning gives projects more coherence and investors the reassurance that their investment will be part of a well-defined national strategy. He also insisted on the importance of providing de-risking mechanisms by letting reliable institutions take on most of the risk, such as with guarantees from governments and multilateral agencies. Mr Kidney also advised MPs to push for tax incentives for green bonds, with tax exemptions and tax credits, to make them more attractive to investors compared to regular taxable bonds. Today, the green bond market is valued at around USD 1.8 trillion globally, and it is expanding very rapidly. Most countries in the world have pledged to reach carbon neutrality by 2050 and have committed to strong targets of emissions reductions, the direction is very clear and there is no question for investors that the future will be green. This is the reason why investors are now increasingly looking at green bonds as being lower risk, as they represent an investment unlikely to be negatively impacted by unforeseen changes in the world. The only unknown that remains is the speed at which we will achieve a net zero global economy, and MPs have a key role to play helping their governments to accelerate this process by raising awareness on the potential of green bonds.