Bonds. Green Bonds: climate finance to the rescue

Developed countries have pledged to raise $100 billion (bn) per year by 2020 for the Green Climate Fund (GCF) as part of their commitments under the new global climate agreement being negotiated in Paris this week. Current financial contributions from developed countries like Australia have fallen short, so engaging the private sector will be key to successfully funding the GCF. A smart solution to bridging the gap — which will benefit Australia and Australian banks — is green climate bonds.

World leaders gathered in Paris on Monday for the opening of the United Nations (UN) climate change meeting, COP 21. After nearly a week of negotiations, finance remains to be a key issue of contention.

In his address to the UN, Australian Prime Minister Malcolm Turnbull pledged $1bn (from the existing aid budget) in climate finance over the next five years. Though this is an improvement on Australia’s 2013 pledge of $200mn, it still falls short. According to a recent report from Oxfam, a fair contribution for Australia, based on the size of its economy, is estimated to be $1.6bn per year.

In the negotiations, achieving the $100bn by 2020 climate finance goal is seen as critical to get developing countries to the table in Paris. And though $100 billion by 2020 sounds like a lot, in the post-2020 period some projections suggest that around $400bn per year is required to effectively address the worsening consequences of climate change in the developing world.

The bottom line — innovative and bold new initiatives are required to raise long-term finance for clean technologies and clean economic development in the developing world —and private sector investment will be key.

Australia was recently elected co-chair of the GCF and could play a vital role in finding creative solutions to the finance shortfall. The emerging green bond market offers an appealing solution because, with the right support, economists estimate up to $1trillion in climate-focussed bonds could be issued per year by 2020.

And Australian banks stand to benefit. According to a recent report from ANZ, social impact financing is already becoming increasingly popular in Australia. The New South Wales Government pioneered Australia’s first two social impact bonds in 2013 for small-scale social projects, which raised $7mn and $10mn respectively.

ANZ issued its first green bond in May 2015 for $600mn. The bond was fully funded by private sector investors and will be used for investments in wind and solar projects and green buildings around Australia, New Zealand, and the Asia Pacific. With well-established Asian business branches, Australian banks like ANZ are well positioned to invest in climate-safe projects in our region through the GCF.

According to Australia’s Clean Energy Finance Corporation, Australian investors are very interested in investing for clean energy projects, but options to date have been extremely limited. These positive examples show that there is great potential for growth in the Australian market, and the future for social impact and green bonds looks very promising.

Green bonds are attractive because they can be designed in a number of ways to diversify risk, and they allow for debt financing that is structured so that both large and small-scale investments can attract funding from capital markets. Investing in GCF green bonds could provide an easy avenue for countries like Australia to contribute to climate finance initiatives abroad without putting further strain on already stretched national budgets, while also creating economic opportunities at home.

Prime Minister Turnbull’s attendance at COP21 is seen by many as a symbolic move signalling a shift in Australia’s position on the global fight against climate change. Let’s hope these small improvements build momentum and that Australia uses its co-chairmanship of the GCF to help create a sustainable future for the world and provide economic and social opportunities for all involved.

Claire Smith is a Murdoch University Masters student who is a Global Voices delegate to the United Nations Framework Convention on Climate Change negotiations in Paris. Claire wrote her research paper on engaging the private sector in funding the UN Green Climate Fund.