Steering more private capital toward achieving climate and development goals can be an elusive effort — but one way that has proven scalable is through bonds.
The green bond industry has grown dramatically in the last decade, with more than $400 billion issued in 2024 thus far. There are questions, however, around how many actually achieve energy or climate objectives and just how accurate the labels are. And rising debt burdens may make bonds less appealing or appropriate in some contexts.
Still, a number of recent announcements pave the way for new types of environmental or sustainability-linked bonds.
The International Finance Corporation has just issued the world’s first biodiversity bond with BBVA bank in Colombia that will finance projects that tackle reforestation, regeneration of land and restoration of habitats, among other things. The first tranche of the bond — $15 million — was issued Friday, and it is expected to eventually reach $70 million. BBVA is issuing the bond, while IFC helped to structure it and is an investor.
We’re also seeing some fruits of the Inter-American Development Bank’s Amazonia Forever program, which scales financing and support for the Amazon region. The bank’s private sector arm, IDB Invest, recently issued the first private-sector bond to finance the Amazon region. The five-year, 50 million Brazilian reais bond aims to create economic opportunities while protecting the region's rainforest.
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“The successful placement of this private sector bond shows an emerging investor appetite to support sustainable development in the Amazon, which is essential to regulating the global climate,” said James Scriven, CEO of IDB Invest, in a statement.
IDB and the World Bank are jointly developing investment guidelines for Amazonia bonds that will govern how the money can be used, what will be measured, and what targets will be set.
IDB Invest also recently supported and provided financing to a sustainability-linked bond issued by Natura, a cosmetics company, that supports its efforts to develop bio-ingredients from the Amazon and provide economic and environmental benefits to the region. IDB Invest put in 200 million reais (about $36.7 million) into the 1.32 billion reais bond.
ICYMI: Looking for a refresher on what bonds are and how they work? This video explainer has you covered.
The nitty-gritty
“Debt capital markets, due to their size and reporting capabilities, can play a particularly important role in providing” significant financing volumes, but very little of the green, social, or sustainability bond market allocates funds to low- and middle-income countries, according to a recent report by the Organisation for Economic Co-operation and Development.
There are some real challenges: currency, liquidy, regulatory constraints. But they can be a useful instrument for low- and middle-income countries to signal a commitment on social or green objectives and access a different group of investors, the OECD report says.
While some donors are working on these issues, they often act separately and should instead align and work together on their efforts, the OECD report says.
So what’s needed to get more of this money moving to lower-income nations? OECD says donors need to better coordinate on supporting large-scale blended finance instruments for these bonds that could provide first loss or guarantees. Donors also need to work together and encourage high-quality impact measurement and reporting related to these bonds. A task force on bonds would improve strategic coordination on impact measurement, technical assistance and other areas where joint approaches can expand this sector.
A new model?
Pricing carbon and environmental impact will be critical to climate funding, and could play into the value of certain financial products in the future. There’s still a long way to go, though a new proposed tax in Denmark aims to serve as a model for the rest of the world.
Starting in 2030, Denmark will tax farmers 300 Danish krone (about $43) per ton of carbon dioxide-equivalent emissions from livestock digestion and manure handling. It would increase to 750 Danish krone by 2035. It’s all part of the country’s efforts to cut greenhouse gas emissions by 70% from 1990 levels.
Denmark's Parliament must still approve the tax agreement, though they are expected to do so after the summer holidays, Devex contributor Tais Gadea Lara reports.
“The way that this measure should impact the climate in the end is through replication in larger countries,” says Michael Svarer, professor at the economics department of Denmark’s Aarhus University and head of the government-commissioned group of experts who designed the tax architecture. “If they do it in the European context, next you could go abroad.”
Read: What the world can learn from Denmark’s new carbon tax on agriculture (Pro)
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Reform, reboot, renew
The Bretton Woods organizations — including the World Bank and the International Monetary Fund, and the other multilateral banks they inspired — need to change in order to fight climate change, according to Eric Pelofsky, the vice president of global economic recovery at The Rockefeller Foundation.
“Reforming the global financial architecture may seem a daunting, technical task, yet it holds the key to fundamentally enhancing support for nations grappling with climate change. We need financial systems that are robust, proactive, responsive, and aptly suited to support emerging economies and the most vulnerable,” he writes in an opinion piece for Devex.
Opinion: At 80, Bretton Woods needs a makeover to fight climate change
+ Catch up on news and analysis on MDB reforms.
Digging deeper
And one example of just how that system may not be working as it should is an investigation that the IFC internal watchdog, the Compliance Advisor Ombudsman, just announced that will look into investments to PT Bank KEB Hana Indonesia, a commercial bank that is financing the construction of two new coal-fired power plants in Indonesia. Local communities filed a complaint last year that the coal plants are causing air pollution that causes health problems, with livelihoods harmed, particularly for fishermen, and that there are land acquisition and resettlement problems.
The CAO’s initial review found cause for further investigation, including that IFC had determined that Hana bank had moderate environmental and social risk, despite its investments in some high-risk projects, including the coal plants. It also found a number of other concerns about Hana bank’s environmental and social practices, a lack of information, and other potential compliance problems.
IFC management said that it complied with the relevant policies for its financial intermediary investments and that they could not be linked to any “alleged harm” because of their limited exposure.
Bigger and better
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The U.S. International Development Finance Corporation is one step closer to expansion, reform, and an extended mandate, after the House Foreign Affairs Committee approved a bill reauthorizing the agency.
If it passes, the DFC Modernization and Reauthorization Act of 2024, would extend DFC’s operations for seven years, would double the agency’s investment cap to $120 billion, change accounting methods allowing the agency to make more equity investments, and also expand the number of countries where it can invest.
“This bill modernizes the DFC and maintains its development mandate, but most importantly, it strengthens the DFC’s ability to further our national security interest by allowing it to provide a better alternative to Russian projects and China's Belt and Road Initiative,” committee chairman Rep. Mike McCaul, a Republican from Texas, said at the hearing about the bill last week.
Read: House committee approves bill extending, enhancing US DFC (Pro)
ICYMI: US Development Finance Corporation hopes to BUILD on its future (Pro)
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What we’re reading
South Africa’s new environment minister is focusing on the $9.3 billion Just Energy Transition Partnership. [Bloomberg]
European Investment Bank ex-chief Werner Hoyer denies €1 million corruption allegations. [Politico]
The European Bank for Reconstruction and Development and the World Bank to disclose in line with ISSB standards. [Responsible Investor]
About the author
Adva Saldinger@AdvaSal
Adva Saldinger is a Senior Reporter at Devex where she covers development finance, as well as U.S. foreign aid policy. Adva explores the role the private sector and private capital play in development and authors the weekly Devex Invested newsletter bringing the latest news on the role of business and finance in addressing global challenges. A journalist with more than 10 years of experience, she has worked at several newspapers in the U.S. and lived in both Ghana and South Africa.
