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Bonds Could Unlock Climate Adaptation in Emerging Markets

New Climate Bonds Initiative report highlights growth in GSS bond issuance in 2021. 

The green, social and sustainability (GSS) debt could provide a key channel for investors to support adaptation in emerging markets countries, according to panellists speaking during a webinar hosted by the NGO Climate Bonds Initiative this week. 

“Investors can skip over a lot of fossil fuel-based energy infrastructure and more directly invest in renewables infrastructure,” said Paul O’Connor, Head of EMEA ESG Debt Capital Markets at JP Morgan. “There’s clear opportunity through bonds as [sustainable and low-carbon] technologies continue to improve.” 

Finance inflows are urgently required to implement adaption techniques and strategies needed for EMs to withstand the effects of climate change, according to Berit Lindholdt-Lauridsen, Senior Operations Officer at the International Finance Corporation (IFC). 

“Climate adaptation finance is needed in EMs because they are likely to be some of the worst effected by climate change. Given that climate adaptation is going to be one of the key topics at COP27, we should see more focus in this area in the near term,” she said. 

As climate urgency increases, and countries around the world look to make good on their nationally determined contributions, the more pressure there is across both emerging and developing markets to adapt to and mitigate the effects of climate change, panellists said.  

Climate Bonds’ newly released annual report highlighted the discrepancy in green bond issuance volumes between developing and emerging markets last year.  

Three quarters (73%) of green bond issuance originated from developed markets (DM), while 21% came from EMs. This is nonetheless an increase from 17% the previous year, the report noted.  

Africa is among the territories most vulnerable to the impacts of climate change, but only three green bonds from the region – amounting to US$405 billion – were added to the Climate Bonds Green Bond Database (GBDB) last year.  

“Historically, fragmented, small-scale borrowing needs have been a barrier to green bond issuance in Africa, especially to increase energy access through renewables,” the report said. 

Estimated adaptation costs and financing needs in developing countries are between five to ten times greater than recorded 2020 international public adaptation finance flows, according to the 2021 Adaptation Gap report published by the UN Environment Programme (UNEP). 

Its sectoral analysis across 26 developing countries highlighted that four sectors make up three-quarters of the quantified adaptation finance they need: agriculture (26%), infrastructure (22.6%), water (15.2%) and disaster (12.5%). 

Some EMs are making progress, Climate Bonds noted. By the end of last year, GSS bonds accounted for 33% of EM Chile’s US$77 billion in outstanding liabilities, making it the only sovereign to have issued bonds across all three themes last year, the report said. Chile aims to ensure that renewable energy makes up half of its energy mix by 2028 and 60% by 2032. 

Latin America accounted for 15% of sovereign GSS issuance in 2021, compared with 8% from Asia-Pacific and 1% from Africa.  

Looking ahead 

Adaptation and resilience is one of the five key themes Climate Bonds has predicted will dominate the GSS+ market this year.  

“Investors are increasing the systematic scrutiny of the resilience of their investments, hence it is crucial for issuers of all types of debt to make sure that any exposure is addressed in the planning process using current best practice,” the report noted.  

Effective climate adaptation and resilience themes for bonds to target include water resource management and urban development projects, it added.  

As well as this, other key future themes the report identified included the development of taxonomies to help issuers identify suitable projects to finance and the evaluation of issuers according to the quality and clarity of their net zero transition strategies. 

Sustainability themed bonds are “well suited” to EM sovereigns, the report added, noting that this broadens the categories of eligible expenditures to include environmental and social themes “which are usually interlinked in EMs to a greater extent than DMs” and also allows issuers to align with a greater number of Sustainable Development Goals (SDGs).  

In 2021, the 11 issuers that priced sovereign sustainability bonds were EMs, Climate Bonds said. 

Surpassing US$1 trillion 

In 2021, GSS-themed debt issuance rose by 57% compared to the previous year, reaching almost US$1.1 trillion, the Climate Bonds report said. Further, annual green bond issuance increased by 75% from 2020 levels, reaching US$522.7 billion. 

The sustainability-linked bond (SLB) market was the fastest growing theme measured, amassing US$118.8 billion last year, with a YoY growth of 941%. 

To qualify for inclusion in the Climate Bonds assessment, the report methodology noted that debt instruments had to have a label, such as green, social, sustainability and transition. However, a broad range of other labels for debt instruments are also acceptable, the report said, including blue, climate, SDGs and positive impact. 

Included GSS and transition bonds also had to demonstrably finance sustainable projects, activities or expenditures. SLBs had to outline clear sustainability performance targets, the report added. 

“The trillion dollars issued across sustainable markets suggests that capital is beginning to shift at scale – but more is needed,” said Sean Kidney, CEO of the Climate Bonds Initiative. “This year, we hope to see a trillion raised in green bonds alone, rising to US$5 trillion by 2025.” 

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