Green shoots in the green bonds market?

It could be time for investors to give the green light to green bonds. Kate Brett and Christina Teague (Mercer) report. The green bond market has developed from its nascent form into an area that large-scale investors are pursuing more actively.

There is a growing awareness of the impact that climate change is having on our world. Increasingly, investors are seeking to understand how this process will affect their investment portfolios. To do so, they are using scenario analysis to identify future risks and opportunities.

More than two centuries of economic development has been underpinned by access to cheap fossil fuels. However, global policymakers have signalled their strong intent to lower greenhouse gas emissions. The most significant development in this area was the recent signing of the Paris Agreement, as confirmed at the December 2015 UN Climate Change Conference (known as ‘COP21’).

The goals agreed at the conference involve keeping emissions low enough to contain global temperature rises to within 2˚C this century, relative to pre-industrial levels. However, while a shift toward a low-carbon economy has begun, given that the world has already surpassed 1˚C of warming, it is anticipated that the policy response to mitigating climate risks will become increasingly urgent in the coming years.

Investors will increasingly identify projects related to the shift to a low-carbon economy that require financing.