Bonds. Green Bonds: Financing a Sustainable Future with the Green Climate Fund

By Claire Smith

Claire attended the 2015 United Nations Climate Change Conference (COP21) in Paris. 


The 21st Conference of Parties (COP 21) to the United Nations (UN) Framework Convention on Climate Change (UNFCCC) is expected to deliver a binding agreement that could be the most important step towards a global climate change solution since the Kyoto Protocol. A key issue for negotiators will be mobilising climate finance for mitigation and adaptation projects in developing countries, which have contributed least to climate change but will be most affected by its devastating impacts.[1] The UN set a goal to mobilise US$100 billion (bn) in climate finance contributions from developed countries by 2020.[2] To date only US$10.2bn has been raised for the Green Climate Fund (GCF), a UN financial mechanism expected to become the premier body for delivering climate finance to developing countries.[3] The World Bank, UN, G20 and climate experts have identified the need to mobilise private finance to fill this funding gap. The emerging green bond market offers an appealing solution because, with the right support, economists estimate up to US$1 trillion in climate-focussed bonds could be issued per year by 2020.[4] The GCF has a unique opportunity to become the world’s leading proponent of green bonds, but it must address challenges related to bond structures, risk levels, debt capacity, and financing models before it is in a position to start issuing bonds and facilitating investment in projects on a large scale. Short-term efforts should focus on mobilising sufficient capital from the public sector, building robust networks, and facilitating market readiness to lay the groundwork for future activities.


  1. The Green Climate Fund Private Sector Facility (PSF) should work toward becoming the world’s leading proponent of green bonds as a long-term solution to bridging the global climate finance gap. 
  2. Short-term PSF efforts should focus on supporting readiness, de-risking, and capacity building initiatives in developing countries to ensure good projects are created and markets are ready to receive financing.
  3. The PSF should partner with Multilateral Development Banks (MDBs) and other organisations working in the green bond market to create strong networks, deliver best-practice learning opportunities, and connect investors and lenders with GCF-approved projects.


The 21st Conference of Parties (COP 21) to the United Nations (UN) Framework Convention on Climate Change (UNFCCC) in Paris is expected to deliver a binding agreement that could be the most important step towards a global climate change solution since the Kyoto Protocol. The current Geneva Negotiating Text (which will form the basis of the Paris agreement) states that the UNFCCC should find ‘new and alternative sources of (climate) finance beyond existing bilateral and multilateral sources’.[5] The emerging field of green bonds has been identified as a source of socially-minded private capital, with the potential to issue up to US$1 trillion (tn) in climate-focussed bonds per year by 2020.[6] Although the concept of green bonds emerged less than a decade ago it already has a proven track record of success in financing transformational development projects around the world. This policy brief will explore the current state of climate finance and argue that the PSF is perfectly positioned to become the world’s leading proponent of green bonds. It will make policy recommendations to the PSF regarding a proposed way forward to begin issuing bonds and facilitating investment in projects on a large scale.


The year 2015 has the potential to usher in a new era of sustainability by ensuring prosperity and environmental protection without compromising the ability of future generations to meet their needs… where people can escape poverty and enjoy decent work without harming the earth’s essential ecosystems and resources.
—    UN Secretary General Ban Ki-moon[7]

In July 2015, the UN hosted the International Conference on Financing for Development in Ethiopia and passed the Addis Ababa Action agenda, which laid the foundation for financing a global sustainable development proposition.[8] In September, world leaders travelled to New York for a special summit at UN Headquarters where they adopted the Sustainable Development Goals, providing a global plan of action through 2030.[9] These conferences have set the scene for the highly anticipated December COP 21 in Paris.

A key issue for delegates will be progressing negotiations around climate finance and securing US$100bn in donations from developed countries by 2020 to enable developing countries to combat the effects of climate change.[10] These nations will be the ones most affected by the consequences of climate variability including droughts, floods, famines and storms, which will undoubtedly cause increased poverty and civil unrest around the world.[11] The majority of funds mobilised under UNFCCC auspices will be channelled through the Green Climate Fund (GCF), created in 2010 to facilitate the building of more sustainable, less carbon-intensive societies by funding climate change mitigation and adaptation projects in developing countries. The GCF provides an avenue for developed countries to take responsibility for their part in causing climate change through financial contributions.[12] Though some industrialised countries were initially reticent to contribute to the Fund, international pressure ahead of COP 21 has led to US$10.2bn raised to date.[13] Unfortunately, this is nowhere near what is needed. Current projections suggest that around US$400bn per annum is required to effectively address consequences in the developing world.[14] Economic projections also show that the cost of inaction is far greater and will only increase with time.[15] Though pledges to the GCF are expected to increase ahead of COP 21, passing a legally binding agreement to secure sustained future contributions to the Fund does not appear likely to happen. Unfortunately, many experts also believe that even if significant additional funding from the public sector is secured, it will not be enough.[16] According to UN Environment Programme (UNEP) assessments, current Intended Nationally Determined Contributions (each country’s post-2020 climate action pledge) are collectively insufficient to limit global temperature increases to two degrees Celsius. This will be especially true if significant climate finance to assist developing countries is not mobilised, making it imperative for the GCF to find additional, long-term sources of funding. [17]

The GCF and the private sector

The GCF is expected to become the premier body for delivering climate finance to developing countries around the globe. Established by the UN in 2010 and headquartered in Korea, it has a similar structure to other global development funds. Its Governing Board consists of twenty-four representatives from developed and developing countries, includes an investment and risk committee, and looks after all funding decisions.[18] Nationally Designated Authorities (NDAs) have been appointed by the GCF to function as its main interface with partner countries. NDAs receive all project proposals which are assessed to ensure that they align with the Fund’s objectives, are country-driven, and follow a strict results management framework.[19] In addition, as of June 2015 the GCF has twenty accredited partner organisations, which act as channels to deploy resources to developing countries.[20] The World Bank is the Interim Trustee and is responsible for managing and reporting on the Fund’s financial assets.[21] As of July 2015, the GCF had received thirty-seven project proposals and eight were selected for review at its November Board Meeting in Zambia.[22]

The GCF is seen as an extraordinary initiative not only because it will be the world’s largest green fund, but because of its distinct approach. In 2013 the GCF created the PSF, which is focused on working with the private sector to increase funding from non-public sources, something no other global fund has done.[23] The UN, World Bank, G20 and climate experts have identified the private sector as a key untapped source of capital. According to UNFCCC Executive Secretary Christina Figueres, the business case for climate action is the strongest it has ever been as demand for low-carbon goods and services continues to rise and new markets open.[24] Companies are already capitalising on these opportunities and in 2014 worldwide green energy investments reached US$270bn, a fourteen per cent increase from the year before. Unfortunately, less than fifty per cent of these funds went to developing countries[25] as concerns related to readiness, risk and available opportunities presented barriers to investment.[26] If the PSF can attract some of these funds to investments in developing countries as well as mobilise new capital, it could significantly improve efforts to respond to the impacts of climate change. The PSF has already started to accredit private organisations and commercial banks as partners, which as a group represent around fifty per cent of global assets (as of 2013).[27] It has also created frameworks to address risk management, engage small and medium enterprises (SMEs) in developing countries, and support readiness initiatives.[28] A Private Sector Advisory Group was created in 2013 to assist with identifying additional opportunities to scale up funding through engagement with the private sector. It has identified a number of possible creative solutions for bridging the finance gap, including the emerging field of green bonds which offers great potential to mobilise funds on a large scale.[29]

What is a green bond?

Green bonds are a type of ‘theme bond’ whereby funds raised from bond sales must be used toward environmental projects.[30] They are similar to loans in that the bond issuer (borrower) receives an agreed amount of money from the bond purchaser (lender) for a fixed period of time. Bonds are referred to as ‘fixed-income securities’ because returns are provided to the bond purchaser via periodic interest payments and the repayment of the principal (amount for which the bond was issued) once the bond matures (the agreed term ends). There are four main types of green bonds, detailed in Table 1 below.

Table 1: Types of Green Bonds[31]

Table 1: Types of Green Bonds[31]

Green bonds are appealing because they can be structured in a number of ways to diversify risk and fund specific projects or companies.[32]For example, a standard bond requires the issuer to assume the full risk of an investment, whereas a project bond limits re-course to the assets of a specific project. Green bonds are an attractive option for the GCF because they can allow the issuer to secure funding for specific projects upfront and share risks.[33] Furthermore, they allow for debt financing that is structured so that both large and small-scale investments can attract funding from capital markets. This could facilitate capital for projects dedicated to mitigation, adaptation and other environment-friendly initiatives through increasing access to green financing with appropriate terms and conditions.[34]

There are some risks with green bonds that may pose challenges for the GCF and serve to deter investors. First, they are not very liquid. As the market is still small it would be difficult for an investor to benefit unless they hold a bond to maturity.[35] Second, there is not a clear definition of a green bond, so an investor may not know exactly where their money is going.[36] Other risks include low returns on investments and a lack of detailed research and historical data to help investors to make educated investment decisions. Fortunately, as the market continues to grow and develop, many of these risks will slowly be addressed.[37]

Changing the world one green bond at a time

Since the European Investment Bank issued the first ‘Climate Awareness Bond’ in 2007, the market has grown significantly and been endorsed by major international organisations.[38] For example, the World Bank entered the green bond market in 2008, and by 2011 had already issued around US$11bn worth of bonds to government agencies, utility companies and banks.[39] According to the Climate Bonds Initiative (CBI), at the end of July 2015, US$503bn was invested in nearly two thousand climate themed bonds around the world.[40] In the U.S. alone the value of professionally managed assets with requirements for socially responsible investing reached US$7tn in 2014, an increase from US$4tn in 2012.[41] Earlier this year, ten of the world’s most prominent banks backed the UNEP Positive Impact Manifesto, which calls for an impact-based approach to banking to foster sustainable development around the world.[42]

As the market has developed, a wider range of issuers, currencies, maturities and bond features are appearing. For example, in 2014, French utility company GDF Suez sold the largest green bond ever issued by a single company for US$3.4bn, which was three times oversubscribed and sold in just over two hours.[43] In 2015, the Seattle, USA municipal transportation authority, Sound Transit, made history when it sold US$1bn in green bonds to fund regional public transport projects.[44] The bonds sold in a single morning. Positive examples like these are important indicators for the GCF of the willingness and potential for the private sector, governments, and the banking industry to participate in creating sustainable development around the globe.[45] CBI forecasts that, with the right support, US$1tn in climate-focussed bonds could be issued per year by 2020.[46] Large-scale fundraising via the PSF could also serve to encourage further public investment in climate finance from developed countries. Investing in GCF green bonds provides an easy avenue for countries like Australia to contribute to climate finance initiatives abroad without putting further strain on already stretched national budgets,[47] while also creating economic opportunities at home.

Does the private sector have a role in sustainable development initiatives?

Though the PSF has been lauded by many as an innovative and exciting addition to the GCF, it has also been criticised by others who believe the private sector should not play a role in development assistance. Private companies doing business in developing countries have not always operated in the best interest of their host country. For example, the unregulated logging industry in the Solomon Islands has practically stripped the country of its natural resources and brought few lasting benefits to local people.[48] Critics of the GCF have raised concerns about recipient countries retaining control of their own projects[49] and whether private finance can be deployed responsibly in developing countries.[50] Fortunately, the GCF has made facilitating country-driven approaches a key component underlying all activities and is already working closely with local governments and private sector stakeholders to ensure appropriate policies are in place to foster sustainable initiatives. The Fund has created a novel approach to accreditation, which allows institutions to choose a best-fit tier for accreditation depending on the activities they hope to engage in: micro, small, medium, or large. However, a stringent assessment process is still applied to all applicants, including fiduciary standards and environment safeguards reviews.[51] This fit-for-purpose approach has the potential to make the Fund more accessible to institutions at all levels so projects can work with their partners of choice.[52] Furthermore, by working with private sector stakeholders in developing countries, the PSF has a unique opportunity to foster innovation and creative thinking toward adaptation and mitigation solutions using local knowledge and experience. The PSF already has plans in place to offer grants for capacity building projects and has made supporting readiness initiatives a key priority.[53]

Policy recommendations: A way forward

An October 2015 progress report on the GCF Strategic Plan identifies questions guiding on-going activity in 2016 and asks, ‘Should the GCF seize the opportunity to become the global leader in green bonds?’[54] Policy recommendations in relation to this document are as follows:

1. The GCF PSF should work toward becoming the world’s leading proponent of green bonds as a long-term solution to bridging the global climate finance gap.

There is enormous potential for the PSF to play a leading role in the emerging green bonds market.[55] A key issue is raising enough foundation capital and garnering appropriate support in order to secure a suitable risk profile and credit rating for the Fund. Thus mobilising sufficient public finance should still be a major priority for the GCF. Putting the appropriate frameworks in place is another priority, and the Fund will need to have robust transparency and governance structures to avoid corruption and maintain support from the international community. The PSF should consider adopting the Green Bond Principles (GBP) outlined by the International Capital Markets Association and seen as the guiding rules on green bonds internationally.[56] The GBP addresses issues related to standards and accountability which are two of the biggest concerns for investors, and promotes transparency, disclosure and integrity in the green bond market.[57]  

Once the appropriate frameworks are in place, the Fund can begin issuing bonds to scale-up its capital, and continue funding projects to build credibility in its activities. Solely issuing its own bonds may not be ideal for the GCF long-term, as it places all of the risk with the Fund and may create unsustainable debt levels. The Board will need to determine how much project and country specific risk the GCF can/should take on, and how much it ought to pass to investors in the future. In some instances, the GCF will continue to be a direct investor in projects and companies via funds it raises from green bonds; but in other cases, it may wish to act as a facilitator connecting proponents directly to investors.

2. Short-term GCF efforts should focus on supporting readiness, de-risking, and capacity building initiatives in developing countries to ensure good projects are created and markets are ready to receive financing.

It is vital that adaptation and mitigation projects in developing countries are ready for investors and the necessary structures and policies are in place to create a friendly investing environment. According to the Global Green Growth Institute:

All in all, it is vital to formulate proposals that can appeal to investors from a risk-and-reward perspective, create a policy-friendly environment in a country that is conducive to green growth investments and provide enhanced and more incentive-based governance mechanisms for private investment.[58]

In the short-term, PSF resources should be allocated to existing readiness and capacity- building initiatives. Working with local SMEs and industry bodies will be vital to building an understanding of opportunities and gaps in the developing country markets. In addition to existing capacity building and readiness grant programs, the PSF should consider issuing grants for pilot projects to facilitate technology transfer and foster innovation while also building local capacity. Continuing to accredit reliable in-country agencies is another vital step for the PSF to ensure it can rely on good local knowledge to guide its activities in developing countries.

Risk has been identified as a major disincentive to investors looking at opportunities in developing countries, especially for large-scale development projects.[59] Thus GCF NDAs have an important role to play in working with local governments to ensure appropriate policies are in place to mitigate investor risk concerns and facilitate partnerships and investments into their markets. The GCF has already established a strategy related to risk mitigation, which includes providing insurance, additional capital, and other risk mitigation instruments.[60] Simply working with the GCF also provides a huge element of risk mitigation for investors. Pre-vetting of projects by accredited agencies imparts a basic level of assurance, and the PSF follows a results-based management model, requiring accredited agencies to monitor projects and ensure they follow PSF requirements.[61]

3. The PSF should partner with MDBs and other organisations working in the green bond market to create strong networks, deliver best practice learning opportunities, and connect investors and lenders with GCF-approved projects.

The PSF should focus on building strong partnerships with established organisations working in social impact and green financing.  As a new institution in the market, it will be important for the PSF to take a collaborative approach to avoid competing for resources and confusing recipients about where to access funding. By working with the GCF, partner groups can also receive benefits such as risk insurance and additional capital for projects.[62] According to the G20, improving cooperation and collaboration between climate funds is imperative to mobilising private finance. Doing so facilitates access to resources by recipient countries as well as the effective and efficient use of resources for both contributor and recipient countries.[63] The PSF should consider taking on a fund-of-funds model, [64] and acting as a facilitating body in the short-term. Creating an e-platform to register GCF-approved projects would be a simple way to start connecting them with partner MDBs and other financial institutions. Sites like Kiva and Kickstarter have shown that connecting projects directly with investors can be an extremely successful approach.[65] 


The GCF has an important role to play in keeping global warming to two degrees and keeping the effects of climate change manageable for future generations. Climate finance has the potential to create a sustainable future for the developing world, but will require assistance from both developed and developing countries to make a real difference. Resources from both the public and private sectors will be needed. Green bonds offer an opportunity to collaborate in a way that provides economic and social opportunities for all involved. Though global negotiations around climate change are important, they can also prevent great initiatives like this one from getting off the ground. COP 21 has provided a sense of hope for the world and one can only hope that it will finish off 2015, the UN’s year of sustainability actions, with another positive step toward a bright future for generations to come.

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