Green bonds market could hit $5.6 trillion by 2035, says OECD

NGO tips low-carbon financial instruments for whopping valuation, but says segment will have to overcome significant hurdles along the way

A blockbuster forecast has tipped the green bonds market to be worth anything between $4.7 trillion and $5.6 trillion by 2035.

The hefty prediction has arrived in a major new report from the Organisation for Economic Cooperation and Development (OECD), which adds that total issuance in the field could reach $620bn to $720bn by the same year.

In Mobilising Bond Markets for a Low-Carbon Transition, the NGO says: “While these figures may seem large on an absolute basis, they are small (approximately 4%) relative to the [entire] scale of debt securities markets.”

By way of comparison, the report notes that in 2014, gross issuance in the full securities markets of the EU, US, China and Japan reached $19 trillion.

That said, the OECD predicts that the 2020s “have the potential to be the start of the ‘golden years’ for bond issuance in the low-carbon sectors. As low-carbon technologies mature and become more familiar to bond markets, and as the risks of assets fall as policy stabilises, the role played by bonds could expand rapidly.”

It explains: “Bond finance has the potential to play a significant role in mobilising additional institutional investors to support the low-carbon investment necessary to meet a two-degree scenario by mid-century.

“Institutional investors in the OECD have the potential to absorb the increased supply of such bonds, through shifting asset allocations in response to the increased percentage of low-carbon bonds as a share of the broader bond markets.”

That conclusion, says the report, is based upon two assumptions:

  1. institutional investors’ appetite for low-carbon bonds may be expected to grow in light of increasing attention to climate risks and opportunities in investment portfolios; and
  2. those same investors will also shift allocations to reflect the increasing share of low-carbon bonds in the market as a whole.

The report acclaims recent sovereign green bond issues by Poland and France – plus the EU’s efforts to enshrine support for green bonds in its Capital Markets Union initiative.

However, the OECD points out, on the way to its potential, multitrillion-dollar valuation, the green bonds market faces significant challenges, such as:

  • underdeveloped domestic institutional investor bases;
  • an underdeveloped credit-rating system;
  • a lack of benchmark yield curves;
  • a lack of risk-hedging instruments; and
  • insufficient market liquidity.

“For some countries,” says the NGO, “a lack of knowledge of existing international standards is an important barrier. In addition, in some countries there is a lack of understanding of the potential benefits of the green bond market among policymakers, regulators, as well as potential green bond issuers and investors.”

Some finance professionals, it stresses, may never have heard of green bonds at all. “In these cases,” it adds, “global green bond market participants – for example, supranational organisations and multilateral development banks – can communicate the benefits of green bonds to these various groups.”

With that assistance in mind, the report says: “Many of these challenges, if addressed in a synchronised way, can be immediately beneficial to the development of local-currency green bonds markets.”

Read the full report online here.

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