International Finance Corporation (IFC), part of the World Bank Group, has expanded on its first offering of green bonds earlier this year, launching a program through Incapital that opens green bonds to individual investors.
The IFC Impact Notes Green Bond offerings are Triple-A rated bond alternatives to securities such as those issued by government-sponsored enterprises (GSEs). They offer proponents of impact investing the added advantage of seeing their money used exclusively for the financing of renewable energy and energy efficiency projects.
The projects are global in nature, with most being built in emerging market countries. While many see that as a risk, both Incapital and IFC see it as an opportunity—and, according to Incapital, the addition to the green bond program is just the beginning.
Here are five reasons why Incapital and IFC say there’s such huge potential for growth.
1. Population growth: According to Evelyn Hartwick, head of socially responsible bond programs at IFC, by 2030, “there will be about 1.3 billion more people in the world … with most growth taking place in emerging markets.”
Low- and medium-income economies will account for 90% of that population growth. And that translates to money. Hartwick said, “These economies are contributing 70% of global GDP growth, and 90% of GDP growth in that area of the world [emerging markets].” So the green bond projects in those regions are only logical, since “it makes sense to [build] where the growth will be [located].”
2. Energy needs: Hartwick said that population growth will equate to “1.3 billion more people looking for energy.” Considering the already volatile disputes over energy from fossil fuel sources, that leads quite logically to the need for renewable sources, the fastest growing energy sector. Much of that growth, said Hartwick, is also within emerging market countries. “Renewables are growing by 7.6% per annum,” she said, adding that biofuels are also on the rise.
3. Climate change: With concerns over climate change driving a need for more efficiency, cleaner sources of energy, and depletion of natural resources including water, green investment isn’t only about more; it’s about better.
Projects already financed by green bonds from IFC include not just Aura Solar in Mexico and Zorlu Wind in Pakistan, but also Modern Karton, in Turkey—a cardboard manufacturer that uses waste paper, straw pulp, and water. With groundwater seriously depleted in the region of Turkey where the company’s wells are located, the government has prohibited additional deep well drilling and limited industrial access. Faced with restrictions that threatened its existence, the company got a green bond-financed loan from IFC that Hartwick said supports a new waste water recovery system that has allowed the company to expand production by 50% without increasing water use.
4. Limiting the increase in global temperature: Last year the International Energy Agency (IEA) said that, to restrict global temperatures from increasing more than 2 degrees Celsius, an investment of $36 trillion was necessary in climate technology and industry—a $1 trillion investment every year until 2050. This year, however, the IEA upped the amount necessary to transition the globe to clean energy to $44 trillion—and added that the investment would save $115 trillion in avoided fuel costs.
Those projects will encompass not just renewable energy and biofuel, but also such sectors as efficiency upgrades for buildings and vehicles, and also rethinking how businesses and systems work, from smart grids to supply chains.
5. Interest in impact investing is growing: Figures from J.P. Morgan and the Global Impact Investing Network indicate that sustainable investments have grown 20% since last year among the 125 development finance institutions, foundations and fund managers they reviewed—totaling $46 billion. While there’s obviously still a long way to go to meet the IEA’s goal of $44 trillion, that also means there’s a lot of room for investment in the sector.
It’s not only the high-net-worth and institutional investors who are interested in impact investing; individuals with smaller bank balances want to do their part too. Incapital said that the first issue of green bonds for individual investors attracted a little under $6 million the week of September 8—a strong showing, since because of rate movement during the week, the bonds were less favorably priced toward the end of the week than at the beginning. Incapital prices its bonds on Mondays and maintains that price for the duration of the week.
Louise Herrle, managing director, capital markets at Incapital, said that sometimes for its broker-dealer distribution group to fully participate “sometimes it does take a little bit of time and multiple offerings.” However, for this first offering of green bonds, “we know a couple of dealers took large chunks of the bonds and onsold them to their financial advisor base…. There’s increasing interest within the BD community for what we call values-based investments … from both clients and financial advisors.”
To allow even more advisors and individual investors to pursue their commitment, not just to green energy investments but to a broader array of values-based investments, Incapital will launch later in the month its Legacy platform, which, according to the firm, is “designed to help advisors align their clients’ financial and social impact goals.”
“It has always been important to us at Incapital to give back to our community and it’s even more rewarding to do so in a way that connects investors to values-based opportunities,” said Tom Ricketts, chairman of Incapital, in a statement. “Incapital’s Legacy platform expands our prior involvement with programs to meet important environmental and social impact needs.”
Herrle said that the new platform will allow issuers of values-based investments “to provide their products to individual investors, to connect them in a way that that’s [otherwise] not readily available to them.” The involvement of more issuers will, in turn, “grow the sector.”