Recently, the Dubai Supreme Council of Energy (DSCE) and the World Bank agreed to design a funding strategy for a green investment program in Dubai that would look at financing green investments through a variety of sources, including green bonds and sukuk (Islamic certificates).
The World Bank has been supporting the growth of the green bond market not only as an issuer, but also by sharing knowledge with potential new issuers, investors, and other market participants through conferences and workshops. All of these developments led to the signing ceremony with DSCE at the World Green Economy Summit in Dubai in April 2014.
The partnership with DSCE to design a funding strategy for green investment in the Emirate represents a next step in the World Bank’s involvement in the growth and diversification of the green capital markets and fits with Dubai’s efforts to go green. Examples of Dubai’s ambitious program in this area include the Sheikh Mohammed Solar Park, designed to generate 1000 megawatts (MW) once finalized, and a strategy to retrofit 30,000 buildings to meet the highest energy efficiency standards. In addition to the carbon reduction benefits, each project will also provide the market with useful knowledge and data that will support the development of the industry in the region.
The Bank’s green bonds have established a process that allows investors to support specific climate and environmentally beneficial programs. The process has been adopted by many other issuers who have adapted it to their own circumstances, including multilateral development banks, government agencies, and corporations – mostly in the US and Europe. Working with DSCE is an opportunity for the World Bank to share its experience in this area with a member country in the MENA region and help mobilize funds for climate-smart activities.
It’s interesting to reflect on how it all began. Nearly seven years ago, the World Bank Treasury was approached by a group of Scandinavian pension funds looking for a liquid, triple-A rated investment that would allow them to support climate-friendly projects. Working with a Swedish bank, SEB (Skandinaviska Enskilda Banken), and the original green bond investors, the World Bank developed the green bond concept that has been credited as the origin of the green bond market.
The idea was simple: The World Bank would issue bonds specifically tagged as ‘green bonds’ whose proceeds were ring fenced only for use to finance projects meeting pre-defined eligibility criteria. Through these green bonds, investors are able to purchase triple-A rated bonds with the assurance that the funds they invest will support projects that address the climate challenge. Green bonds also provide investors with transparent reporting about the specific projects being financed and the impact these will have in terms of mitigating, or adapting to, the effects of climate change.
The World Bank Group has two separate issuers that are active in the green bond market. Since its first green bond in November 2008, the World Bank (IBRD) has issued 62 green bonds in 17 currencies raising some $5.6 billion. The International Finance Corporation has issued about $3.4 billion in green bonds, including two $1 billion benchmark bonds that supported the growth of the market.
The green bond market is growing rapidly in terms of the range of participants. Over the past year or so, many new issuers have joined the market, including local governments, government agencies, banks and corporate issuers. Although supranationals pioneered the green bond market, it is increasingly attracting private sector issuers seen as essential for channeling capital market funding towards climate and environmentally sustainable projects. Investors are welcoming this diversity, which increases their options with respect to issuers, credit exposure, and types of project in which they can invest.
Momentum in the market’s growth in volume is also significant. In 2013, more than $11 billion was issued in designated green bonds, and in the first few months of 2014 over $12 billion has already been issued. At the World Economic Forum in Davos, President Kim called for doubling the global market for green bonds to $20 billion by September 2014, and to US$50 billion by December 2015 – both dates when the United Nations will hold climate summits. With nearly $12 billion issued by the end of April, it looks like President Kim’s target for 2014 may well be exceeded.
With the advisory agreement signed in at the World Green Economy Summit in Dubai in April, Dubai and the World Bank will be working together to mobilize financing for Dubai’s ambitious transition towards a more environmentally sustainable economy. Dubai’s entry into the green capital markets will be a milestone introducing, as it does, a new issuer, a new geographic focus in the Middle East and North Africa region, and a new type of investment. It could also demonstrate a model for green financing that has the potential to catalyze more investment for sustainable growth, which could be replicated by others in the region.
by Michael Bennett
co-authors: Christine Davies
Michael Bennett is the Head of Derivatives and Structured Finance in the treasury department of the World Bank.
Ms. Davies has 15 years of professional finance experience which includes a diverse portfolio of roles in addition to her current position. Prior to joining the Capital Markets Department, she spent 5 years working for the International Development Association (IDA) –the World Bank’s concessional lending arm-- leading work designing innovative financing solutions to mobilize resources for IDA’s operations among other corporate finance responsibilities.
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