Debt capital markets: Helping lenders scale climate finance in emerging markets

Debt capital markets: Helping lenders scale climate finance in emerging markets

By Peter Cashion and Peer Stein, International Finance Corporation

There is an enormous business opportunity for climate finance in emerging markets. Over the next decade, it is estimated that there are at least US$23 trillion in climate-smart investment opportunities, including green buildings, renewables, transportation, energy efficiency, waste management, and agriculture.1 And this doesn’t even include the growing need for adaptation finance. Global capital markets — and debt capital markets in particular — are critical to enabling this transition.


At IFC, we expect climate-related lending in emerging markets to grow up to four times as fast as conventional lending. And the COVID-19 (Coronavirus) pandemic may further increase that rate as governments implement green recovery plans. By 2030, we believe climate-related loans could account for 30% of total loans – up from about 7% before the COVID-19 crisis. For lenders in emerging markets, this projected shift in loan portfolios toward climate-related lending presents a massive business opportunity. Yet, it is reliant on two key factors.

Primarily, access to long-term funding is imperative given that most climate-related loans, particularly for infrastructure, have longer term maturities than is typically offered in emerging markets. The other salient factor is that lenders require expertise to identify, manage and report on their climate-related lending. Given the scale of projected demand, lenders also will need a range of instruments, either to fund their own lending or to facilitate direct funding of climate projects. This may entail devising new green finance products, as well as utilising products such as green and sustainability bonds that have a proven ability to appeal to a wide spectrum of institutional and retail investors.

Green bonds continue to be the instrument of choice for lenders with eligible green use-of-proceeds to seek financing through both domestic and offshore investors. Green bonds have seen exponential growth since the emergence of benchmark sized green bonds in 2013. The global green bond market expanded from a mere annual issuance of US$4bn in 2012 to US$240bn in 2019. Emerging market countries have also seen a steady rise in green bond issuance—from US$1bn in 2012 to US$52bn in 2019.2

The Coronavirus outbreak in early 2020 impacted the volume of bond issuance and by the end of the first quarter, green bond issuance was down compared to the same period in 2019. However, this lull in issuance has proven temporary. In March 2020, US$4.3bn in new issuance was priced and April saw a quick rebound with US$17bn issued. Given the continuous uncertainty of the Coronavirus across the globe, projections for total green bond issuance in 2020 range from US$175bn to US$250bn.3

As the green bond market further develops, a deeper domestic investor base and ecosystem is critical to avoid issuers taking on exchange-rate risks. Domestic green bond markets have begun thriving in certain regions, as evidenced by local-currency issuances placed in numerous countries, including Brazil, China, Colombia, Fiji, India, Indonesia, Kenya, Malaysia, Mexico, Namibia, Nigeria, Peru, Philippines, South Africa, Thailand, and Turkey. There is still significant room for growth in most of these markers. Even China, which already has one of the largest green bond markets in the world, can expand further. Yuan denominated local-currency green bonds accounted for over 90% of the US$52bn in new green bonds issued in emerging markets in 2019, illustrating the room for growth in other emerging market currencies.

The development of the global green bond market — and its potential for further expansion — has the attention of issuers, investors and regulators. The Sustainable Banking Network — whose members from 38 emerging markets account for over 85% of total emerging market banking assets — dedicated a working group to take stock of the key recommendations for green bond market development. IFC, through its advisory work, has been supporting capacity building and green bond market development through its Green Bond Technical Advisory Program, which provides training and hands-on advice to issuers and regulators.

IFC, for example, worked with Access Bank to help develop the market in Nigeria. After reviewing the bank’s green portfolio and preparing a green bond framework, Access Bank issued its first green bond in March 2019, a NGN15bn (naira) local-currency issuance. The green bond was listed on the Lagos Stock Exchange and Luxembourg Stock Exchange, and became the first private sector certified climate bond in Africa. A year after it was issued, almost 100% of the bond’s proceed had been allocated against four eligible projects: a flood defence system for the Victoria Island axis of Lagos, two solar photovoltaic projects and one water management agriculture project.

As green bond issuance in emerging markets continues to grow, we expect to see greater differentiation of the instrument, with an expansion into asset-backed green bonds, covered green bonds and project green bonds in the more mature domestic capital markets. We also anticipate the take up of new categories of climate-related bonds such as blue bonds, transition bonds, and sustainability-linked bonds. While some of those categories may overlap with the traditional green bond universe, they offer issuers options regarding the use of proceeds and present diversity of impact and investor demand.


Exhibit 1: Emerging markets green bond issuance by currency (US$bn)


The sustainability-linked bond is a relatively novel concept which has so far been issued only by corporate borrowers. The recent publication of the Sustainability Linked Bond Principles provides a framework that will allow for more issuers to access this product and for investors to evaluate linked issuance programs. Sustainability-linked bonds are somewhat similar to the sustainability-linked loans employed by corporates to link their sustainability related improvements to their cost of borrowing.

This model may prove to be a particularly well-adapted instrument for banks that plan to become climate finance leaders. Banks could potentially reduce the cost of borrowing of their bonds by setting targets such as an increase in climate-related assets or reductions in climate risks in their overall portfolio in line with the Paris Agreement. Sustainability-linked bonds give issuers greater flexibility over the use of proceeds than green bonds which have a strict exclusive use of proceeds for eligible projects. And they allow investors to influence the overall direction of a banks’ climate business — including alignment with the Paris Agreement — far more so than the dollar-for-dollar match the use of proceeds of a green bond would give them.

Whether issuers choose green bonds, blue bonds, sustainability-linked bonds or another instrument, we believe debt-capital markets will provide an ample source of funding for the necessary transition to a low-carbon future.


 Key debt capital market instruments for lenders to scale up climate finance

Green Bonds: The main dedicated debt capital market instrument of climate related financing for banks and corporates in emerging markets today and in the future. Global green bond issuance has grown over the last 10 years to US$240bn in 2019, of which US$52bn have been issued in EMs.4 Global green bond issuance by financial institutions was US$64bn in 2019, of which US$24.4bn were issued by financial institutions in emerging markets.

Blue Bonds: Very early stage with only few issuances globally with total issuances to date of US$0.2bn, led by the initial sovereign blue bond issuance of the Seychelles and related issuances by MDBs. Proceeds are used to finance marine and ocean-based projects as well as sustainable water management that have positive environmental, economic and climate benefits. As attention of climate related impacts and benefits continue to increase the focus on water and oceans, we expect commercial lenders to tap into the investor base for blue bonds.

Transition bonds: The Transition bond market is still very nascent with total issuances at approximately US$1.6bn. While there is currently no internationally agreed definition for “transition”, the intention of a transition bond is to implement and issuer’s decarbonisation strategy and fund projects that displace higher emitting options and contribute to a country’s decarbonisation pathway. As such, this emerging product may be particularly relevant for issuers/projects in high-emitting industries such as e.g. agriculture, cement, chemicals, energy, shipping, steel and aluminum. In 2019, ICMA launched the Climate Transition Finance Working Group, of which IFC is a member, to consider the concept of transition financing in the context of the green bond market.

Sustainability-linked bonds: The Sustainability-linked bond market currently stands at US$5.7bn of cumulative issuance globally – to date six different issuers have issued debt under this label. In contrast to a sustainability bond, the issuer of a sustainability-linked bond does not earmark the use of proceeds for specific purposes. Instead, this is a general-purpose product, for which the coupon is being adjusted depending on the issuer achieving pre-determined sustainability performance targets. Sustainability-linked bonds build on the Sustainability-linked Loan Principles of the Loan Market Association. In early 2020, ICMA created a separate Sustainability/KPI-linked Bonds Working Group which may eventually propose additional market guidance.



1 IFC Climate Investment Opportunities in Emerging Markets: An IFC Analysis; 2016.

2 Global green bond market annual issuance volume is calculated based on data sources from Climate Bonds Initiative, Environmental Finance Magazine and Bloomberg.

3 Moody’s Investor Service: Coronavirus shrinks green bond issuance while spurring social bonds; May 5, 2020.–PBC_1227042

UniCredit: The Green Bond and ESG Chartbook; April 16, 2020.

4 IFC-Amundi Emerging Market Green Bonds Report 2019 Link.



Peter Cashion, CFA

Chief Investment Officer & Climate Head

Financial Institutions Group




Peer Stein

Senior Adviser



International Finance Corporation

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Washington, DC 20433, US

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