Green Bonds: Lasting Solutions For Climate Change
How much will it cost to combat climate change? By some estimates, a staggering $50 trillion. And while this may seem like an impossibly daunting figure, you should know there is a solution to this financing gap: green bonds.
But having only been around for a little over a decade, they are still a relatively unfamiliar investment for many.
The above infographic from IFC explores the exciting world of green bonds, which are gaining serious traction in financial markets.
Green Bonds 101
To begin, green bonds are not that different from regular bonds. Both are debt instruments or fixed income securities that pool capital from investors for a specified project or objective. But while Fortune 500 companies issue bonds to generally enhance their bottom line, green bonds differ in their commitment to eco-friendly ventures and sustainability.
Here’s a closer look at the anatomy of bonds, including green bonds:
- Yield: The fixed coupon rate as a % of the market value of the bond price.
- Maturity: The predetermined length of the bond.
- Credit Rating: The rating bonds receive to determine their riskiness and quality.
- Bond Price: The price of the bond purchase (typically starts out in $1,000 denominations).
- Coupon: The payment on the bond usually occurs in semi-annual or quarterly installments.
Unlike bonds which have been around for centuries, dating back to the Mesopotamian times, green bonds are still relatively new. And in this short time, they have been taking modern finance by storm.
Why Green Bond Offerings Are Accelerating
It has become practically impossible to ignore the conversation around climate change. And as of late, there appears to be a newfound sense of urgency due to the acceleration of natural disasters occurring. Thanks to rising global temperatures, infrequent and extreme weather events are becoming more frequent than ever before. For example, when compared to 1850-1900, heat waves occur almost 3x more often today.
Here’s a breakdown of extreme weather event occurrences, based on future projections for global temperature averages:
|Extreme Weather Event||1850-1900||1℃ (Today)||1.5℃ (Future Projections)||2℃ (Future Projections)||4℃ (Future Projections)|
Unfortunately, as it stands, global temperature increases show no signs of slowing. That said, these risks can also expedite the growth for the green bond market, especially since they’re a compelling investment.
The Investment Case For Green Bonds
Since 2018, green bonds have been an outperformer relative to the average returns from the global bond universe. With interest rates at near-century lows, and equity valuations at frothier levels, investors may see green bonds as an increasingly attractive route.
In some cases, the yield on green bonds goes upwards of 6%—4 percentage points greater than the 2% yield on 10 Year Treasury. Furthermore, 61% of green bonds are assigned a credit rating of ‘A’ or higher. This is an important feature given that the amount of high quality credit ratings have been capitulating since the 1990s.
Breaking Down Green Bond Issuance
Green bonds make up over half of the ESG investment universe and are being used primarily for transport and energy projects, which make up 35% and 29% of proceeds, respectively. Here’s how their total proceeds break down:
|Type of Green Bond Project||Use of Proceeds (%)
To add to this, the U.S. represents the largest market by green bonds outstanding, followed by France and China. By currency, however, the Euro represents almost 60% of all green bonds.
Green Bond Growth: A Timeline
In a short time period, green bonds have experienced a rapid ascent into mainstream finance. The table below provides an overview of some of the major milestones achieved:
2010: IFC issues its first green bond through a $200 million private placement and becomes one of the earliest issuers of green bonds.
2010: IFC launches the Green Bond Program to unlock investment in private sector projects in emerging markets.
2013: IFC issues first $1 billion green bond, and then issues a second $1 billion green bond in the same year, helping to catalyze the market.
2014: Total green bond issuance more than triples to $37 billion.
2015: Green bond market hits $100 billion in cumulative issuance.
2017: Green bond market hits $250 billion in cumulative issuance.
2019: In September 2019, IFC crossed the $10 billion threshold in cumulative issuances under its own Green Bond Program.
2020: Green bond market reaches the $1 trillion milestone in cumulative issuance.
2021: As of June 30th, IFC has issued 178 green bonds in 20 currencies amounting to more than $10.5 billion.
In a little over a decade, green bonds have had a monumental rise from a market worth millions to $1 trillion in cumulative issuance.
The Next Decade: Where Do Green Bonds Go From Here?
Although issuance is at record breaking levels, this is still just the beginning. Green bonds have a substantial expected growth trajectory, especially when considering that the regular bond market is worth $128 trillion.
Climate change is often touted as humanity’s biggest challenge, ever. In the next decade, the green bond market can propel to a multi-trillion dollar market, and equip society with the much needed tools to address our changing global climate.
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Operational Health Tech: A New Billion Dollar Market
Operational health tech is poised to be a multi-billion dollar industry. This graphic breaks down how its disrupting healthcare as we know it.
Operational Health Tech: A New Billion Dollar Market
Many lessons were learned throughout the COVID-19 pandemic, but what has become most apparent is the need to invest in healthcare on all fronts. In fact in just a few short years, businesses, governments, and consumers have had to entirely reassess healthcare in ways not quite seen before.
What’s more, this elevated importance placed on health could be here to stay, and one area in particular is poised for significant growth: operational health tech.
The graphic above from our sponsor Bloom Health Partners dives into the burgeoning market that is operational health tech, and reveals the key driving forces behind it.
What is Operational Health?
To start, operational health is an industry that provides health services to employees to help keep companies running smoothly.
A critical piece of operational health is workplace health, which is expected to soar in value. From 2021 to 2025, the market for workplace health is expected to grow 200% from $6.5 billion to $19.5 billion.
The industry is undergoing a tremendous amount of innovation, specifically in relation to technological advances.
Operational Health Tech: Disrupting Healthcare
The operational health tech industry is disrupting traditional healthcare by providing direct services to employees in the workplace.
For decades now, the U.S. has increasingly become a statistical outlier for healthcare spending relative to health outcomes. For instance, the average American incurs $9,000 in healthcare spending per year, nearly twice that of OECD countries, yet life expectancy is flatlining while other countries see rises.
A worsening and increasingly expensive health dynamic makes the environment ripe for disruption and is allowing for new ideas to be brought to the table.
In addition, people are already responding to these inefficient practices by shifting greater emphasis on health within the job market. For example, studies show that workers care more about healthcare benefits over the salaries when choosing an employer.
Going forward, employees will gravitate towards employers that provide standout health benefits like workplace healthcare options offered by operational health. Here are some additional factors that act as catalysts for this space.
1. Healthcare as Smart Business
What do companies that rank as some of the best to work for have in common? First, they all tend to outperform relative to the S&P 500 on a cumulative stock performance basis. Second, many offer superior healthcare benefits.
Moreover, from 2012 to 2022, companies that were the best to work for saw shares appreciate nearly 500%, compared to around 300% for the broader market. Data like this suggests investing in healthcare and keeping employees happy is smart business that pays dividends.
2. Healthcare as a Differentiator
Since 2020, labor markets have changed dramatically. As a result, employees now have more options and are much more selective about where they work. This is evident from the difference between job openings and hires which has risen to unrecognizable levels. For example, the data shows that there are nearly 12 million job openings, but only around 6-7 million hires in 2022.
Altogether, with an oversupply of jobs relative to workers, employers will have to find new ways to differentiate. One way to stand out is through healthcare and initiatives around operational health tech.
3. The Looming Mental Health Epidemic
Today some 700 million people suffer from some form of a mental health condition and COVID-19 has continued to exacerbate the problem.
Moreover, the cost of mental health for the global economy is estimated to be a whopping $6 trillion by 2030, over double compared to the $2.5 trillion figure in 2010.
Under the umbrella of services operational health tech covers, mental health will stand to benefit. Especially in the years to come as we look for new ways to combat its mounting costs.
Investing in Operational Health Tech
Bloom Health Partners is an operational health tech company looking to revolutionize workplace health by supplying employers with data to better understand their employee base and business.
One way Bloom stands out is with Bloom Shield—its flagship cloud-based big data platform for employee health data management. With Bloom Shield, new health insights become available to make better decisions. Employers can get insight into demographic data and age trends within the workplace, pre-screening detection for cancer and diabetes, and testing for management to tackle the spread of disease.
Click here to learn more about investing in operational health tech with Bloom Health Partners.
How Environmental Markets Advance Net Zero
The global price of carbon increased 91% in 2021. Below, we show how environmental markets are supporting a greener future.
How Environmental Markets Advance Net Zero
In 2021, roughly 20% of global carbon emissions were covered by carbon pricing mechanisms.
Meanwhile, the global price of carbon increased 91%, bolstered by government, corporate, and investor demand. This puts traditional fuel sources at a disadvantage, instead building the investment case for renewables.
This infographic from ICE, the first in a three part series on the ESG toolkit, explores how environmental markets work and their role in the fight against climate change.
What are Environmental Markets?
First, meeting a goal of net zero carbon emissions involves limiting the use of the world’s finite carbon budget to meet a 1.5°C pathway.
Achieving net zero requires us to:
- Change how we utilize energy and transition to less carbon-intensive fuels
- Put a value on the conservation of nature or “natural capital” and carbon sinks, which accumulate and store carbon
Environmental markets facilitate the pathway to net zero by valuing externalities, such as placing a cost on pollution and placing a price on carbon storage. This helps balance the carbon cycle to manage the carbon budget in the most cost-effective manner.
What Is the Carbon Budget?
To keep temperatures 1.5°C above pre-industrial levels, we have just 420 gigatonnes (Gt) of CO₂ remaining in the global carbon budget. At current rates, this remaining carbon budget is projected to be consumed by 2030 if no reductions are made.
Each scenario based on a 50% chance of success
Source: IPCC AR6 WG; Friedlingstein et al 2021; Global Carbon Budget 2021
Across three different scenarios, the above table indicates the amount of carbon emissions humanity can emit to prevent the worst effects of climate change.
What are Negative and Positive Externalities?
Second, when companies compensate for CO₂ emissions, they can fall across two categories: negative and positive externalities.
- Negative externalities include pollution. Carbon cap and trade programs, using carbon allowances, put a cost on pollution.
- Positive externalities include renewables, such as wind and solar power that generate carbon-free electricity. The value of renewable energy can be expressed with a renewable energy certificate.
Natural capital is another example of a positive externality, which involves the capturing and storing of carbon. The value of this type of natural capital can be expressed using a carbon credit.
Environmental Markets and the Energy Transition
Next, environmental markets can drive the transition to cleaner energy sources by ascribing a cost to pollution and putting a premium on renewables, to change how we use energy.
As one example, in 2013 the UK government introduced the Carbon Price Support mechanism to complement the emissions cap and trade program and weaken the investment case for coal. Between 2013 and 2020, Britain’s overall CO₂ emissions fell by 31%.
Here’s how coal was phased out of the UK’s energy mix, while renewable energy sources such as wind, solar, and bioenergy played a greater role.
|Date||Coal||Gas||Wind and Solar||Bioenergy|
|Q1 2000||31 TWh||40 TWh||0 TWh||1 TWh|
|Q1 2005||41 TWh||36 TWh||1 TWh||2 TWh|
|Q1 2010||31 TWh||47 TWh||2 TWh||3 TWh|
|Q1 2015||28 TWh||23 TWh||13 TWh||6 TWh|
|Q1 2020||3 TWh||27 TWh||28 TWh||9 TWh|
Source: Digest of UK Energy Statistics (DUKES); BP; EMBER via Our World in Data (2021)
Today, less than 5% of the UK’s electricity is coal-generated, with remaining plants expected to be decommissioned by 2024.
How Environmental Markets are Advancing Net Zero
Finally, as governments increase their commitments to net zero, carbon prices are rising towards a level that requires industries to decarbonize and meet those goals.
In fact, between 2014 and 2021, the global price of carbon has increased over sixfold.
|Date||Global Carbon Price (Year End)||Annual % Change|
As indicated by the ICECRBN Global Carbon Price (CPW Weighted)
Source: ICE (Apr 2022)
As companies begin to treat their carbon footprints as liabilities, there will be increasing demand for environmental attributes, such as carbon allowances and carbon credits.
Managing Risk and Opportunity
Quoted markets like ICE Futures Exchanges and NYSE allow stakeholders to precisely value positive and negative externalities to:
- Manage emissions cost effectively
- Hedge climate transition risk
- Allocate capital to facilitate the energy transition and build carbon sinks
- Create an asset class for Natural Capital
- Invest in assets to meet climate obligations
Everyone is exposed to climate risk which means it needs to be measured and managed.
That’s why balancing the carbon cycle will be critical to managing the world’s carbon budget. Markets are providing greater access, liquidity and opportunity in supporting net zero ambitions.
In part two of the series sponsored by ICE, we’ll look at four motivations for using ESG data.
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