Green and climate resilience bonds – Scaling up access to affordable finance in developing countries, notably in LDCs

Thank you for the opportunity to speak with you today.

As the world’s largest climate fund, GCF brings together players from across the public and private sectors to catalyse climate finance at scale and create new, green markets. 

Markets that work for developing nations, not against them.  

Since our first project was approved in 2015, our portfolio has grown to USD 10.2 billion – USD 37.3 billion in total assets under management with co-financing.  We now have 192 projects approved in 128 developing countries. Thirty percent of our our resources are invested in LDCs.

The pandemic has magnified the SDG financing gap in developing countries by simultaneously increasing financing needs and decreasing availability of resources. This gap was estimated to USD 3.7 trillion annually in 2020.

Green, Social, Sustainability and Sustainability-linked (GSSS) Bonds represent a new asset class that has gained traction over the past years across developed markets and that can help fill the SDG Financing Gap. Even though GSSS bonds grew by USD 600 billion in 2021, they still make up just a fraction of the bond market.

As climate change effects are felt, investors are likely to become increasingly concerned of lending to vulnerable countries. A shift towards GSSS bond issuances aiming at funding the climate transition for sovereign issuers could also contribute to mitigate such risks by enabling governments to assert their political commitment to fight against climate change.

However, the size of this market remains limited in developing countries. Africa accounted for only 0.077%  of the global green bond market in 2021. Those at the forefront of climate change continue to have the least access to climate finance to reduce its devastating impacts.

The market for GSSS bonds is hampered by several barriers in developing countries, especially LDCs and SIDS. Adequate market infrastructure is needed to provide the foundation for capital market depth and liquidity. This includes exchanges and trading platforms, clearing houses, credit risk assessment, custodians, and fiduciaries, without which bond markets will be difficult to scale.  

Furthermore, supporting local public development and commercial banks in the issuance of green bonds in the form of green bond trainings, screening of portfolios, advising on green bond frameworks, and providing clarity about the role of green bond verifiers is critical to accelerate the issuance of GSSS bonds. Although there are around 260 public development banks operating in developing countries, less than a quarter  can access the international capital markets to capitalise their operations.

GCF assists developing countries in removing these different sets of barriers. For example, GCF has supported through its grant-based readiness programme the efforts of the Government of Jamaica to set up a Caribbean green bond listing on the Jamaica Stock Exchange, enabling it to list green bonds through a dedicated facility.

Several of our projects are also supporting the legal and financial structuring of green bonds and provide credit enhancement mechanisms to improve their credit rating.

For instance, GCF partners with the Asian Development Bank, to support the ASEAN Catalytic Green Finance Facility. The Facility was designed as the first “Green Recovery” programme for Southeast Asia, providing a platform to kick-start low-emission investments to support economic recovery following COVID-19. It will assist in developing and de-risking a pipeline of priority green infrastructure.

The anchor investment of USD 300 million from GCF financing will leverage over USD 3.3 billion from the Asian Development Bank and other public co-financiers. In turn, these public funds will mobilise substantial additional private  capital flows through green bonds, hybrid public-private partnerships and other innovative financing models.

In partnership with the Inter-American Development Bank and several local public development banks, GCF is also supporting the new Amazon Bioeconomy Fund in six Amazon countries. The Fund aims to reduce the impacts of climate change and greenhouse gas emissions and increase climate resilience in the region. 

The USD 600 million programme will include USD 279 million of GCF investment and will encourage private investment in six key areas of the bioeconomy with a mix of financial instruments, including green bonds, to de-risk eco-businesses in the Amazon.

GCF funding under the bond component of the Amazon Fund will be used to finance advisory services on how to effectively include bio-businesses in thematic bond issuances, as well as how to deploy credit guarantees for green bonds issued by public entities.

Finally, GCF,  is currently exploring through a project preparation grant  the possibility of establishing a Green Guarantee Company that will be dedicated to helping developing countries mobilise climate finance from international capital markets.

The access to credit of an individual climate project is capped usually at the level of the credit rating of the country in which it will take place. Even if a project could be BBB rated, if the country is rated BB then bonds for that project will most likely be BB rated.

GCF would make an equity investment into the Company, which would then use its credit rating to provide guarantees to green bonds and loans, which enable developing countries meet their climate adaption and mitigation objectives. The guarantee will enhance their credit rating, enable them to exceed their country rating and access capital markets at lower cost.

In addition to guarantees, GCF and its partners will continue to explore a range of dedicated credit enhancement mechanisms to facilitate access to capital markets for the most climate vulnerable countries, in particularly LDCs and SIDS.

Thank you for your kind attention.