This includes all of the main publicly traded debt and equity instruments that are traditionally associated with public capital markets such as stock markets. The most common publicly traded instruments are stocks and bonds which are used to facilitate financing of companies and countries. Publicly traded stocks allow for the ownership of companies by both retail and institutional investors. The stock market allows for easy transfer of ownership, liquidity, through buying and selling shares. Bonds are debt instruments financed through investments (as compared to internal bank finance) and can be traded on capital markets. Green Bonds have raised hundreds of billions USD for the environment and although generally focused on renewable energy investments, increasingly offer opportunities for investments in nature. Blue bonds are a recently emerging niche of Green Bonds with a specific focus on the oceans and aquaculture. In 2016, the Republic of Seychelles, with help from The Nature Conservancy, raised funds for marine conservation totaling $430,000 per year through a Blue Bond. Stock markets are increasingly encouraging their listed companies (companies are listed through public offerings) to report on various sustainability measures and some stock markets are collaborating on improving their impact on sustainable development through efforts such as the Sustainable Stock Exchanges Initiative.
Debt-for-Nature Swaps
Through debt restructuring agreements, governments are able to write off a proportion of their foreign held debt. The savings accrued will be channelled into domestic conservation initiatives and climate adaptation programmes. This often entails the establishment of a Conservation Trust Fund to channel the funds. Debt-for-nature swaps can target both official and commercial lending, with the former being the most common scheme.
As recently as 2016, the Nature Conservancy, through its NatureVest division and Africa program announced the closing of the first debt-for-nature restructuring with the Government of Seychelles and its Paris Club creditors, designed to help the Government re-direct a portion of its debt payments towards marine conservation and climate adaptation. This is the first ever climate adaptation debt restructuring that also includes a strong marine conservation component, using a combination of $15.2 million of impact capital and $5 million of grants to buy back $22 M worth of debt that the Seychelles owed to Paris Club members Belgium, the United Kingdom, France and Italy.
To learn more about the debt ‘conversion’ of the Seychelles, and the public-private trust fund SeyCCAT that manages the restructured debt, visit here.
Green Bonds
Green bonds can mobilize resources from domestic and international capital markets for climate change adaptation, renewables and other environment-friendly projects. They are no different from conventional bonds, their only unique characteristic being the specified use of proceeds which are invested in projects that generate environmental benefits. In its simplest form, a bond issuer (public or private) will raise a fixed amount of capital, repaying the capital and accrued interests over a set period of time. Sovereign bonds and forest bonds are being issued to finance biodiversity related activities.
The Green Bond market has been mobilizing with increasing intensity since the first Green Bond was issued by the World Bank in 2007. At the end of the fiscal year 2018, there were 91 eligible projects and a total of US$15.4 billion in commitments. Recently, in the summer of 2019, one of the largest green bonds ever was issued by the Dutch government – with a value of roughly US$ 6.8 billion. To read more about this particular bond and the development of the overall Green Bond market, visit here.
Blue Bonds
Green bond financing projects related to the blue economy, i.e. sustainable fishery and conservation of maritime resources.
Important global private investment institutions have shown concrete interest in entering into the Blue Bond space. Morgan Stanley, in early 2019, served as sole underwriter of a blue bond for the World Bank that focused on plastic waste reduction efforts in oceans as well as the promotion of the sustainable use of marine resources in developing countries. To read more about Morgan Stanley and its involvement in Blue Bonds, visit here.
Climate Bonds
Green bond financing projects related to climate adaptation and mitigation, e.g. renewable energy projects.
Climate Bonds Initiative is an international, investor focused not-for-profit that is focused on mobilized the estimated $100 trillion bond market for climate change solutions. To learn more about the Climate Bonds Initiative, please visit here.
Ecosystem Green Bonds
Green bonds linked to self-sustained cash-flow generating initiatives from ecosystem related services.
Forest Bonds
Green bonds financing projects related to sustainable forest management or forest conservations, e.g. investments in sustainable timber production companies. Innovative schemes offer repayment in climate credit offsets.
The International Finance Corporation (A World Bank Group) has issued a Forest Bond in order to support the Kasigau Corridor region in East Kenya, which covers over 200,000 hectares. The proceeds from the bond issued in 2016 were used to support sustainable private sector development in order to provide income for the local community. Read more about the project, which follows the Reducing Emissions from Deforestation and Forest Degradation (REDD) scheme in order to offer economic incentives to reduce deforestation and invest in low-carbon growth here.
Islamic Finance
Islamic finance is a unique form of socially responsible investment that abides with the Shari’ah Islamic law, principles and rules. Shari’ah does not permit receipt and payment of "riba" (interest), "gharar" (excessive uncertainty), "maysir" (gambling), short sales or financing activities that it considers harmful to society. Instead, the parties must share the risks and rewards of a business transaction. Islamic finance and particularly green Sukuk are emerging as alternative green finance products.
A finance mechanism that has emerged from the concept of Islamic Finance is the Green Sukuk. The Green Sukuk is a unique example of a Shari’ah compliant impact investing instrument with strong growth prospects to fund environment-friendly endeavors. One of the many examples of Green Sukuks in the Islamic world is the 64$ million Green Sukuk issued by Tadau Energy in Malaysia to finance a 50 MW solar project.To explore other case studies of Green Sukuks, visit here.