Central banks and supervisory authorities now consider climate-related risks as part of their mandate for ensuring financial stability. Recently, the Central Bank of Ireland wrote to all regulated financial services providers outlining its concerns and expectations for how these institutions should carry out their duties in relation to climate-related risks. For banks and credit unions, this translates into more sustainable balance sheets that are more resilient to climate risks and enable the transition to a low carbon future.

The Carbon Disclosure Project (CDP), a non-profit organisation running a global environmental disclosure system, reported that in 2020 financial institutions were underestimating the most significant climate-related risks, with a potential financial impact of over US$1 trillion. However, the same report also found financial institutions were keenly focused on financing the transition to a low carbon future, a market opportunity worth up to US$2.9 trillion, with green bonds among the preferred sources of green finance.

Like any other bond, a green bond is a fixed-income financial instrument for raising capital from investors through the debt capital market. In addition, green bonds follow specific criteria, a set of guidelines for best practice known as the Green Bond Principles (GBP) developed by the International Capital Market Association (ICMA). The GBP include requirements for the project selection process, management of proceeds and reporting of the positive impact generated by the green assets in the bond. An external review is generally arranged by the issuers to ensure the proposed green bond framework complies with the guidelines of the GBP.

Proceeds raised by green bonds are earmarked for projects with a clear and well-defined environmental benefit. Typical eligible assets include renewable energy, energy efficiency, green building, and transport, which combined accounted for over 70% of all uses of finance raised in the green bond market in 2021, according to the Climate Bonds Initiative. Although the implementation of the GBP remains a voluntary exercise, it has become common practice in the EU, with regulation based on the GBP expected soon. A proposed EU Green Bond Standard (EUGBS) sets out clear definitions of green projects whilst creating standardisation and a mechanism for the supervision of external reviewers. Until the EUGBS comes into force, financial market participants like Cantor Fitzgerald are applying a rigorous approach to ensure issuers are following best practice and green bonds are correctly labelled, before investing or recommending to clients. This increased due diligence is applied in line with the Sustainable Finance Disclosure Regulation (SFDR), which aims to protect investors from false claims regarding the green attributes of products, also known as greenwashing.

Since the first green bond was issued by the European Investment Bank in 2007, the green bond market has grown substantially to include social and sustainability bonds; the latter includes a mix of both environmental and social projects. Last year, green bonds passed the $1 trillion mark in annual global issuance for the first time, according to a report by the Climate Bonds Initiative.

Banks have built a strong presence in the green bond market, not just as issuers themselves but also as investors and bookrunners for many other green bonds. They earned an estimated US$3.4 billion from green debt deals last year, for the first time this was more than they earned from deals involving fossil fuel companies. The table below shows the largest bookrunners of green bonds in 2021, with JP Morgan in top position, followed by Credit Agricole CIB, BNP Paribas and Bank of America, all of which have consistently been in the top five bookrunners over the past five years.

Green bonds provide a hedge against climate-related risks at a time when regulation and supervision of such risks in the financial industry are being strengthened. By properly accounting for these risks, financial institutions are not only better equipped to cope with the impacts of climate change but are also key players in the efficient channelling of resources needed to transition to a more sustainable future.

Carolina Angarita-Cala is Sustainability & Responsible Investing Manager at Cantor Fitzgerald Ireland.