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Felipe Gordillo, BNP Paribas Felipe Gordillo, BNP Paribas

COP Blog: Sovereign green bonds: the missing link between NDCs and the $100trn debt capital markets

Channels: COP

Companies: BNP Paribas, Intergovernmental Panel on Climate Change, Bank of England

People: Felipe Gordillo, Mark Carney

After the ratification of the Paris Agreement, we expect COP22 in Marrakesh to focus on the transparency of Nationally Determined Contributions (NDCs), compliance and means of implementation.

The sum of current countries' climate pledges (NDCs), will only reduce global greenhouse gas (GHG) emissions to 56 GtCO2e by 2030; thus limiting global temperature rise to 3.5°C.

This is clearly better than the "business as usual scenario" of 61 GtCO2e, but it is still far from the Paris goal of below 2 degrees - the Intergovernmental Panel on Climate Change-IPCC emissions level consistent with a 2°C scenario, 42 GtCOe. The question is no longer whether the transition will happen but how fast and whether or not we will meet our 2°C target.

The good news is that Paris established a ratcheting process by which countries ought to review their ambitions every five years to become ever more ambitious. The importance of Marrakesh and the COPs to come is to make countries genuinely implement the agreement, and for the ratcheting process to fulfil its purpose.

The second fundamental question is how countries will finance the transition. It is estimated that between now and 2030, USD 4 trillion a year will be required to finance green infrastructure and support the energy transition towards a low carbon economy. Given the strains on public finances, large-scale private investment will be needed for the transition towards a green economy. By way of comparison, only the global fixed income market totals 100 trillion of outstanding securities, 40% of which is sovereign debt.

We believe sovereign green bonds are the perfect financial vehicle for countries to close the gap between NDCs and debt capital markets; in other words "the missing link".

This instrument could help countries to finance their sustainable infrastructure needs and climate strategies as described in NDCs. And could become a "commitment device" to deliver faster carbon reductions consistent with a 2°C world.

So far green bonds might only represent less than 0.1% of global debt securities. Current outstanding green bonds total $140 billion with the majority of issuance taking place between 2014 and 2015. However, Nigeria, Sweden, China, Japan, France and Canada have recently announced they will issue green bonds.

Given the importance of sovereign securities in financial markets, we expect these commitments to further increase the supply of green bonds. For example, the French government has announced it will issue €3 billion per year over the period 2017-19; that's a total of €9 billion, representing almost 7% of current global green bond issuance from a single issuer.

Now, as the supply of green bonds increases, responsible investors need to support this movement by clearly disclosing the criteria that drives their appetite for green sovereign bonds. BNPP IP would support green sovereign issuance aligned with the following three criteria.

First, we will require green sovereign issuance to be aligned with Green Bond Principles standards, covering use of proceeds, process for project evaluation and selection, and management of proceeds and reporting. These international guidelines are aimed at promoting transparency and integrity in the market.

Second, we will expect governments to allocate funds raised to environmental projects which are essential to the achievement of their NDCs. The allocations of funds could take several forms, such as subsidies for research, direct investment in sustainable infrastructure, or actions to adapt existing infrastructure to climate impact. In any case, we expect sovereign debt issuers to commit the "use of proceeds" to sustainable projects and to ringfence them from changes in government policy. Political stability is crucial.

Third, strong sustainability credentials are a necessary condition to ensure success during the implementation and management of a sovereign green bond program. Therefore we will back sovereign issuance from countries committed to protecting citizens' best interests and providing goods and services embedding environmental, social, or institutional strength.

The financial sector has a clear role to play in supporting the implementation of NDCs, by changing the way it allocates capital from carbon intensive to low carbon assets. We strongly believe that sovereign green bonds are a powerful financial instrument to do so. In the words of the Chairman of the Financial Stability Board and Governor of the Bank of England, Mark Carney: "The development of this new global asset class (Green Bonds) is an opportunity to advance a low carbon future while raising global investment and spurring growth ".

Felipe Gordillo is SRI Senior Analyst at BNP Paribas Investment Partners.