2018 - 2019 Edition of Citi Perspectives for the Public Sector

Citi Perspectives for the Public Sector |  2018-2019 5 On the Future of Sustainability Bonds O ver the past decade, we have witnessed the emergence of an extraordinary new market; from its launch in 2007, the green and theme bond market is expected to approach the $200 billion issuance mark by the end of 2018. 1 The pace of development for this financial product set is tremendous, and its record of innovation is no less impressive, even if it disappoints the most vociferous of green bond advocates. The questions now, both for market participants and for policymakers alike, are: Where will the next five years take us, and what more can be done to develop the market? Will the market peter out, evolve slowly or speed forward, potentially radically altering the face of finance? Given the macro-political and the investor demand dynamics, I’m betting on the latter; this market will become the “new normal,” with broad-based thematic issuance, significant liquidity, multi- product components and substantial downside for those participants that are late in understanding its significance. The Current State of Play First, let us clarify the term “sustainable”: Historically, “sustainable” has been narrowly used to refer to all things green — both climate-neutral and environmentally friendly. Over time, the term took on a broader meaning, particularly with the publication of the 1987 Brundtland Commission report and when, in 2015, the United Nations replaced the Millennium Goals with 17 Sustainable Development Goals (SDGs). The policy community now often uses “sustainability” in the broader SDG context to refer to the greatest social, economic and environmental challenges of mankind, from water scarcity and poverty to gender and, yes, “green” objectives. This paper will use this broader definition of “sustainability.” Jay Collins Vice Chairman, Corporate and Investment Banking, Citi 1 Green bond issuers agree with investors prior to issuance to allocate proceeds specifically to green investments with agreed-upon documentation, disclosure and monitoring. The agreement often refers to standards and norms set by outside parties such as ICMA. Citi estimates the green and theme bond market will reach $180 billion in 2018, while Moody’s and others have estimated as much as $250 billion of issuance. Kchutyak, M. et al, “ Global green bond issuance set to eclipse $250 billion in 2018, ” Moody’s Investor Service, January 31, 2018. I would like to thank Philip Brown, Val Smith, Michael Eckhart and Paull Randt at Citi for their thoughtful contributions to this analysis.