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Report shows size of climate bonds market, how hydro fits

Climate bonds and hydro

Global growth of green finance is encouraging, but global emissions remain on track to exceed 2 degrees of warming, meaning even more investment in “climate projects” is needed by 2030, according to the Climate Bonds Initiative.

According to Bonds and Climate Change: The State of the Market 2018, there is a universe of US$1.45 trillion in climate-aligned bonds. This breaks down to $389 billion in green bonds, $497 billion in bonds from fully-aligned issuers, $314 billion in issuance from strongly-aligned issuers, and $250 billion in issuance from fully-aligned US Muni issuers.

Importantly, hydropower accounts for 20% of all outstanding clean energy bonds, coming in second only to bonds that finance a mix of at least two clean energy sources.

Specific to hydro, the report references US$54 billion outstanding aligned, 36 issuers, and 291 deals.

According to the report, the top three fully-aligned issuers are Hydro-Quebec (Canada, US$13.8 billion), China Three Gorges (US$10.3 billion, including US$295 million of green bonds) and NHPC (India, US$6.1 billion). Hydro-Quebec and NHPC have yet to issue a green bond. Examples of fully-aligned issuers that have already entered the green bond market to finance hydro projects include Norway’s BKK and Iceland’s Landsvirkjun power company. Emerging markets account for half of the outstanding debt from hydro companies. China, India and the Russian Federation are in the top three.

The top two strongly-aligned entities are Toronto Hydro (Canada, US$1.7 billion) and Emgesa (Colombia, US$1.2 billion). They have yet to issue a green bond. In terms of emerging markets, issuers from Colombia and India have a good potential.

Importantly, the report says:

Bonds from fully- and strongly-aligned issuers in the energy theme represent a wider range of energy generation types than is currently eligible under the Climate Bonds Standard and Certification Scheme – in particular, nuclear and hydro power. Both of these electricity generation types have the potential to provide large-scale and low-carbon power that could meet baseload power demands. However, both power types can be controversial and require stringent criteria and standards in place in order for them to be included. In the absence of such criteria, they have been integrated into this report but may be excluded in the future as criteria are developed.

While hydro issuers in this study have not undergone a controversy screening process (the main challenge being to assess all of the issuers’ projects one by one), the following criteria have been put in place for green bonds related to hydropower: run-of-river, existing reservoirs or new reservoirs with high density (preferably for >5 W/square mile or higher) are eligible. These projects are included unless they are controversial due to loss of habitat/biodiversity and/or displacement of people or with weak social/environmental impact assessment (if publicly available).

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