The green bond market: a potential source of climate finance for developing countries

Abstract

This paper examines the potential of green bonds in mobilizing adaptation and mitigation finance for developing countries. Building upon a theoretical approach, it identifies the key drivers of the green bond market over the last few years and the barriers that impede its appropriation by developing countries. The results suggest that the rise of green bonds is a fact in developed and emerging countries, backed by an increasing climate-awareness from investors. However, in developing countries, the market remains incipient, and its full potential seems to be underappreciated. The lack of appropriate institutional arrangements for green bond management, the issue of minimum size, and high transactions costs associated with green bond issuance, are the key barriers to the development of green bonds in developing countries. In order to cope with these challenges, this paper suggests an efficient use of multilateral and national development banks as intermediary institutions for local green bond management. Furthermore, local governments are required to provide local green bond issuers with guarantees aimed at covering the transaction costs associated with green bond issuance.