Green bonds are becoming a more and more attractive way of financing low carbon projects with the supply doubling in value this year. Now cities are getting in on the act and issuing their own green bonds, led by Johannesburg and Gothenberg.

A landmark was reached yesterday when the International Finance Corporation (IFC), a member of the World Bank Group which provides support to developing economies, issued a 500 million renminbi-denominated green bond (approximately $80.29 million). It is the first green bond issued by a multilateral institution in the offshore Chinese markets and marks a further step in the internationalisation of China's currency.

According to the Financial Times, the appetite for green bonds is growing rapidly because an increasing number of fund managers are mandated to invest in climate-friendly projects. Standard and Poor say that overall, the corporate green bond market is expected to reach £20 billion this year, twice the amount of last year. In May, the largest ever green bond, worth $3.4 billion, was issued by GDF Suez, the French power company, mostly to finance low carbon nuclear power. Citigroup's head of environmental finance, Michael Eckhart, agrees. He told Bloomberg earlier this year that green bonds may account for 10-20% of the $7 trillion-a-year market for the securities within a decade.

This is good news for cities aspiring to reduce their carbon emissions.

Sweden's Gothenburg sold a Skr500 million ($76 million) green bond in September last year; Toronto has issued an 'Atmospheric Fund' which is financing a combined heat, power and cooling plant, a solar power plant, an energy efficiency financing program and a pilot test of outdoor LED white lighting; and Johannesburg launched its own green bond just over a week ago (right).

Johannesburg's R1.46 billion ($143 million) bond was priced at 185 basis points (1.85%) above the R2023 Government Bond and will mature in 2024. The money raised will be used to finance green initiatives such as the Bio Gas to Energy Project and the Solar Geyser Initiative, as well as all other projects that reduce greenhouse emissions and contribute to a resilient and sustainable city.

"This is the first green bond to be listed in the 2013/2014 financial year and marks a historic occasion, as Joburg is the first city in the C40 Cities Climate Leadership Group to issue the Green bond," said Mayor Tau. Johannesburg will be working with the C40 Sustainable Infrastructure Finance Network and the Climate Bonds Initiative to share its successful model with cities across C40.

Benjamin Powell, head of funding at the IFC, said green bonds represent a "capital markets solution" to the need for climate-friendly investment and were becoming increasingly popular with corporates around the world.

IFC green bonds support projects to reduce greenhouse gas emissions — for example, by rehabilitating power plants and transmission facilities, installing solar and wind power, and providing financing for technology that helps generate and use energy more efficiently. Criteria for the use of IFC green bond proceeds are certified by Cicero, the Center for International Climate and Environmental Research, an independent research center associated with the University of Oslo.

In FY13, IFC invested a record $2.5 billion in climate-smart projects—nearly 14% of the institution's overall commitments for the year. About two thirds of IFC's investments in the power sector involved energy efficiency and renewable energy. By FY15, IFC expects its climate-related investments to make up 20% of its long-term financing, or $3 billion per year.

IFC Vice President and Treasurer Jingdong Hua added: "IFC is committed to supporting the development of China's capital markets, which are key to creating access to finance for the private sector and especially small and medium businesses. We will continue to seek opportunities to help deepen liquidity and extend the yield curve for offshore renminbi assets. The addition of the renminbi as a new green bond currency also supports our goals to strengthen this important asset class."

The bond, which yields 2%, saw demand from investors in Asia and Europe. HSBC is the sole lead manager for the bond.

What type of investments qualify for IFC bonds?

Cicero has reviewed IFC's inclusion criteria, which cover the following three groups of investments.

• Renewable Energy (RE): investments in equipment and systems which enable the use of energy from renewable resources, such as solar, wind, hydro, biomass, geothermal and tidal.
• Energy Efficiency (EE): investments in equipment, systems, products and services which help reduce energy consumption per unit of output, such as installing waste heat recovery systems, reducing transmission and distribution losses and producing energy efficient motors.
• Other: investments that reduce GHG emissions in other ways, like sustainable forestry and agribusiness, capturing and flaring or use of methane, carbon capture and storage (CCS).

Previous examples of recipients of funding include a 158 MW run of river hydroelectric plant in Chile, a loan to enable Armenia's Ameriabank to finance small hydropower projects; and support for an energy services company in Mexico that serves the hotel industry there with complete energy efficient solutions. a full list can be found here. 

But IFC is not the only provider of green bonds; many banks are jumping on the bandwagon. Green bond principles, drafted by a committee comprising Bank of America Merrill Lynch, Citigroup, Crédit Agricole Corporate and Investment Bank and JP Morgan Chase, were announced in January with the backing of nine other banks. Since then another 12 have declared their support.

However, these principles do not define greenness, instead detailing guidelines for issuance. Offering guidelines for issuing green bonds without defining what they are begs the question of what exactly is "green" and how rigorously definitions should be policed. For example, is the retrofitting of coal-burning plants to reduce emissions green? Questions like that are likely to become more important as the market grows and diversifies.

There is, as yet, no fully developed, global standard. Cicero, mentioned above, is one independent standard, another is Vigeo, the French environmental, social and governance assessment firm. A third, the Climate Bonds Standard, has been drawn up by the Climate Bonds Initiative, a lobby group.

The attitude of the World Bank is that guidelines are useful, but it's ultimately up to investors to decide. That may not satisfy environmentalists.

The Green Bond Principles stipulate that, to qualify, bond proceeds must be exclusively applied towards new and existing green projects, via specified use of proceeds, direct project exposure or securitisation.

Apart from the organisations above, the US Environmental Protection Agency offers its own advice on environmental financing with a helpful list of financing tools and sources and support from the Center for Environmental Finance and the Environmental Finance Center Network.

At any rate there is no shortage of choice for those wishing to enter the green bond market as a ready source of capital finance for green projects.