Since March, an unprecedented sum of public and private capital has been mobilized to address the economic dislocation caused by the COVID-19 pandemic. In the capital markets, COVID-19 bonds—which did not exist at the start of the year—raised $203 billion by the end of June.
Initially, this rapid growth prompted concerns that financing COVID-19 recovery might crowd out green financing. Indeed, green bond issuances in the first quarter of 2020 attained just one-third the volume of the previous quarter. While green capital markets rebounded in the second quarter, more worrying is the expectation that national and subnational governments will sharply reduce or eliminate climate-related funding to fill budget shortfalls triggered by pandemic-related spending. This concern is already playing out in California, where Governor Gavin Newsom’s updated budget proposal pulled funding from a new $1 billion Climate Catalyst Fund and retreated from a $4.75 billion climate resilience bond.
This dynamic between COVID-19 and green financing has sparked intense discussion about to what extent the post-pandemic recovery should be shaped by environmental and climate-friendly priorities. However, what has been less of a focus are the ways in which financing the pandemic recovery benefits from the path forged by green finance—and vice versa.
Arguably, the rapid mobilization of capital directed to the COVID-19 crisis occurred at the scale and speed that it did because it relied on a robust green finance infrastructure that facilitates targeted, impact-focused capital flows.
Purpose-driven financing’s move to the mainstream was abetted by a network of funders and financiers who highlighted areas of need and directed funds accordingly. In particular, climate and the environment have long been top priority issues in the mission-driven investing market, prompting a diverse set of financial actors—including banks, asset managers, funds, and institutional investors—to consider factors beyond financial returns in their lending and investment strategies. This rapid and expansive shift in mind-set has had considerable implications.
A decade ago, banks reporting their sustainability metrics were still considered novel, but today major financial entities are expected to build on that reporting to articulate strategies that meet a diverse set of climate-related impacts.
A significant outgrowth of this trend toward purpose-driven financing has been the rapid expansion of impact investing funds, further normalizing the notion that investments should meet measurable social and environmental outcomes alongside financial returns. Once the purview of foundations and niche investment firms, the global impact investing market now exceeds $715 billion and has been embraced by asset managers, wealth management arms of global banks, and family offices. It is this established foundation that enabled impact investing firm ImpactAssets to establish a COVID Response Fund, with a capacity of $1 billion, mere weeks after the COVID-19 pandemic emerged in the United States.
Certain green finance instruments have also been repurposed for COVID-19 relief, facilitating a rapid response to meet urgent needs. Green bonds, first issued in 2008, allow investors to easily identify debt instruments that deliver defined environmental benefits. Later, this concept was applied to social bonds, which fund projects promoting positive social outcomes, paving the way for the estimated $7 billion raised thus far for COVID-19 relief under the social bond label. In fact, the International Capital Market Association, which publishes both the Green Bond Principles and Social Bond Principles, affirmed at the end of March that the social bond guidelines apply to bond issuances with use-of-proceeds related to pandemic. In the absence of this existing framework, it would have been difficult to raise capital from an impact-focused investor base as quickly.
The role of climate finance is also relevant here. Multilateral institutions and development banks have been instrumental in directing the capital flows to developing countries to help them mitigate and adapt to climate change. This model is now being applied to the current crisis: the World Bank issued an $8 billion social bond to help developing countries address impacts of COVID-19, and the Inter-American Development Bank’s recent $2 billion sustainable development bond issuance is part of its $12 billion program to help member countries to address the pandemic and its consequences.
If green finance paved the way for COVID-19 relief by creating a replicable framework for purpose-driven financing, the investor response to the pandemic demonstrates how quickly capital can be mobilized when the urgency of the moment is a shared, global priority.
This rapid scaling is evident in the numbers. The global COVID-19 bond market, which didn’t exist six months ago, is now estimated to be almost $203 billion. Of that total, $17 billion was issued under the Social Bond Principles, meaning the proceeds are earmarked for specific projects that will yield defined outcomes; in comparison, the global social bond market for all of 2019 was $16.7 billion. Moreover, COVID-19 social bonds are breaking other records. When the African Development Bank issued a $3 billion social bond at the end of March, it was the largest on record. Less than two months later, Unédic, the French unemployment insurance management body, issued one for 4 billion euros ($4.5 billion). Moreover, many of the COVID-19 bond issuances—much like green bonds before it—have been well oversubscribed, further attesting to healthy investor appetite for purpose-driven financing.
Of course, pandemic relief is not only proceeding from the capital markets. Direct government outlays to address the medical and economic fallout of the COVID-19 crisis have been swift and deep. G20 countries have unleashed, in the aggregate, $8 trillion in global economic stimulus—an estimated 5% of their combined GDP.
Clearly, the world is reacting to the immediate health and economic impacts sparked by the pandemic. What if we were to apply similar levels of focus and commitment to climate change?
For starters, we might focus more on climate adaptation (managing the impacts of climate change), in addition to climate mitigation (addressing the causes of climate change).
The vast majority of green finance (over 80% by some estimates) flows to mitigation strategies, whether by investing in renewable energy resources or creating carbon credit markets that support forest protection and natural habitat restoration. But COVID-19 funding has followed the opposite pattern: while funds are certainly channeled to mitigation (vaccine development), the primary destination of the capital mobilized thus far has been adaptation (addressing the economic fallout of the lockdowns).
Could this focus on the economic consequences of the pandemic offer a model for green finance?
While we tend to think of climate adaptation in terms of physical assets (e.g., hardening key infrastructure from extreme climate events), this is an opportunity to think more broadly about using green finance to address the economic impacts triggered by climate change (e.g., livelihoods impacted from floods, droughts, and wildfires) and by the energy transition (e.g., economic dislocation of resource-dependent workers and communities).
At their most elemental levels, the twin climate and COVID-19 crises have clear parallels. Both have a distinct source (global warming and viral contagion, respectively) whose impacts on the world are broad but unevenly felt. Soon after the COVID-19 threat emerged, there was a tendency to de-prioritize green financing in order to focus on the urgency of the pandemic. Increasingly, these crises are being linked in the policy realm as strategies to ensure long-term recovery takes shape. Most notably, the European Union’s recently unveiled 750 billion euro COVID-19 recovery fund is anchored around sustainable finance principles. This linkage is sound. The reliance of COVID-19 relief on the green finance infrastructure allowed it to scale quickly and efficiently; channeling those monies raised to projects that reduce emissions and mitigate climate impacts can ensure that the resulting economic recovery is mutually reinforcing.