The global bond market is roughly $100 trillion globally–roughly three times the size of the EU and the United States GDP combined –and it’s been growing by a factor of ten since the early 1990s. Bond markets are a critical source of capital for governments, companies, and financial institutions. Their advantage lies in the relatively long-term tenor of the debt instrument, as well as the market’s liquidity, reducing financing costs.
For securitized instruments, they help institutional investors be exposed to household credit (e.g. through mortgage-backed securities) and banks refinance themselves in the context of providing this credit. In its role as a core pillar of capital markets, bond markets can also play a key role in financing the transition to a low-carbon economy.
Despite their importance, the discussion of bond markets has largely focused on the green bond space, which currently represents a marginal share(0.5%)of outstanding bonds. This report focuses on creating a broader understanding of the interface between climate goals and bonds.
The report concludes with a discussion of potential actions, including providing / withholding capital, influencing pricing, and engagement. It highlights the potential approaches and case studies for each of the three examples. The key challenge is the limited evidence as to the relative impact of these actions to each other, creating uncertainty as to the right step for investors to take. Building that evidence-base is crucial as part of a period of data-driven and evidence-building experimentation in order to mobilize the power of global bond markets in the service of climate objectives.