The 2015 Paris climate agreement, so far ratified by 168 countries, formalizes nations’ mutual efforts to combat climate change through clearly defined targets, such as limiting global warming to well below 2 degrees Celsius from pre-industrial levels. Several countries have formalized ways to achieve the goals stipulated by the agreement in pledges known as Nationally Determined Contributions (NDCs). These pledges specify each nation’s intended actions to meet the agreed targets, and they become binding at ratification of the Paris agreement. However, there are no legal repercussions for noncompliance. The NDCs include details on policies and targets to mitigate or adapt to climate change to comply with the Paris agreement targets. Governments can achieve these targets first and foremost by channeling funds to projects that incentivize climate-friendlier alternatives.

However, these targets come with a significant price tag. We believe governments will use a wide range of actions to meet these ambitious targets. This will not only include sovereign green bond issuance, in our view, because sovereign willingness and ability to increase budgets and debt burdens to accommodate these costs is likely to be very limited. We think it will also likely include private sector funds, potentially through legislative incentives and other efforts, to meet these targets.

More Ambition Than Action So Far

There are growing signs that action is falling short of ambition. The United Nations 2017 Emissions Gap Report, published in October 2017, concluded, among other things, that there is an urgent need for accelerated short-term action to meet the goals of the Paris agreement. However, it said that there are practical and cost-effective options available to make this possible.

The report states there is also a shortfall in the estimated climate impact of the NDCs. Currently, if all NDCs were fully implemented, there would still be a temperature increase of 2.8 degrees Celsius by the end of this century, 0.8 degrees above the upper bound of the Paris target. The report indicates that the NDCs cover only approximately one-third of the emission reductions needed to stay on track, stating that “the gap between the reductions needed and the national pledges made in Paris is alarmingly high”. The ratchet mechanism incorporated in the Paris agreements, whereby countries that are party to the agreement must pledge increasingly ambitious NDCs on a five-year basis, should help to target this shortfall. However, issues remain regarding how pledges will be put into action and financed.

To turn these targets into reality, a number of countries have included exact financial targets and figures to identify the extent of the overall cost and funding needs to achieve them. Although these financial targets are spread over a time horizon until 2030, we consider them extremely ambitious, and the likelihood of sovereigns bearing these costs via direct government expenditure and issuance of public debt appear to us to be very limited. We therefore estimate that significant private sector or multilateral funding will bridge the gap.

The total implementation cost for countries that have submitted specific financial figures to meet their NDCs stands at $5,280 billion. By comparison, the total outstanding global climate-aligned bonds issued (see Endnote) currently stands at only $895 billion, according to the Climate Bonds Initiative, a not-for-profit organization promoting investments in low-carbon and climate-resilient projects. Of the 189 countries that have submitted NDCs, only about 60 have included specific financial estimates of the costs, meaning the total would likely tally up far beyond the $5 trillion stated. Added to this, overall spending so far, whether private or public, is falling drastically short of the targets, and only a few viable plans to address this have been made public and official.

Sovereign Green Bond Issuance Will Not Suffice

To illustrate the magnitude of NDC pledges, we have studied the 10 rated sovereign issuers that have pledged the highest total implementation costs and compared these costs to the sovereigns’ current overall general government debt. For many of these countries, the implementation costs exceed current debt burdens manifold. Furthermore, two of these 10 countries have stated unconditional commitments directly from the government: Zambia has pledged $15 billion, equivalent to about 73% of 2016 GDP; and Ghana $1.4 billion, equivalent to about 3% of 2016 GDP. The size of the Zambian government commitment in particular raises questions over its feasibility. When averaged over the period for which the cost applies (2015-2030), the average annual cost for the period of $3.67 billion represents 18.6% of GDP, which, although much less than 73%, is still enormous. The rest–totaling 99.7% of pledges by the 10 sovereigns–remains unspecified in terms of sources of funding. In our view, it is very unlikely that governments would be willing, or able, to risk deteriorating their creditworthiness by stretching their budgets and debt burdens to fund the implementation costs. We acknowledge that political motivation, such as wishing to appear progressive to the international community, may have a bearing on such considerations, but this is likely only to be to a limited extent. 


Sovereign issuance in the green bond space picked up in late 2016 with Poland’s inaugural green bond. Although only modest, at around $800 million with a four-year maturity, this issuance was followed early 2017 by the largest green bond issuance to date, by France, of about $7.5 billion, with a 22-year maturity. This first and sizable issuance from a G7 member has also contributed to providing further liquidity for the embryonic sovereign green bond market. Most recently, Fiji joined the group of sovereign green bond issuers in October 2017 by announcing a $50 million issuance. Nigeria is expected to become the first African issuer with a green bond in the pipeline.

Development, Multilateral, And Private Financing Could Help To Bridge The Gap

Potential financing to help fill the gap could come from development finance institutions (DFIs). The 2017 Global Landscape of Climate Finance, published by the Climate Policy Initiative, estimated the average financing levels over 2015 and 2016 from development finance institutions (national, bilateral, and multilateral) at $123 billion. We note that this is less than 2.5% of the total implementation costs found in the NDCs, therefore highlighting the need for financing from other sources, such as the private market. In this regard, the multilateral development banks are becoming more focused on crowding in private finance by encouraging more risk-sharing. Using a blended approach of DFI and private capital, multilateral development banks can achieve a multiplier effect whereby for every dollar invested directly by a multilateral development bank in private sector operations, about $2-$5 are mobilized in additional private investment. This will likely prove to be crucial in helping countries meet their NDCs because the depth of the private markets is significant compared to either sovereign or multilateral development bank markets. Clear legislative and regulatory incentives from the public sector and sovereigns could be key to the overall success of these efforts to engage the private sector. Such initiatives could create a favorable investment environment in climate change mitigation projects, which may attract further private capital. In our view, the potential resulting from the creation of these enabling environments could far exceed the potential from increasing budgets or debt burdens. The level of climate finance flowing from private sources is already superseding those from public sources.


Many other initiatives are also mobilizing private funds into climate change. For example, the Green Climate Fund, set up by the UN Framework Convention on Climate Change, has established a private sector facility to encourage institutional investors and corporations to invest in the sector or co-invest with the fund. Bank of America Merrill Lynch has launched the Catalytic Finance Initiative, a consortium of leading financial institutions pledging to direct $8 billion into high-impact projects within the field of sustainability by increasing access to funding. The Global Innovation Lab for Climate Finance is another initiative aimed at driving billions of dollars of private investment to the low-carbon economy through the development of innovative financial instruments specifically designed to unlock finance for energy efficiency, renewable energy, sustainable transport, climate smart agriculture, and curbing deforestation. All of these initiatives aim to reduce the barriers that currently limit the level of private capital flowing to climate change adaptation and mitigation projects. They will be critical to helping close the gap between NDC requirements and governments’ willingness and ability to increase budgets and debt burdens.

We expect sovereign green bonds to increase in popularity in the future on the back of countries’ growing green commitments, as highlighted by various reforms enacted in this direction by China, France, Mexico, and Switzerland. However, we do not foresee issuance growing at a pace necessary to cover the costs stipulated by the NDCs. After all, green bonds are debt, like any other liability. Overall, however, the few sovereign issuances to date have contributed to adding credibility to their Paris agreement commitments. We have also seen robust market appetite for green issuance so far, as demonstrated by oversubscriptions recorded for the two sovereign green bond issuances and the premium at which those bonds have been trading on the secondary market. Nevertheless, our expectation remains that, rather than assuming the bill themselves by issuing any kind of debt, states will play a key role in mobilizing private sector funds alongside their own efforts.

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