Bond markets–representing the largest asset class in capital markets –are critical in the context of achieving the Paris Agreement.
The global bond market is roughly $100 trillion globally–roughly three times the size of the EU and 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 paper focuses on creating a broader understanding of the interface between climate goals and bonds.