The World Bank has completed a SKr2.7 billion ($344 million) issue of bonds whose proceeds are set aside specifically for climate change prevention projects. The issue, led by SEB, is the first time that the World Bank has issued debt whose proceeds are dedicated to a particular area of operations. It is set to lead to follow-on issues, not least from the Bank, but also from other multilaterals.

The bond offers enormous promise to multilateral lenders, which can tap investor enthusiasm for green issues, and often access new, and competitive funding sources. It also promises to expand the funding available to emerging markets renewable energy developers.

But it also threatens to turn multilaterals' lending divisions into popularity contests, where the most favoured causes garner the most attention – and cash. Managing the impact of such infusions on lending operations and the banks' wider policy thinking, will be essential.

The idea for the bond issue did not come from inside the Bank, but as a result of demand from SEB's clients. The World Bank, as a supranational, can borrow at extremely low rates of interest, usually a few basis points over the United States. Such debt usually offers little attraction to retail or institutional investors.

But such investors are under pressure, whether self-generated or from their stakeholders, to put their money to work in worthy ventures. Most such ventures tend to be at the opposite end of the risk spectrum, in start-ups, or emerging markets operations. Marrying this risk aversion to social interest is the Green Bond.

The structure of the bonds is simple. They carry full recourse to the World Bank, and like any other World Bank lending, the proceeds will be lent to government, government-owned, or government-guaranteed entities. The chances of a private renewable power developer snagging some of the proceeds are small.

The proceeds must be lent to a project that meets the bonds' eligibility criteria. They might help to mitigate climate change, including power plant and transmission rehabilitation, both on- and off-grid solar and wind farms, coal gasification and carbon capture technologies, dedicated bus-lane construction, bus fleet fuel conversion, deforestation prevention and reforestation and energy-efficient housing. Or they could help countries adapt to climate change by supporting new agricultural technologies such as drought-resistant crop strains, or by helping construct flood defences.

The bond indenture does not include language that allows investors to call or accelerate the bonds in the event of non-compliance, with investors trusting to the World Bank's reputation for doing the right thing. But Cicero, a think-tank attached to the University of Oslo, has laid down the types of projects that could receive loans from the proceeds. The World Bank will produce a short report one year after the bonds are settled, outlining which projects have received funding to date.

The pressure from SEB's investors to gain such exposure is unprecedented. "We have never seen a development like this," says Doris Herrera-Pol, the global head of capital markets at the World Bank. "None of the other areas the Bank works in, not combating AIDS, not malaria, has attracted this kind of interest." As a gauge of investor concern about global warming, the difference is telling.

But the focus on climate change prevention efforts will make some at multilaterals uneasy. Until now, allocating resources to different projects has largely been a matter for the leadership within multilaterals, who in theory can concentrate on the highest-yielding and most effective programmes without worrying which are most popular. Allowing bondholders to channel their funds to favoured causes threatens to upend this process.

However, this is unlikely to happen for two reasons. First, such earmarked bonds are likely to form more than a small subset of the Bank's fundraising efforts, which typically amount to between $15 and $25 billion in a typical year. Second, as Herrera-Pol stresses, earmarked funding will be layered on top of the Bank's ordinary process of setting a $40 billion budget, and will not lead to resources being diverted according to investor popularity.

But this will hopefully spur governments to put forward projects that will benefit from World Bank funding. If other banks, those with larger and more active private sector departments, choose to follow suit, earmarking might produce more activity in adding emerging markets renewable generating capacity than has so far been the case.

SEB, after closing on 6 November a SKr2.325 billion fundraising with Länsförsäkringar, Skandia, AP3 (Third Swedish National Pension Fund), and AP2 (Second Swedish National Pension Fund), reopened the process on 14 November to accommodate a SKr375 million commitment from the United Nations Pension Fund. Other pension funds, in particular US public employee funds such as Calpers, have expressed an interest in such instruments. Follow-on issues from the World Bank or its peers look likely. The main difficulty with this, and future non-dollar issues, is funding sufficient cross-currency swap capacity to hedge the borrowers' exposure.

It would be easy to dismiss such initiatives as simple PR for borrowers and investors, if current demands on multilaterals' resources were not presently so heavy. As it happens, and after a period in which both private and public borrowers spurned multilateral debt as slow and burdened with restrictions, commercial banks are ceding ground to the development finance institutions. Boosting their resources, and supplementing shareholder equity and general purpose borrowing, will be vital.

Green Bond programme
Status: Closed 6 November, reopened 14 November, settled 24 November
Size: SEK 2.7 billion
Description: World Bank bond issue, with proceeds earmarked for climate change-related purposes
Issuer: International Bank for Reconstruction and Development (IBRD)
Maturity: 12 November 2014
Increase Issue price: 102,069%
Rating: Aaa/AAA
Redemption: 100%
Coupon: 3.5%
Clearing system: Euroclear
Sole lead manager: SEB
Senior co-manager: Credit Suisse
Co-manager: Landesbank Baden-Württemberg