As the world increasingly focuses on tackling climate change and other environmental problems, investors who want to align their financial goals with their values have taken a particular interest in Green Bonds. This is an increasingly debated topic in our region as well, yet there are still some uncertainties or misconceptions surrounding it. Let us now try to set the record straight.
What is a Green Bond?
Green bonds are a type of fixed-income investment used to finance projects with a positive environmental impact. Like traditional bonds, green bonds offer investors a fixed return. They are issued by public, private or multilateral entities to raise capital for initiatives that contribute to a more sustainable economy and deliver identifiable climate, environmental or other benefits. Projects financed by green bonds include renewable energy, energy efficiency, clean public transport, pollution prevention and control, nature conservation, sustainable water and wastewater management, and green buildings that meet internationally recognised standards and certifications. They often have tax incentives attached to them that make them more attractive to investors.
As countries around the world increase their efforts to reduce carbon emissions, the green bond market is booming. This rapid growth was first highlighted in October 2021 when the European Union (EU) issued approximately $14 billion worth of these bonds, the largest deal in history at the time.
For the sake of completeness, the term 'green bond' is sometimes interchanged with 'climate bond' or 'sustainable bond'. However, these are not synonymous.
How big is the green bond market?
The green bond market has been growing exponentially recently. According to the World Economic Forum's Fostering Effective Energy Transition 2023 report, $270 billion has already been spent on green bond issuance four years ago. This amount continues to increase. According to S&P Global, annual issuance could be around $1 trillion by 2023. Indeed, solving the climate crisis will not be cheap. The UN's Intergovernmental Panel on Climate Change estimates that limiting the temperature rise to 1.5°C, the target of the Paris Agreement, will require annual investments of more than $3-6 trillion by 2050. As a result, governments and businesses are increasingly turning to green bonds as one way to raise these huge sums. In November 2023, for example, Brazil sold its first-ever green bond to support President Luiz Inacio Lula da Silva's ambitious plans to protect the Amazon.
This is greatly helped by the fact that major investors, from asset managers to insurance companies and pension funds, are keen to acquire them. The green bond market is thus expanding rapidly thanks to a combination of political determination and investor appetite.
Who issues green bonds and where do they come from?
The first green bond was issued by the European Investment Bank in 2007, followed a year later by the World Bank. Since then, many governments and companies have entered the market to finance green projects. In the Czech Republic, for example, ČSOB has issued green bonds.
The second largest source of green bonds is the United States, led by government-backed mortgage giant Fannie Mae. Corporations from Apple to Pepsi and Verizon have also got involved. State and local governments are also turning to green bonds to pay for infrastructure projects. China is currently leading the way, with more than $85 billion worth of green bonds issued in 2022.
As it could be seen from the above, investment in green bonds is more the province of institutional investors, mutual funds, hedge funds and endowments that can afford to invest large sums in debt instruments. However, many mutual funds and ETFs also offer exposure to green bonds for retail investors who want to align their portfolios with their environmental sensibilities and values.
How do I know if a bond is green?
Greenwashing is a big challenge for the market for green bonds and other sustainable investments.
Regulators and the industry itself are trying to address this problem. Many borrowers are following guidelines called the Green Bond Principles, which have been endorsed by the International Capital Market Association (ICMA) to help bring transparency to the market. There are also a number of companies that offer bond assessment and certification.
The European Union is taking transparency one step further with its European Green Bond Standard, which was adopted at the end of 2023. This voluntary standard, based on the EU Taxonomy, is designed to help grow the market by giving investors the information they need to assess and compare securities that claim to be green.
What are the prospects for green bonds?
Despite the urgency of tackling the climate crisis, the fossil fuel industry received far more funding than green projects in the years following the Paris Agreement. That will change in 2021, according to Bloomberg Green. Sustainable investment is therefore likely to continue to grow at a dizzying rate as governments place a premium on climate protection.
How can my company get involved?
The whole issue may seem quite complex at first glance, especially for potential bond issuers. If your company is considering issuing them, your first thought is probably how to determine for yourself that your project is "green" and how you can issue them. The experienced advisors at Green0meter can help you by guiding your company through the complete process to ensure that your green bond complies with the Green Bond Principles framework and other relevant standards.
With Green0meter, you get the assurance of lower-cost financing with long-term returns to support your sustainability, energy efficiency and savings initiatives. Plus, within the Green0meter platform, you can then manage your data over the long term and gain a long-term and efficient overview.
Comments