What is a green bond?
A green bond is a fixed-income instrument for funding climate and environmental projects. Due to their asset-linked nature and balance sheet backing, these bonds often have the same credit rating as their issuers’ other financial obligations.
Climate bonds and green bonds are not the same. Green bonds date back to the first decade of the 21st century. Climate bonds support initiatives that cut carbon emissions or mitigate climate change, whereas green bonds finance a more comprehensive range of environmental projects.
Understanding Green Bonds
Green bonds promote sustainability and assist climate-related or other environmental projects. Green bonds fund energy efficiency, pollution prevention, sustainable agriculture, fisheries forestry, aquatic and terrestrial ecosystem preservation, clean transportation, clean water, and sustainable water management projects. They fund climate change mitigation and green technology development.
Green bonds may offer tax perks like exemptions and credits, making them a more appealing investment than taxable bonds. These tax breaks encourage climate change and renewable energy initiatives. A third party, such as the Climate Bond Standard Board, verifies that green bonds will support environmental projects.
History of Green Bonds
Green bond issuance was $2.6 billion in 2012. However, green bonds emerged in 2016. Over one-third of all issuances were from Chinese borrowers, who contributed $32.9 billion. Interest is global, with the E.U. and U.S. leading.
In 2017, green bond issuance reached a record high, generating $161 billion in global investment, according to Moody’s. Growth decreased to $167 billion in 2018, but surged in 2019 due to climate awareness. Green issuances peaked at $266.5 billion in 2019 and approximately $270 billion in 2020.
The 2010s witnessed the rise of green bond funds, allowing regular investors to engage in these efforts. Several financial businesses and asset management firms, including Allianz S.E., Axa S.A., State Street Corp., TIAA-CREF, BlackRock, AXA World Funds, and HSBC, have sponsored green bond mutual funds or exchange-traded funds.
Green Bonds in Practice
The World Bank issued $14.4 billion in green bonds from 2008 to 2020. This funding has supported 111 global initiatives in renewable energy and efficiency (33%), sustainable transportation (27%), and agriculture and land use (15%).
In one of its earliest green issuances, the bank backed the Rampur Hydropower Project to supply northern India’s energy system with low-carbon hydroelectric power. With green bond financing, it generates roughly 2 megawatts per year, avoiding 1.4 million tons of carbon emissions.
Green Bond Types
All green bonds are debt financing for an environmental project. Still, their characteristics vary depending on the issuer, the funds used, and bondholders’ rights to the company’s assets in a liquidation. The following are some types of green bonds available:
- Proceeds Use Bonds: These instruments finance green initiatives, but lenders can use the issuer’s other assets in a liquidation. These bonds have the issuer’s credit rating.
- Proceeds Use income bonds or asset-backed securities (ABS): These securities fund or refinance green projects using the issuer’s income streams, such as taxes or fees. State and local governments may issue green bonds this way.
- Project bonds apply solely to assets tied to a specific green project.
- Securitization Bonds: Bondholders have access to the assets underpinning a portfolio of projects. Solar leasing and green mortgages are examples of green securitization bonds.
- Covered Bonds: These bonds finance the “covered pool” of green initiatives. Investors can turn to the issuer, but bondholders can turn to the covered pool if the issuer defaults.
- Loans: Secured or unsecured green project financing is available. In unsecured loans, lenders can claim the borrower’s assets. Secured loan lenders have recourse to the collateral and, in some situations, the borrower.
Buying Green Bonds
Institutional investors, such as mutual funds, hedge funds, and endowments, invest huge sums in green bonds. Many mutual funds and ETFs provide green bond exposure for individual investors wishing to connect their fixed-income portfolios with environmental principles.
The iShares USD Green Bond ETF (BGRN) replicates the performance of an index of investment-grade bonds intended to finance environmental initiatives. The ETF only invests in U.S. dollar-denominated bonds, including bonds from non-U.S. issuers and borrowers.
Although ETFs like BRGN are easily accessible through brokerage accounts or internet platforms, ordinary investors seeking to acquire individual green bonds may encounter additional challenges. Your broker may let you buy individual bonds, but corporate green bonds may have minimum deposits, maintenance fees, and other costs. You may buy government-issued green bonds from your broker or the government.
How do green bonds work?
Green bonds function like corporate or government bonds. Borrowers issue these securities to finance environmental initiatives, including ecosystem restoration and pollution reduction. Buyers of these bonds can benefit when they mature. Green bonds also provide tax advantages.
Green bond market size?
The Climate Bonds Initiative reported $269.5 billion in green bond issuance in 2020. The U.S. led with $50 billion in fresh issuances. The same investigation showed over $1 trillion in green bond issuance.
How do green and blue bonds differ?
Sustainability blue bonds support ocean and environmental protection projects. This includes sustainable fisheries, coral reef and other delicate ecosystem conservation, and pollution and acidification reduction efforts. All blue bonds are green, but not all green bonds are blue.
What distinguishes green bonds from climate bonds?
Some authorities utilize “climate bonds” expressly for initiatives that reduce carbon emissions or mitigate climate change. The Climate Bonds Initiative strives to standardize climate bond certification.
How can I verify a green bond?
Despite efforts like the Climate Bonds Initiative, no global criteria for bond environmental friendliness exist. Banks may sell debt products as “green” even if their environmental impact is questionable. Investors must conduct due diligence when considering green bond purchases owing to instances of greenwashing, which involves overstated or deceptive environmental claims. Bloomberg L.P., Moody’s, and other specialist businesses evaluate bond issuers’ environmental claims in addition to the Climate Bonds Initiative.
Bottom Line
Green bonds finance eco-friendly projects. Green bonds may offer tax incentives for investing in sustainable initiatives that regular bonds do not. Investors seeking environmentally friendly securities should examine bond issuer sustainability claims.
Conclusion
- Green bonds are fixed-income instruments that fund climate-related projects.
- Tax incentives may make green bonds more appealing to investors.
- Some use “green bonds” instead of “climate bonds” or “sustainable bonds.”
- Investment in green bonds aligns with the growing social responsibility and ESG investment trends.
