What are green bonds and how are they helping to fight climate change? Issuance is growing rapidly as investors seek to fund renewable energy without sacrificing investment returns. They appear to be a win-win for investors and the environment, although some are greener than others.
In just over 10 years, ‘green’ bonds have come a long way. The European Investment Bank (EIB) and World Bank launched the first of these bonds in 2007, targeting investors who wanted a financial return while at the same time helping the climate. That was the same year the Intergovernmental Panel for Climate Change, a United Nations agency, published an authoritative report linking human action to global warming.
Since then, extreme weather events such as typhoons and floods become more frequent, and the appetite for green bonds has grown. They have funded projects ranging from wind farms, to electric or hybrid vehicles, to refurbished green buildings and the protection of marine environments. So green bonds can be described as being specifically earmarked to be used for climate and environmental projects.
Over the last five years, the green bond issuance has grown every year. By the end of 2018, USD 521 billion of bonds had been issued, according to the Climate Bonds Initiative. In 2018, issuance peaked at USD 167.6 billion and in 2019 it is expected to be higher still at a record of about USD200 billion.
While issuers from the United States topped the green bond rankings for 2018, with a 20 per cent market share, China was not far behind with 18 per cent. After that, France had an 8 per cent share. Asia-Pacific achieved the highest regional year-on-year growth rate at 35 per cent.
The top three individual issuers were Fannie Mae, the US mortgage agency, China’s Industrial Bank and the Republic of France. Examples of companies that have also issued green bonds include high-profile names such as Tesla Energy, Apple, SNCF (France’s national state-owned railway company) and Credit Agricole. Multilateral institutions such as the EIB and World Bank, as well as the International Finance Corporation, continue to be big repeat issuers. Countries like France and Belgium also tap the market for funds for environmental projects.
Typically, green bonds offer the same yield as their normal counterparts. Issuers win by offering a green product that helps to fund environmental projects. Investors win by contributing to positive change without missing out on returns.
Investors can either buy individual bonds or can choose to spread their risks through green bond funds or exchange-traded funds (ETFs). Some green bonds are listed on international exchanges such as the London Stock Exchange, which only admits issuers that comply with specific criteria, chiefly concerning independent external review. Large asset management companies are actively advocating for more green bonds. For instance, a group called on the UK government to issue green bonds in mid-2019.
There are differences of opinion as to what truly constitutes green.
Judging whether a bond is green is hard. Typically, external expert bodies review bonds to judge whether they are in line with the Green Bond Principles, a set of guidelines for bond issuers published by the International Capital Markets Association. But there are differences of opinion as to what truly constitutes green; for example, some investors shun bonds that fund new, cleaner types of coal-fired power generation.
A small but significant step
Trillions of dollars are needed to combat global warming. Green bonds are an important, if relatively small, step on the way. For investors, green bonds offer the chance to fund environmental projects without sacrificing investment returns.
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