ESG Investing

Green Bonds 10 Years In: How They’ve Changed the Game


A decade after the first one came to market, green bonds’ popularity is surging. As their name suggests, green bonds are debt securities issued by public or private concerns to raise capital for specific environmental or climate related projects. They fund a gamut of sustainable and environmentally friendly projects, injecting much-needed capital into the sector. “At the end of the day, the fight against climate change requires money. It’s the simple reality. And not a little bit of money. Massive investments will be required to change the way we produce energy,” Pierre Blandin, managing director of Crédit Agricole CIB, told the European Investment Bank (EIB).

The Green Bond Scene

The EIB issued the first-ever green bond in 2007. The €600 million Climate Awareness Bond helped fund renewable energy and energy-efficient projects, such as waste-to-energy and geothermal power plants. Since then, the program has issued more than €18 billion in debt, financing more than 160 projects. “Green bonds are an interesting tool to reconnect the dots between finance and the real economy,” said Philippe Zaouati, CEO of Mirova, a French investing firm, “What green bonds bring to the market is transparency. When you invest in a green bond, you know exactly where the money will go.”

The market has flourished, with issuance rising around the globe especially in recent years. According to Bloomberg, the green debt market, which now includes both public- and private-sector issuers, is projected to grow 30% this year to $123 billion.

One private player is Apple. Earlier this year, the tech giant issued a $1 billion green bond to fund renewable energy generation. This comes after selling $1.5 billion worth of bonds last year to pay for projects that will allow the company to meet its goal of operating entirely on renewable energy.

In another notable example of private-sector green debt, in 2016 Hyundai issued a $500 million bond — South Korea’s first — to pay for hybrid and electric vehicle development.

In the public sphere, municipalities worldwide are considering this type of debt to finance infrastructure projects. In July, Cape Town issued its first green bond to pay for electric buses, increase energy efficiency in buildings, and implement water management initiatives. In January, France became the first country to enter the market, issuing bonds worth €7 billion as part of its commitments to the Paris Climate Accord.

How Green Bonds Work

Governments, large companies, and other organizations may decide to use a green bond. As with standard bonds, the issuer typically works with an investment bank, which will underwrite the bonds and bring them to the market. The bonds are often purchased by pensions funds, mutual funds, or individual investors who value sustainability.

Unlike standard bonds, however, the issuer must also make sure that the project meets appropriate environmental standards. While this may involve the organization creating its own criteria, it more often means complying with industry standards such as the Green Bond Principles or the Climate Bonds Initiative.

Investors are starting to demand greater transparency from issuers, accompanied by a growing industry of third-party companies available to audit them. Once the bonds have been sold, the issuer is responsible for monitoring to make sure that standards continued to be met.

Benefits and Lingering Questions

A recent EY report on this type of bond touted their advantages, noting that they “are not only becoming an attractive financing option, but also attracting project developers to raise capital for their projects, assets, and other activities to showcase their responsible approach toward business.”

However, there are drawbacks. It can be difficult to define exactly what’s meant by the “green” bond label, so specific investments may not meet every investor’s standards. Bloomberg characterizes bond-sale promises as “hard to check and often legally impossible to enforce.” Issuing and monitoring entails more work and additional communication efforts with investors, making it an inherently more expensive form of financing than some other types of bonds.

This may be why Tesla recently issued a bond without the green label. The electric car company doesn’t need to bolster its credibility on sustainability issues, after all, and it has plenty of investors interested in buying its debt.

Interested parties will want to work with an issuer that has the resources and willpower to carefully monitor projects. Sustainable investors can leverage green bonds as an impactful debt instrument, as long as they use the bond’s inherent transparency to their advantage. Due diligence by all parties is key, and the results can be profitable for investors, companies, and the planet.

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