Countries and companies need large-scale financial instruments with which to fund sustainable development and reduce their greenhouse gas emissions. Green bonds are an instrument for driving the environmentally friendly and low-carbon economy.
Green bonds are like standard bonds, since they offer predictable returns for investors in the form of a fixed coupon in exchange for medium- to long-term funding for an economic activity. The main difference is that green bonds are primarily for funding projects that generate environmental benefits (and often social benefits, too), which means that a reliable assessment method is required throughout the investment's life cycle.
This market is currently booming
The volume of green bonds has tripled in the last four years, as many companies have adopted this source of funding.
Green bonds can be issued by companies, municipalities, development banks, national banks, etc. To date, development banks have been the main issuers, although companies have begun to issue green bonds in recent years. Multilateral issuers include IFC, EBRD, World Bank, EIB, KBN, FMO and AfDB. Private sector issuers of green bonds include Acciona, Hera, GDF Suez, EDF and Unilever, among others.
Not everything qualifies for green bonds
Projects that are eligible for green bonds are mainly related to adaptation to climate change, renewable energy, energy efficiency, sustainable waste management, clean transport, biodiversity conservation, water management, etc.
The two main initiatives or standards at present are:
- Green Bond Principles: voluntary guidelines for issuing green bonds. Approved by 50 large issuers, underwriters and investors, they establish criteria for disclosure and rules for how the funds can be used. An external consultant can give a second opinion on a bond's structure and the projects that it finances.
- Climate Bonds Standard: proposed by the Climate Bond Initiative, it provides a model that ranges from wind to solar energy and also encompasses low-energy buildings and transport. This Standard also requires independent professional audits.
Green bond issuance in 2016 was double the 2015 figure and this area is expected to experience exponential growth in 2017. While celebrating this boom, it is important to analyse and filter the sectors and projects that qualify for green bond funding. It's worth considering whether we are moving towards more rigorous standards that set clear limits, or whether green bonds are becoming a form of greenwashing.