What Is a Green Bond?
A green bond is a type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects. These bonds are typically asset-linked and backed by the issuing entity’s balance sheet, so they usually carry the same credit rating as their issuers’ other debt obligations.
Dating back to the first decade of the 21st century, green bonds are sometimes referred to as climate bonds, but the two terms are not always synonymous. Whereas climate bonds specifically finance projects that reduce carbon emissions or alleviate the effects of climate change, green bonds represent a broader category of instruments related to projects with a positive environmental impact.
KEY TAKEAWAYS
- A green bond is a fixed-income instrument designed to support specific climate-related or environmental projects.
- Green bonds may come with tax incentives to enhance their attractiveness to some investors.
- The phrase “green bond” is sometimes used interchangeably with “climate bonds” or “sustainable bonds.”
- Green bonds are part of a larger trend in socially responsible and ESG investing.
A record US$41 billion worth of green bonds was issued in 2015 which is estimated to rise to US$80 billion by the end of 2016. Notably, the World Bank issued its first green bond in 2008, and has since issued about US$8.5 billion in green bonds in 18 currencies. In addition, the International Finance Corporation issued US$3.7 billion, including two US$1 billion green bond sales in 2013.
Green bonds have the potential to raise tens of billions of dollars required each year to finance the global transition to a green economy. According to International Energy Agency, around $53 trillion of energy investments are required till 2035 to put the world on a two-degree path, as agreed during the historic Paris Climate Conference COP21. The main drivers of green bonds for investors includes positive environmental impact of investments, greater visibility in fight against climate change and a strong urge for impact investment .
Key Hurdles to Overcome
Many developing countries experience hurdles in raising capital for green investment due lack of awareness and to inadequate technical capacities of financial institutions. Many banks, for instance, are not familiar with the earnings and risk structure of green investments, which makes them reluctant to grant the necessary loans or to offer suitable financing products. With rising popularity of green finance, it is expected that financial institutions will quickly adapt to funding requirements of environment-friendly projects.
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