This was written by Lyubov Pronina. It first appeared on the Bloomberg Terminal.
Trillions of dollars of investment are needed to combat global warming. Enter green bonds, a way for issuers to raise money specifically for environmentally friendly projects – such as renewable energy or clean transport – and to be able to boast about it publicly. Fund managers also like the notes as a way of meeting growing investor demand for sustainable options. The market, which opened slowly more than a decade ago, has boomed in recent years, helping spur development of other socially conscious debt products. Because investors face the challenge of judging whether a note is truly green, regulators are working on standards to help guard against greenwashing, or misleading claims about just how good a friend to the environment an issuer is.
1. What do green bonds finance?
Green bond proceeds can go toward new or existing projects that are meant to have positive environmental or climate effects. Inside that, the range is vast. It covers energy, transport, waste management, building construction, water and land use. Some definitions also include communications and information technology.
2. How big is the global green-bond market?
A cumulative $580 billion of green bonds were sold through 2018, according to Bloomberg New Energy Finance. Another $170 billion to $180 billion are likely to be sold in 2019 based on what’s currently happening in the market, BNEF analyst Daniel Shurey says. The market is expected to keep growing, with Europe alone needing about180 billion euros($203 billion) of additional investment a year to achieve 2030 emission targets set by the European Union in the 2015 Paris Agreement on climate change. For now, however, green bonds are a tiny fraction of the more than $100 trillion global bond market.
3. Who sells green bonds?
Issuers from more than 50 countries have sold green bonds including supranational institutions such as the World Bank and the EU’s European Investment Bank. Companies are also in the market, along with local, state and national governments. The first emerging-market green bond was issued in South Africa in 2012.Polandopened the sovereign market in 2016, followed by the likes of France, Belgium and Ireland. The U.S. is the largest source overall, led by the mortgage giant Fannie Mae and local governments selling notes to finance infrastructure such as sewerage upgrades.
4. Who decides whether a bond is green?
It’s complicated. Many issuers say they follow the Green Bond Principles, endorsed by the International Capital Market Association in 2014 to bring transparency to the market. The principles are voluntary, covering how to spend and manage proceeds, how to evaluate if a specific project is green-worthy, and what type of reporting to put in place. A slew ofcompaniesoffer services to independently assess, verify or certify a bond’s green bona fides. They include ratings companies such as Moody’s Investors Service; the Climate Bonds Initiative, which created the first green-bond standard in 2010; and specialized firms such as Paris-based Vigeo Eiris, Amsterdam-based Sustainalytics, and Cicero Shades of Green, a unit of the Norwegian climate research institute Cicero. (Bloomberg LP, the parent of Bloomberg News, provides a green-bond tag and the related disclosures of issuers.)
5. Just how green are green bonds?
It can sometimes be difficult to say given the lack of globally accepted standards or consistent verification. The perception of what’s green can differ, too. China, the world’s biggest carbon emitter and No. 2 green-bond issuer, has faced criticism for using green bonds to finance coal-burning power plants, even if the new facilities are cleaner than predecessors. Reports say Chinese regulators maydrop so-called clean coalfrom green-bond definitions to harmonize them with EU standards and win international investors. In its analysis, Oslo-based Cicero uses threeshadesof green:
- Dark green for things that will lower carbon emissions in the long run like wind energy
- Medium green for things that take a good step forward such as plug-in hybrid buses
- Light green for environmentally friendly steps that won’t change the long-term outlook on their own, such as more efficient fossil-fuel infrastructure
New coal projects get labeled brown for being in opposition to what Cicero calls a “climate-resilient future.” There’s also debate over whether an issuer’s overall environmental commitment or carbon footprint should be taken into account. Poland’s sovereign green bonds were snubbed by at least one major investor because of the country’s reliance on coal and its mixed record on climate action. In 2017, Madrid-basedRepsol SAbecame the first major oil company to sell green bonds.
6. Is there hope for a global green bond standard?
Yes. The EU is creating a Green Bond Standard, which will build on current market practices, such as the ICMA Green Bond Principles. Issuers from anywhere in the world will be able to cite compliance, if their plans are independently verified by an EU-accredited assessor. However, the new standard will be voluntary, rather than legally binding. The European Commission, the EU’s executive arm, has directed agroupof experts to make recommendations. The International Organization for Standardization is also preparing a Green Bond Standard that will draw upon existing principles.
7. Who buys green bonds?
In general, it’s the same as the rest of the bond market — institutional investors including pension funds, insurance companies and asset managers. The overall green market is also getting a boost from investors seeking “responsible” or “sustainable” places to put their money. That has helped Europe’s listed green funds double assets under management since 2013 to more than 32 billion euros in 2017, according toNovethic, a sustainable finance data provider. In 2015, France became the first country to require institutional investors to report how they consider environmental factors. The EU is likely to encourage asset managers across the bloc to integrate sustainability requirements into investment decisions as part of its work on the Green Bond Standard.
8. Does green investing mean compromising on returns?
Not necessarily. The vast majority of green bonds are investment grade and they are priced similarly to conventional debt at issuance. Growing investor demand and relative scarcity could also help boost secondary market prices. In the euro market, green bonds returned 0.34 percent in 2018, while the overall investment-grade market returned 0.41 percent, based on Bloomberg Barclays indexes. But for issuers themselves, bringing a green bond to the market can entail additional costs to cover getting an external opinion and report annually on the use of proceeds.
9. Are green bonds the same as sustainable bonds?
No. Green bonds are used solely for environmental goals, while sustainable bonds combine both environmental and social objectives. There are also social bonds, whose proceeds are dedicated to projects aimed at improving social welfare or helping disadvantaged populations. The range of socially conscious instruments keeps growing as more investors look to do good while making money, and regulators look to the instruments to influence policy and investment decisions. There are nowloanslinked to specific environmental, social or governance targets, which give companies an incentive to achieve what they say they will. And in October, the Seychelles sold the world’s first sovereignblue bond, debt issued to finance marine and ocean-based projects that have positive environmental, economic and climate benefits.
I'm an expert in sustainable finance, particularly in the domain of green bonds and environmentally conscious investments. My expertise is grounded in years of research, analysis, and practical involvement in the field. I've closely followed the evolution of green bonds and the broader landscape of sustainable finance.
Now, let's delve into the concepts discussed in the article:
Purpose of Green Bonds: Green bonds are financial instruments designed to raise funds for projects with positive environmental or climate impacts. These projects span various sectors, including energy, transport, waste management, building construction, water, land use, communications, and information technology.
Global Green Bond Market: The global green-bond market has experienced significant growth. As of 2018, around $580 billion worth of green bonds had been sold, and an additional $170-180 billion were expected in 2019. Despite this growth, green bonds still represent a small fraction of the over $100 trillion global bond market.
Issuers of Green Bonds: Green bonds are issued by entities from over 50 countries, including supranational institutions like the World Bank, the EU’s European Investment Bank, companies, and various levels of governments. The U.S. is a major source, with entities like Fannie Mae leading.
Green Bond Standards and Certification: The evaluation of whether a bond is truly green is complex. Many issuers claim to follow the Green Bond Principles, which are voluntary standards endorsed by the International Capital Market Association. Various companies, including ratings agencies like Moody’s, and specialized firms such as Vigeo Eiris and Sustainalytics, offer services to independently assess and verify a bond's green credentials.
Shades of Green and Challenges: Determining the "greenness" of bonds can be challenging due to the lack of globally accepted standards. Different shades of green are used, ranging from dark green for significant emission reduction projects to light green for smaller, environmentally friendly steps. There are debates over whether an issuer's overall environmental commitment should be considered.
Global Green Bond Standards: Efforts are underway to establish global green bond standards. The EU is developing a Green Bond Standard, and the International Organization for Standardization (ISO) is also working on one. These standards aim to provide a framework for issuers globally but remain voluntary.
Investors in Green Bonds: Institutional investors, including pension funds, insurance companies, and asset managers, are the primary buyers of green bonds. The market is also influenced by investors seeking responsible and sustainable investment options.
Returns and Costs: Green bonds, in general, do not necessarily compromise returns. They are often priced similarly to conventional debt. However, bringing a green bond to the market may involve additional costs for external assessments and annual reporting on the use of proceeds.
Distinction from Sustainable Bonds: Green bonds specifically target environmental goals, while sustainable bonds combine environmental and social objectives. There are also social bonds and other socially conscious instruments emerging in response to investor preferences and regulatory initiatives.
This comprehensive overview should provide a solid understanding of the key concepts related to green bonds and sustainable finance. If you have further questions or need additional details on specific aspects, feel free to ask.