A green bond is a bond whose proceeds are used to finance environmentally friendly projects. They offer an added incentive for governments, organisations and companies to fund projects in the areas of renewable energy, carbon capture, clean transportation, energy efficiency, water management and waste management.
Why are green bonds important?
Climate change is a global issue and the market for green bonds is growing rapidly in both volume and variety. A bond that is funded through green bonds provides capital to a project that is environmental in nature, but without necessarily investing in supply chains or technology that is environmentally friendly with just the money received from the bond itself. The green bond’s secondary market provides a price for carbon that influences the investment decision making of the company that receives the funding and also other investors.
The value of the bonds lies in the fact that they provide businesses, governments, and non-profit organisations with access to large amounts of capital that they can use to fund environmentally friendly projects. The green bond is also backed by national, regional, and provincial governments that want to lower the environmental impact of their debt. Since only 7% of government bonds issued worldwide had a green attribute in 2015, this area is likely to see even more growth in the coming years.
What are Green Bonds?
Green bonds are debt securities that are used to fund projects that help protect the natural environment and its resources. They may be denominated in fiat or in hard currencies such as euros or dollars. Green bonds differ from traditional corporate bonds in that they are connected to an environmental, social or climate benefit. The World Bank Group started issuing green bonds in 2008 with a $2 billion offering. In 2016 there were $46 billion worth of green bonds issued globally. This year numbers are estimated to top $100 billion. Green bonds can generally be grouped into four categories: climate bonds, habitat bonds, conservation/degradation bonds and resource use bonds.
With interest rates at historic lows in many areas globally, global investors are looking for opportunities to invest their cash. Many global pension funds, insurance companies and future generations of funds are making the switch from traditional government bonds to investing in the growing market for green bonds. In fact, Chatham House found that 82 percent of surveyed global financial institutions said they would encourage their clients to invest in green bonds.
What are Green Bonds? | Definition & Examples
How is money spent?
Example: Climate Bonds Initiative (CBI)
The Climate Bonds Initiative (CBI) is a global partnership formed by banks and many leading investors aimed at driving sustainable investment practices for the benefit of current and future generations by supporting investors and Issuers with wide ranging green practices, including issuing ‘climate risk free’ bonds.
CBI was launched by HSBC in 2012 and has since attracted some 15 institutional investors representing nearly $10 trillion of investable assets. These include Allianz, Aviva, CDP (an investor disclosure platform), Legal & General Investment Management and Schroder Investment Management. CBI works closely with other groups operating in the Green Bond market space to increase awareness and uptake of Green Bonds including the Climate Bonds Initiative Consortium (CIC).
The CBI supports issuers and promotes the development of Green Bonds by offering free services such as reporting standards, templates and working groups to help engage with the market. If successful proposals meet all CBI’s support requirements then an offer may be made subject to CBI advise but regardless of CBI support, issuers have complete freedom in how the proceeds are spent as long as they do not contradict any of the applicable legal or industry standards.
The Climate Bonds Initiative acts as “a secretariat” providing support services to each fund by establishing a standards platform for ALL fund members to follow. In this way the secretariat informs all members about best practice procedures so that only high quality documentation is written for a fund. The secretariat refers back to these definitions consistently with each new fund engagement, ensuring best practice continues throughout. There will always be exceptions but we prefer minimising them rather than producing generic full documents that cover ALL situations which will never be applied consistently across all funds. We believe this approach allows for better fund management reducing risk at every stage although it largely relies on self discipline on behalf of fund members.
CBI membership is provided in stages through various levels - these levels provide no financial returns but do provide access to funding on preferential terms.
Who can apply? Banks, Pension Funds, Insurance Companies, Money Managers (Investment Advisory Companies), Family Offices or Private Investors who would like to:
* Manage their Climate Risk; e.g., for reducing emissions over time (Carbon Assets) or for responding to climate change events (External Surprises).Sitemap