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The emergence of Green Bonds

Every effort is being made to facilitate the transition of the present economy to a low-carbon economy and the issuance of green bonds is one such initiative. In order to develop an understanding of the green bonds market, let us first understand its meaning.


Meaning of Green Bonds


A green bond, also known as a climate bond, is basically a debt security which is used for the purposes of financing or refinancing an environment-friendly project. The working of a green bond is on similar lines to a conventional bond. It is simply like a loan given by an investor to an organisation for a purpose, upon the fulfilment of which, the principal amount along with interest is repaid to the investor. The differentiating factor between the two bonds is only the ‘purpose’. When a conventional bond is issued, the proceeds of the loan can be utilised to finance any general project. Whereas, for a green bond, the proceeds can only be used for environmental purposes such as renewable energy projects, waste-management projects, green transportation projects or alike.


What led to the rise of green bonds?


The green bond market emerged in 2007 when the concept was first introduced by the United Nations agency IPCC [Intergovernmental Panel for Climate Change]. Climate change was recognised as an alarming issue that needed to be dealt with urgently. The first to be hit by the concept was Swedish pension funds to which the first green bond was officially issued by the World Bank in 2008. And in the decade that followed, these bonds have been issued by nearly 50 countries. With temperatures soaring high every single day, nobody can evade the consequences of high temperatures. As investors became more educated about climate change, an investment shift was observed in their investing pattern. They started resorting to socially responsible investing. It compelled companies to take up environmentally sound projects which led to a boom in the “green-bonds” market.

The foundation for “International Green-Bond Principles”, which was coordinated by the International Capital Markets Association was built through initial green bonds.



Advantages of Green Bonds


Green bonds increase the volume of capital allocation towards clean projects, thereby helping investors to tackle climate challenges. These bonds act as essential drivers behind taking up projects that can reduce the carbon footprint on Earth. And we cannot stress enough how it is the pressing necessity of the moment. They have huge potential to change investor behaviour. Considering the potential of the clean energy market, green bonds definitely guarantee better return potential as opposed to conventional bonds. Thus, the issue of these bonds is not only purposeful and impactful but also backed by prospective returns. Governments across various countries have announced tax incentives and tax credits attached to green bonds to encourage investment in climate-smart projects.


Data on Green Bonds


According to Green-Bond Impact Report 2018, 69% of the green-bond commitments catered to projects relating to renewable energy and energy efficiency and clean transportation. A major issuer is the World Bank which has issued green bonds to 111 projects, amounting to $14.4 billion between 2008 and 2020. As per the data revealed by the Climate Bonds Initiative, green-bond issuance touched a whopping $269.5 billion in 2020 and is expected to reach $1 trillion in 2023. In October 2021, the European Union issued the largest-ever green bond worth $14 billion.


Examples of green bonds


Swiss Prime Site AG raised CHF 300 million through green bonds in November 2020 to construct green infrastructure. Green bonds were issued by the European Union in 2021 to support the installation of wind power plants in Lithuania and to set up a research platform for facilitating the energy transition in Belgium. Recently, the Indian city Indore is planning to issue green bonds worth Rupees 250 crores to undertake a giant solar power project.


Challenges


Policymakers lack clarity on mobilising sufficient debt and equity capital to finance a low-carbon economy. Only providing finance in the form of green bonds does not suffice the cause. The green bond market is still a very tiny part of the whole global bond market and it is still a long way ahead. The real challenge is to draw finances from investments that inevitably lead to emissions Also, the lack of a universally recognised standard to determine the authenticity of a green bond could turn out to be fraudulent or misleading. Countries need to step further to ensure transparency in this market.


There exist green bond mutual funds too, which are co-sponsored by giants like BlackRock, HSBC, Allianz S.E, AXA World Funds and similar. Drawing inspiration from green bonds, other cause-related bonds like blue bonds, social bonds and others have also made a space for themselves in the market. It is not wrong to conclude that the bond market has undergone a positive transformation as all we need at this point in time is a positive environmental impact.




You can learn more about this market through ESG Expert Certification from Directors’ Institute.


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