Green Bonds

Green bonds are fast becoming one of the most interesting aspects of financial market innovation with increasing interest among investors in advanced and emerging economies alike.

What are green bonds?

• Green bonds represent an alternative investment opportunity for participants in financial markets.
• It is crucial to link green bonds to pressures to meet the 17 sustainable development goals.
• Green bonds are fixed interest loans with long dated maturity designed to raise debt finance to fund climate-friendly investment
• First introduced by the European Investment Fund in 2007 under the name Climate Awareness Bond and the World Bank in 2008
• Increasing interest from pension funds, sovereign wealth funds and insurance companies in helping to finance green bonds

The green bond market has clearly grown but compared to financial markets as a whole, it remains a drop in the ocean. It is estimated that in 2019, the total amount of sustainable debt (green bonds) issued climbed above $1 trillion. But this is still only 1 percent of the size of the global bond market.

Green bonds fund businesses and projects that are green – here are some examples:

• Bonds to fund more fuel-efficient container ships and tankers in the global logistics industry
• Investment projects in offshore wind turbines and solar farms
• Telecoms firms issuing bonds to finance upgrade copper cabling with carbon fiber
• Dutch government raising green bonds to help fund improved flood defence systems
• Seychelles—an archipelago of 115 islands —issued a bond to support sustainable marine and fisheries projects.

Green bonds – evaluation comments

1. Risk of “greenwashing” where firms raising money in bond markets make misleading claims about their green credentials
2. Increased transactions costs – regulatory costs of showing how the money is being used
3. Other policy interventions might also be needed e.g. fiscal policy via carbon taxes, renewable subsidies and tougher environmental regulations

Green bond finance is still a relatively new concept – but the fast growth of responsible investing – targeting funds on climate smart projects – is one to watch. Can the greening of the financial system help accelerate the transition to a low-carbon economy and help mitigate the risks from the climate crisis?

This is an area of change in financial markets that is well worth following as part of your economics studies.