Green Bond: A Meaningful Financial Instrument

Green Bond: A Meaningful Financial Instrument

The ongoing acceleration of green bond issuance has brought the market to only slightly more than half a trillion dollars in 2021. This yearly number is the largest since the industry's establishment, and it follows the pattern of the green market expanding for the tenth year in a row.

A green bond is a fixed income instrument that is aimed to raise cash for initiatives that are beneficial to the environment and promote sustainability. Before placing an order, prospective buyers of green bonds should educate themselves on the various types of bonds as well as the benefits and drawbacks of investing.

What are Green Bonds

Green bonds function in the same way as any other type of corporate or government bond. Borrowers issue these types of securities in order to get finance for initiatives that would have a beneficial effect on the surrounding environment, such as the restoration of ecosystems or the decrease of pollutants. When the bonds reach their maturity, the purchasers of the bonds may anticipate receiving a return on their investment. In addition, there are often favorable tax implications associated with the purchase of green bonds.

This kind of bonds are issued by supranational institutions, public entities (such as municipalities, states, or federations), and private corporations. In order to be able to issue them, the organization that is doing the issuance is required to disclose their financial information to regulatory authorities, rating agencies, as well as potential investors. In addition, issuers will often appoint investment banks to act as underwriters, hence providing their technical knowledge of the bond market, government regulations and other similar factors.

History of Green Bonds

Green Bonds were issued for the very first time on July 5, 2007, by the European Investment Bank (EIB), with the intention of providing funding for environmentally conscious endeavors such as the generation of renewable energy, the improvement of energy efficiency, the promotion of clean transportation, and the management of waste in an ethical manner.

The following is a list of the primary concepts associated with green bonds according to the standards published by the International Capital Market Association (ICMA):

  • Providing financial support for environmentally friendly endeavors that will result in positive outcomes for the planet.
  • Transparency in management, alerting investors of environmental sustainability targets, and allowing for external inspection and review. –
  • Complete authority, with the possibility for an auditor to do an additional review.
  • Information is updated on a regular basis regarding how funds are used and the environmental advantages that are realized.
Figure 1: Green bonds issuance (2007-2020). Source: Climate Bonds Initiative

The green bond market has expanded rapidly ever since it was first introduced – Total amount of the green bond market has reached $104 billion in 2015. And it surpassed $1 trillion by the time the year 2020 came to a close.

Green Bonds Examples

Since 2013, Bank of America has issued a total of five corporate green bonds, bringing in a combined total of $6.35 billion for use in the financing of renewable energy projects. Another noteworthy example is Tesla, with $600 million green convertible bonds issued in 2013.

Despite the fact that access to green bonds is normally restricted to institutional investors, individuals may nevertheless acquire indirect exposure to green bonds via exchange-traded funds (ETFs) and mutual funds featuring green bonds in their portfolios. Here are a couple:

  • Calvert Green Bond Fund
  • Invesco Global Clean Energy
  • Invesco Solar ETF
  • First Trust Global Wind Energy
  • Invesco WilderHill Clean Energy

How do Green Bonds Differ from Their Peers?

Blue bonds

Blue bonds are a particular subcategory of green bonds. Projects that promote sustainable fishing, conserve coral reefs and other sensitive ecosystems, and minimize pollution and acidification are examples of the kind of initiatives that fall under this category. There are some green bonds that aren't also blue bonds, but all blue bonds are green bonds.

Climate Bonds

Green bonds and climate bonds are occasionally used interchangeably; however, in some countries, the latter word is used expressly for projects focused on either reducing carbon emissions or mitigating the effects of climate change. The Climate Bonds Initiative is a group that is working toward the goal of establishing a benchmark for the certification of climate bonds.

Benefits and Drawbacks

As seen, green bonds investing embodies a meaningful investing approach. Furthermore, the fact that many green bonds are issued by governments means that they are eligible for tax advantages; This advantageous tax status also serves as an incentive for investors to contribute to the funding of initiatives that are good for the environment.

Benefits

Tax benefits: Investors who purchase green bonds that have been issued by certain government bodies may be eligible for tax-free income.

Positive impact: Investors have the potential to profit from their investments while also contributing to the improvement of environmental conditions.

Drawbacks

Lower rates: The yields on bonds issued by government entities are often lower than those on bonds issued by corporations.

Lack of liquidity: Investors often want liquidity when making investments, however green bonds do not provide high degrees.

Green Bonds for the Future

In recent years, investors and regulators have increased pressure on firms and financial institutions to enhance their ESG ratings and sustainability activities. The issue of green bonds is one approach for financing projects with a net positive effect on the environment and climate. Companies may collect funding for ESG projects while also demonstrating their commitment to environmental preservation and sustainability.

In summary, green bond investing is a meaningful approach that contributes to the overall improvement of the environment – It offers investors the opportunity to grow their capital while simultaneously having a good environmental impact.

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