What is a Green Bond?
A green bond is a debt security issued by an organization for the purpose of financing or refinancing projects that contribute positively to the environment and/or climate. A green bond is alternatively known as a climate bond.
- A green bond is used to finance or refinance projects that contribute positively to the environment and/or climate.
- Climate Bonds Initiative is a valuable resource for tracking global green bond issuances and finding a directory of third-party green bond verifiers.
- Green bonds may offer tax incentives to attract investors.
How It Works
Green bonds are fundamentally the same as conventional bonds: a loan made by an investor to an organization to finance a project, with the investor receiving the principal amount at the end of the loan’s life, in addition to interest payments (depending on the loan terms) throughout the loan’s term.
The key differentiator between a green bond and a conventional bond is the underlying project that is financed with the proceeds. Green bonds are issued exclusively to finance projects that positively impact the environment. On the other hand, conventional bonds are primarily issued to finance general projects, general working capital purposes, or refinance existing debt.
Green bonds are commonly used to finance the following types of projects:
- Energy efficiency projects
- Renewable energy projects
- Pollution prevention and control projects
- Natural resources and land management projects
- Clean transportation projects
- Wastewater and water management projects
- Green building projects
History of Green Bonds
In 2007, the Intergovernmental Panel for Climate Change (a United Nations agency) published a report that linked global warming and human activity. It prompted several Swedish pension funds to consider financing projects that contributed positively to the environment.
In 2008, the World Bank issued its first green bond in response to such increasing demand. Since the issuance of the first green bond, the market’s grown considerably, as shown below.
Today, more than 50 countries have issued green bonds, with the United States being the largest source of green bond issuances. The organization Climate Bonds Initiative is a valuable resource for those who want to follow the green bonds market’s growth. According to the organization, global green bond issuance in 2020 was estimated to be $350 billion.
Advantages of Green Bonds
The popularity of green bonds has been rising considerably, driven primarily by investors embracing socially responsible investing, and not a better risk and return potential over conventional bonds. As mentioned, green bonds operate the same as conventional bonds.
With that said, green bonds may offer tax incentives (depending on the issuer and jurisdiction), such as tax exemption and tax credits. It is done to attract investors to finance projects that benefit the environment and/or climate.
Verifying a Green Bond
Any organization – such as governments, corporations, and financial institutions – can issue a green bond. Third-party organizations are generally used to validate a green bond’s legitimacy to provide investors with assurance by preventing misleading claims. Climate Bonds Initiative provides a directory of third-party verifiers for green bonds, which can be found here.
Example of a Green Bond
On November 30, 2020, issuer Swiss Prime Site AG raised CHF300 million in green bonds to fund real estate projects with high sustainability standards. The bonds were externally reviewed and approved as green bonds by ISS ESG and posted on the Climate Bonds Initiative’s website.
CFI is the official provider of the global Capital Markets & Securities Analyst (CMSA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful: