First things First, what is Bond – it is an instrument used by issuers to borrow funds from investors and there is an agreement to repay the investors after a specified amount of time, at an agreed rate. The word Green, as you would guess, makes the bond more nature and energy-friendly. The key is that money should go for climate and environmental projects. They can be issued by central and local governments, banks or corporations. In November 2008, World Bank became the first institution to issue the green bond, thus triggering a novel way to bring money from investors on climate projects.
We don’t have to harp on the gravity of climate change and the impact it will have in the coming few years. The focus is now on finding solutions. There are simple solutions, which each of one us can take provided we have willingness and desire. Then, there are solutions which require efforts at a massive scale and this requires money – loads of it.
The first World Bank green bond kick-started a process of developing a sustainable financial market. The instrument has linked the investors and the developers who want to create a positive social and ecological impact. It has also helped raise awareness on the environmental challenges and provided investors ample opportunities to invest in causes that help in overcoming these challenges. Some of the typical areas where money gets invested in are – energy efficiency, pollution prevention, sustainable farming, clean transportation, water management and the cultivation of environmentally friendly technologies.
To qualify for green bond status, it has to be verified by a third party such as the Climate Bond Standard Board, which certifies that the bond will fund projects that benefits the environment.
More than $600 billion in green bonds have been issued worldwide in the past decade, according to BloombergNEF. In 2018, total green bond issuance was about $170 billion, while in 2017 it was about $160 billion. In terms of market share, the USA with 20% leads the pack followed by China 18%, France 8%, Germany 5%, Netherlands 4%.
Over $120 billion worth of green bonds were issued in the HY 2019, according to BloombergNEF. Total issuance this year is expected to reach about US$250 billion globally, which is about 20% more compared to 2018.
In the past few years, a prominent list of big multinational corporations has joined the fray. Apple, Unilever, Bank of America, State Bank of India are some of the big ones that have issued green bonds. A recent addition to the list is Pepsi, the cola giant which has offered $1 billion of Green bonds in October 2019. Pepsi’s rival Coca-Cola Co. issued the same about 4 years back. Both companies have pledged to use more recycled plastic in their bottles over the next decade. As per the statement from Pepsi, proceeds from the deal are also marked for tree plantation and for projects that will improve Pepsi’s operational water-use efficiency.
Though Green bonds are a fraction of the overall corporate bond market, with an increased focus on finding solutions to combat climate change the market will surely grow. If the Government also intervenes and promotes the initiative by offering tax incentives, that will also spur a lot of interest from the investor and developer community.