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What is Green Bonds

What is Green Bonds

How Green Bonds can help in bringing sustainable change.

First things First, what is a 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.

In the case of normal bonds, the purpose of raising money can be varied, while in the case of Green Bond, the purpose of raising the money should relate to climate and environmental projects.

Similar to Bonds, Green Bonds can be issued by central and local governments, banks, or corporations.

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 on finding solutions. There are simple solutions, which each of one us can take at an individual level provided we have the willingness and desire. Read Sustainable Lifestyle.

Then, there are solutions that require efforts at a massive scale and this requires money – loads of it. That’s where Green Bonds become a mechanism to fund projects that are needed to fight climate change. The instrument links the investors and the developers who want to create a positive social and ecological impact and has provided investors opportunities to invest in green projects.

In November 2008, World Bank became the first institution to issue the green bond, thus triggering a novel way to bring money from investors to climate projects. World Bank green bond kick-started a process of developing a sustainable financial market.

Some of the typical areas where money gets invested are – energy efficiency, waste management, pollution control, sustainable farming, clean transportation, water management, biodiversity conservation, and clean 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 benefit the environment.

If we look at the global green bonds market, it is continuously on a growth trajectory. 

Green Bonds Market

US-based mortgage loan company Fannie Mae was the largest green bond issuer in 2020 with a total issuance of $13bn closely followed by the Federal Republic of Germany ($12.8bn) and Société du Grand Paris ($12.2bn).

2019 was a great year for the green bonds market, it increased by more than $95 billion from the previous year. The $3 billion increase in green bond issuance in 2020 compared to 2019 is low because of the pandemic and overall sluggishness in the market.

In the past few years, a prominent list of big multinational corporations has joined the fray. Apple, Unilever, Bank of America, Pepsi, Coco-Cola, and Toyota are some of the big corporates that have issued green bonds.

Global consumer brand Pepsi raised $1 billion through their first-ever Green bond in 2019. The proceeds from the deal are being used to improve operational water-use efficiency, adopt recycled plastic, and invest in renewable energy. The company issued a detailed report in 2020 highlighting its progress and future plans.

Japanese manufacturer Toyota became the first automobile company in 2014 to issue a green bond since then it has sold five green bonds – totaling about $6 billion. The proceeds of their green bond funding go towards low-carbon Toyota vehicles.

Future looks Green

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.

Article Update on 9th June 2021


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