Green bonds can provide an alternative for financing clean energy, mass transit, and other low-carbon projects that can help countries adapt to and slow down rapid climate change. They also give investors high-quality credit and fixed-income investment opportunities.
The world climate is rapidly changing, which is increasing the risk and development costs for fast-growing cities and developing economies. Green bonds, an innovative funding structure, bring investment opportunities in low-carbon investments to institutional bond investors and private investors.
How Is This Article Useful to Practitioners?
Green bonds are providing financial opportunities for low-carbon projects that might otherwise not get enough government funding because of the conflicting priorities of developing infrastructure and reducing carbon. Proceeds from green bonds are invested in projects that assist in addressing problems related to climate change. Green bonds issued by the World Bank have the added advantage for investors of an AAA rating and have attracted large institutional investors. Since 2008, the World Bank has issued nearly $4.5 billion through 60 green bond transactions in 17 currencies, and the International Finance Corporation (IFC) has issued nearly $3.4 billion. Each issue has drawn strong demand.
The market is expected to double to $20 billion between March and September 2014, reaching close to $50 billion by December 2015. The proceeds of the bonds are invested in various countries, including Tunisia, Colombia, Mexico, and South Africa, and in such projects as developing energy-efficient mass transit, creating clean electricity, improving irrigation systems, and reducing vulnerabilities to natural disasters.
The investors in recent issues include Microsoft, Ford Motor Company, central banks, institutional investors, and private wealth clients. The variety of investors showcases the growing demand, which is prompting development banks, local authorities, corporations, and utilities in North America, Europe, and Asia to set up programs to issue green bonds.
Recently, 13 commercial and investment banks along with the IFC and the World Bank launched a set of voluntary guidelines called “Green Bond Principles” that are aimed at providing clarity and transparency for issuers and investors and covering the processes for designating, disclosing, managing, and reporting of green bonds. The availability of these guidelines will likely further broaden the investor base.
Green bonds are an opportunity for investors and financial advisers to contribute their share to the climate change mission. The Green Bond Principles will help expand the young green bond market and attract new investors.