Green Bond

What is a 'Green Bond'

A green bond is a tax-exempt bond issued by federally qualified organizations or by municipalities for the development of brownfield sites. Brownfield sites are areas of land that are underutilized, have abandoned buildings or are underdeveloped, often containing low levels of industrial pollution. Green bonds are short for qualified green building and sustainable design project bonds.

BREAKING DOWN 'Green Bond'

Green bonds are created to encourage sustainability and the development of brownfield sites. More specifically, green bonds finance projects aimed at energy efficiency, pollution prevention, sustainable agriculture, fishery and forestry, the protection of aquatic and terrestrial ecosystems, clean transportation, sustainable water management, and the cultivation of environmentally friendly technologies.

The tax-exempt status makes purchasing a green bond a more attractive investment compared to a comparable taxable bond, providing a monetary incentive to tackle prominent social issues such as climate change and a movement to renewable sources of energy. To qualify for green bond status, the development must take the form of any of the following:

• At least 75% of the building is registered for LEED certification

• The development project will receive at least $5 million from the municipality or state

• The building is at least 1 million square feet or 20 acres in size

LEED Certification

Leadership in Energy and Environmental Design (LEED) is a rating system created by the U.S. Green Building Council (USGBC) to measure the environmental impact of buildings, such as homes, commercial offices and schools. Among other factors, the USGBC evaluates buildings based on water and energy consumption and greenhouse gas emissions. There are four possible designations that a building or project can receive: Certified, Silver, Gold or Platinum. Gaining a LEED certification fosters a positive image in the community and translates to energy conservation and cost savings.

Green Bond Issuance

In 2015, green bond issuance soared to a record high, accounting for $41.8 billion worth of investment worldwide. As recently as 2012, green bond issuance amounted only to $2.6 billion. Of the total green bond issuance in 2015, $18 billion was issued in the European Union and $10.5 billion was issued in the United States, making these two regions the leaders in the green bond initiative, although India and China are expected to gain a larger share of investment in coming years.

The World Bank is a major issuer of green bonds. The institution has been very active through the first half of 2016, especially in the United States, where its issuances total over $496 million in U.S. dollars, and in India, where its issuances total over $2.7 billion Indian rupees. World Bank green bonds finance projects around the world, such as India's Rampur Hydropower Project, which aims to provide low-carbon hydroelectric power to northern India's electricity grid.