Green Bond

What Is a Green Bond?

A green bond is a type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects. These bonds are typically asset-linked and backed by the issuing entity's balance sheet, so they usually carry the same credit rating as their issuers’ other debt obligations.​

Dating back to the first decade of the 21st century, green bonds are sometimes referred to as climate bonds, but the two terms are not always synonymous.

Key Takeaways

  • A green bond is a fixed-income instrument designed specifically to support specific climate-related or environmental projects.
  • Green bonds may come with tax incentives to enhance their attractiveness to investors.
  • The World Bank is a major issuer of green bonds. It has issued 164 such bonds since 2008, worth a combined $14.4 billion.
  • In 2020, the total issuance of green bonds was worth almost $270 billion, according to the Climate Bond Initiative. The cumulative issuance since 2015 is over $1 trillion.

Understanding Green Bonds

Green bonds are designated bonds intended to encourage sustainability and to support climate-related or other types of special environmental projects. 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, clean water, and sustainable water management. They also finance the cultivation of environmentally friendly technologies and the mitigation of climate change.

Green bonds come with tax incentives such as tax exemption and tax credits, making them a more attractive investment compared to a comparable taxable bond. These tax advantages provide a monetary incentive to tackle prominent social issues such as climate change and a movement toward renewable sources of energy. To qualify for green bond status, they are often verified by a third party such as the Climate Bond Standard Board, which certifies that the bond will fund projects that include benefits to the environment.

History of Green Bonds

As recently as 2012, green bond issuance amounted only to $2.6 billion. But in 2016, green bonds began to sprout. Much of the action was attributable to Chinese borrowers, who accounted for $32.9 billion of the total, or more than a third of all issuances. But the interest is global, with the European Union and the United States among the leaders too.

In 2017, green bond issuance soared to a record high, accounting for $161 billion worth of investment worldwide, according to the latest report from the rating agency Moody's. Growth slowed a bit in 2018, hitting only $167 billion, but rebounded the following year thanks to an increasingly climate-aware market. Green issuances reached a record $266.5 billion in 2019, and nearly $270 billion the following year.

2008

The year the World Bank issued the first so-labeled green bond for institutional investors.

The 2010s saw the development of green bond funds, broadening the ability of retail investors to participate in these initiatives. Allianz SE, Axa SA, State Street Corporation, TIAA-CREF, Blackrock, AXA World Funds, and HSBC are among the investment companies and asset management firms that have sponsored green bond mutual funds or ETFs.

Real-World Example of Green Bonds

The World Bank is a major issuer of green bonds and has issued $14.4 billion of green bonds since 2008. These funds have been used to support 111 projects around the world, largely in renewable energy and efficiency (33%), clean transportation (27%), and agriculture and land use (15%).

One of the bank's first green issuances financed the Rampur Hydropower Project, which aimed to provide low-carbon hydroelectric power to northern India's electricity grid. Financed by issuances of green bonds, it produces nearly two megawatts per year, preventing 1.4 million tons of carbon emissions.

How Does a Green Bond Work?

Green bonds work just like any other corporate or government bond. Borrowers issue these securities in order to secure financing for projects that will have a positive environmental impact, such as ecosystem restoration or reducing pollution. Investors who purchase these bonds can expect to make as the bond matures. In addition, there are often tax benefits for investing in green bonds.

How Big Is the Green Bond Market?

According to the Climate Bonds Initiative, the issuance of green bonds reached $269.5 billion in 2020. The United States was the largest player, with $50 billion in new issuances. The same analysis found that the cumulative issuance of green bonds had reached over $1 trillion.

How Are Green Bonds Different From Blue Bonds?

Blue bonds are sustainability bonds to finance projects that protect the ocean and related ecosystems. This can include projects to support sustainable fisheries, protection of coral reefs and other fragile ecosystems, or reducing pollution and acidification. All blue bonds are green bonds, but not all green bonds are blue bonds.

How Are Green Bonds Different From Climate Bonds?

"Green bonds" and "climate bonds" are sometimes used interchangeably, but some authorities use the latter term specifically for projects focusing on reducing carbon emissions or alleviating the effects of climate change. The Climate Bonds Initiative is an organization that seeks to establish a standard for certifying climate bonds.

Article Sources

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  1. S&P Global Market Intelligence. "Green bond market to rebound in 2019 with 20% growth, Moody's says." Accessed Feb. 10, 2020.

  2. Climate Bonds Initiative. "Record $269.5 Bn Green Issuance for 2020: Late Surge Sees Pandemic Year Pip 2019 Total by $3 Bn." Accessed Sept. 14, 2021.

  3. World Bank. "10 Years of Green Bonds: Creating the Blueprint for Sustainability Across Capital Markets." Accessed Sept. 14, 2021.

  4. Sustainable Research and Analysis. "New Green Bond Fund Investing Options Double in Number." Accessed Sept. 14, 2021.

  5. World Bank. "The World Bank Impact Report 2020: Sustainable Development Bonds and Green Bonds." p. 45. Accessed Sept. 14, 2021.

  6. World Bank. "The World Bank Impact Report 2020: Sustainable Development Bonds and Green Bonds." p. 100. Accessed Sept. 14, 2021.

  7. World Economic Forum. "Blue Bonds: What They Are, and How They Can Help the Oceans." Accessed Sept. 14, 2021.

  8. Climate Bonds Initiative. "Frequently Asked Questions." Accessed Sept. 14, 2021.