What is a Green Bond

A green bond is a bond specifically earmarked to be used for climate and environmental projects. These bonds are typically asset-linked and backed by the issuer's balance sheet, and are also referred to as climate bonds.

BREAKING DOWN Green Bond

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, sustainable water management and the cultivation of environmentally friendly technologies.

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. This provides 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, 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.

Green Bond Issuance

In 2016, green bond issuance soared to a record high, accounting for $93.4 billion worth of investment worldwide, according to the latest report from ratings agency Moody's. Green bond issuance is expected to surge to more than $200 billion in 2017, Moody's estimates. As recently as 2012, green bond issuance amounted only to $2.6 billion. The surge was attributable largely 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.

The World Bank is a major issuer of green bonds. The institution has been very active through 2016, especially in the United States, where its issuances total over $500 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.