ESG Investing - What Green Bonds are, and why do they matter? (2024)

Sustainability has become an integral part of how we do business and live our lives, and the concept of ESG investing has taken hold with investors and financiers alike. What are green bonds, and why do they matter? Read on to find out!

3 key ways green bonds improve corporate sustainability

green bonds increase access to capital for sustainable projects; green bonds help decrease reliance on fossil fuels, and green bonds help finance critical social programs. We’ll examine each of these ways in detail below.

An introduction to green bonds

Undertaking a green business venture or a project is by no means cheap. The costs of starting up an alternative energy project could run into millions of dollars. And even if you secure funding for such projects through loans or grants, those payments will add to your operating costs over time. However, governments worldwide have been easing financing concerns through what’s known as green bonds — debt securities that raise funds to support environmental-friendly endeavors. More recently, private organizations have been taking up their initiatives in making it easier for entities engaged in green initiatives to raise funds from investors. These so-called green bonds have several advantages over conventional debt offerings. You need to know about them: 1) What are Green Bonds? 2) How Do They Work? 3) Where Can You Buy Them?

The history of green bonds

The idea of a bond linked to environmental, social, or governance criteria – known as ‘green bonds’ – originated in 2003 when HSBC issued its first ecological bond in response to investor demand. This was followed by BNP Paribas with its first Corporate Sustainability Bond in 2005. Today there is greater recognition of ESG issues from governments, investors, and issuers than ever before. Green bonds have increased over recent years. In 2010, only three green bonds were issued globally; today, it is not uncommon for international financial centers like London to see two or three different green issuance rounds each week.

How is a green bond different from any other bond?

A green bond is no different from any other bond in that it is debt security – a loan – given by an organization to raise money for any purpose. However, green bonds typically have specific criteria which make them eligible for being classified as green or environmentally friendly. They tend to be used exclusively for projects with positive environmental or social impacts, whether that means energy efficiency retrofits or renewable energy generation. These bonds are commonly referred to as ESG bonds (Environmental Social Governance). An investor who wants to include more green investments in their portfolio can purchase ESGs because these securities contain safeguards against non-environmentally friendly use of proceeds. In short, if your company has borrowed money through a green bond, you must use that money only on activities with positive effects on people and the planet. This way, investors can feel good about making such investments while knowing they’re getting solid returns.

Challenges in the market for Green Bonds

The market for green bonds remains relatively small, but both public and private sector actors recognize a need to increase access to capital for climate-friendly projects. In October 2017, Sustainable Finance Lab, in conjunction with The Rockefeller Foundation, released its second Climate Finance Survey. The survey results reveal that limited capital and coordination are among the most significant barriers to scaling up investments in clean energy. One of those critical challenges has been high transaction costs, or what is often referred to as the pipeline problem. Green bond issuance data from Bloomberg New Energy Finance (BNEF) shows that transaction costs for green bonds have been more than double those of comparable rated corporate bonds since 2008. This means that investors looking to invest in low-carbon infrastructure through green bonds were paying too much due to inefficient issuance processes. As a result, some financiers had said that there was limited interest amongst potential institutional investors when investing in them.

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