Green bonds as a key tool for addressing environmental challenges
The environmental finance market offers a wide array of mechanisms designed to leverage millions of dollars while achieving conservation goals. The list includes debt-for-nature swaps, mutual funds, exchange traded funds, private equity funds, green bonds, catastrophe bonds, convertible loans, convertible grants and mitigation banking, among others.
The financial products with greater potential for addressing environmental challenges are the so-called green bonds. They are basically standard fixed income instruments whose proceeds are used to finance environmentally friendly projects. Green bonds are compatible with the ESG criteria and can be issued by corporations, governments, banks and local authorities. The investment rationale is pretty straight forward: green bonds allow investors to direct funding towards environmental goals with a comparable risk-return profile to traditional bonds.
A recent study of all the corporate green bonds issued by public companies globally from January 1, 2013 to December 31, 2017 showed that they triggered positive market response, improved financial and environmental performance and attracted long term investors. Other potential benefits of green bonds include enhanced reputation, direct investment in the greening of brown sectors, increased transparency on the use of proceeds and adoption of longer time horizons.
Corporations like Apple, Unilever and Iberdrola have issued green bonds to finance environmentally focused initiatives. Apple offered a $1bn green bond which will be used to finance renewable energy and to procure safer materials for its products, Unilever issued a green bond to fund a number of new ecoefficient factories and Iberdrola released a green bond with proceeds earmarked to finance investments in onshore wind farms.
In addition, green bonds are being used by governments to increase awareness about climate plans and to fund commitments under the Paris Agreement. The United States, China and France were the main sovereign issuers of 2018 whereas Indonesia, Belgium, Lithuania, Ireland and Seychelles were the new ones. Spain, The Netherlands, Hong Kong and Egypt are expected to join the green bond market during the present year.
Financial institutions like commercial banks, property banks and real estate investment trusts are also active green bond issuers accounting for 25% of the market. In 2018, 78 financial institutions issued 102 green bonds with a median size of $290m and an average deal size of $482m. This sector fueled the 2018 green bond market growth by doubling their 2017 issuance rate.
Green bonds are equally attracting corporations, governments, banks and local authorities. The global issuance of green bonds is expected to grow 20% and reach $200bn in 2019 by virtue of continue issuer diversification and greater clarity standards. They have exhibited a growth in average deal size, which is positive in order to provide more liquidity to the market.
All financial instruments could deliver good environmental results if applied well. Green bonds are probably the best instrument to raise the $300bn to $400bn needed each year to preserve and restore ecosystems. The green bond market “brings fixed income issuers and investors together in an investment-oriented dialogue around environmental challenges and offers a response to evolving expectations around the responsible deployment of capital” according to Marilyn Celi,Managing Director at JP Morgan.
It is important to note that the green bond market is still in the early stages of development. The use of green bonds could be scaled up more effectively by raising awareness about their benefits, agreeing on universal standards and redefining additionality. Green bonds are often dismissed as not going far enough in terms on additionality, but that critique is ungenerous. The rise of the green bond market has been a catalyst for the broader financial industry to address sustainability concerns and stop doing business as usual.