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Green Bonds: Investing in a Sustainable Future

The economic recession spurred by the coronavirus pandemic has given the world a unique moment of pause. While governments and companies across the world build recovery plans, investors have indicated that their focus will be on investing in a sustainable manner. Green bonds are ideal for investors who are seeking out securities that can generate returns while simultaneously helping the environment.

A green bond is a fixed-income instrument designed to support climate-related or environmental projects. These bonds, also known as climate bonds, first hit Wall Street in 2007. They encourage sustainability by financing a wide range of programs, including energy efficiency, pollution prevention, protection of aquatic and terrestrial ecosystems, and clean transportation. They are also used to support sustainable agriculture, fishery, forestry, and water management. Green bonds can also contribute to sustainability by financing environmentally friendly technologies and the mitigation of climate change.

Green bonds typically come with economic incentives such as tax exemptions or tax credits, making them more attractive investments relative to comparable taxable bonds. The bonds also help manage prominent issues related to the environment. In order to qualify for official green bond status and certify that the bonds will fund appropriate projects, they are often verified by a third party, like the Climate Bond Standard Board.

A member of the European Central Bank’s executive board, Isabel Schnabel, gave a speech in July that highlighted the value of a green global economy, stating “The pandemic is a stark reminder that preventing climate change from inflicting permanent harm on the global economy requires a fundamental structural change to our economy, inducing systematic changes in the way energy is generated and consumed.”

One major issuer of green bonds is the World Bank, which finances environmental projects around the globe. The institution has been especially active in the United States, where its issuances have totaled $5.3 billion between 2014 and 2018. Green bonds have also been issued recently by large corporations and financial institutions including CPI Property Group and Suzano and Standard Bank.

As societies across the world become more aware of the urgency of climate change, international governments are offering green bonds to help meet ambitious climate goals, and companies are using them to reduce their environmental impacts. The social unrest spurred by the pandemic is encouraging companies to intensify their focus on addressing societal and environmental issues. According to Bloomberg New Energy Finance, the value of green bonds issued in the first nine months of 2020 was 12% more than in 2019, reaching more than $200 billion. 

“While financings related to pandemic response efforts will subside as the worst of the crisis fades, an enduring focus on environmental and social issues will continue to prompt public and private sector issuers alike to consider issuing debt instruments tied to specific sustainable projects,” Moody’s Investors Service said in an August report.

The largest single offering in 2020 so far came from the German government, which issued a €6.5 billion ($7.7 billion) green bond in September. The European Union and Volkswagen are also among the most recent adopters of green bonds. In September, European Commission President Ursula Von der Leyen announced that 30% of the €750 billion ($882 billion) coronavirus recovery package would be raised via green bonds. In the same month, Volkswagen offered its first green bonds, raising €2 billion ($2.4 billion) to fund the development of its new platform for electric vehicles and two new models.

The prevalence of green bonds is projected to continue growing as the market matures and rules governing the securities are standardized. More than $1 trillion in green bonds have been sold since 2007, but some critics have questioned whether the success of the bonds is rooted in marketing strategies rather than in actual concern for the environment. Some have pointed to green bonds as an example of greenwashing, while others argue that investors should not be pessimistic about their potential to help the environment and mitigate climate change.

Sources:

“Explaining Green Bonds.” Climate Bonds Initiative, 19 Feb. 2019, www.climatebonds.net/market/explaining-green-bonds. 

“Record-Breaking Green Bonds despite Covid-19: ICLG.” International Comparative Legal Guides International Business Reports, Global Legal Group, iclg.com/ibr/articles/14778-record-breaking-green-bonds-despite-covid-19. 

Segal, Troy. “Green Bond.” Investopedia, Investopedia, 6 Oct. 2020, www.investopedia.com/terms/g/green-bond.asp.