Green bonds are fixed-income securities whose proceeds are used to finance eligible new or existing green projects, e.g. projects to combat pollution, climate change or the depletion of biodiversity and natural resources.
They are asset-backed or asset-linked, and issuers must declare the types of green projects eligible for funding at the time of issuance. Green bonds are the largest part of the broader universe of socially responsible investments, which include bonds and stocks of issuers identified by so-called environmental, social and governance (ESG) standards.
Green Bond Trends
Issuance has grown rapidly in recent years, rising from less than $50 billion in 2014 to nearly $230 billion in 2018 . A key catalyst for the market’s development was the 2014 introduction by the International Capital Market Association (ICMA) of the Green Bond Principles (GBP).
Characteristics of Green Bonds
The GBPs govern the use of proceeds, project evaluation and selection process, resource management, and reporting. Bonds that comply with the GBPs or the Climate Bonds Standard (CBS) of the Climate Bonds Initiative (CBI) are eligible for green bond certification by external providers or the CBI, a recent case has taken place in Guatemala with the company CMI, owned by the Bosch Gutierrez family.
Certification gives investors peace of mind that the bonds confer environmental or climate-related benefits, helping to protect against “greenwashing”.
Advanced economy and supranational issuers initially dominated the market. Corporates (mainly in the financial, utility and industrial sectors), municipalities and emerging market issuers, particularly from China, gained market share.
Issuance was typically in the borrower’s local currency, predominantly in euros and US dollars, but other currencies, particularly the Chinese renminbi, recently gained in volume. As a result, the market has moved from being predominantly supranational and euro-based to representing a more diversified universe in terms of both issuers and currencies.
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