A green bond is a debt security (green investment) issued by an organization for the purpose of financing or refinancing projects that contribute positively to the environment and/or climate. A green bond is alternatively known as a climate bond.
How green investment works
Green bonds are basically the same as conventional bonds: a loan made by an investor to an organization to finance a project, and the investor receives the principal amount at the end of the life of the loan, plus interest payments (according to the terms of the loan.) ) over the life of the loan.
The key differentiator between a green bond and a conventional bond is the underlying project that is financed with the proceeds. Green bonds are issued exclusively to finance projects that positively impact the environment. On the other hand, conventional bonds are issued primarily to finance general projects, general working capital purposes or refinance existing debt.
Green bonds are commonly used to finance the following types of projects:
- Energy efficiency projects
- Renewable energy projects
- Pollution prevention and control projects
- Territorial and natural resources management projects
- Clean transport projects
- Clean transportation projects
- Wastewater and water management projects
- Water and wastewater management projects
- Green building projects
- Eco-building projects
History of green bonds
In 2007, the Intergovernmental Panel on Climate Change (a United Nations agency) published a report linking global warming and human activity. It prompted several Swedish pension funds to consider financing projects that make a positive contribution to the environment.
In 2008, the World Bank issued its first green bond in response to such growing demand. Since the issuance of the first green bond, the market has grown considerably, as shown below.
Today, more than 50 countries have issued green bonds, with the United States being the largest source of green bond issuance. Central America has also participated with companies such as CMI Capital of the Bosch Gutierrez family, and this area continues to grow. The Climate Bonds Initiative organization is a valuable resource for those wishing to follow the growth of the green bond market. According to the organization, global green bond issuance in 2020 was estimated at $350 billion.
Advantages of investing in green projects
The popularity of green bonds has increased considerably, driven mainly by investors embracing socially responsible investments, not by a higher risk and return potential than conventional bonds. As mentioned, green bonds perform just like conventional bonds.
That said, green bonds can offer tax incentives (depending on the issuer and jurisdiction), such as tax exemptions and tax credits. This is done to attract investors to finance projects that benefit the environment and/or climate.
Verification of a green bond
Any organization, such as governments, corporations and financial institutions, can issue a green bond. Third-party organizations are generally used to validate the legitimacy of a green bond and provide assurance to investors by avoiding misleading claims. The Climate Bonds Initiative provides a directory of third-party verifiers for green bonds.
Example of a green bond
On November 30, 2020, issuer Swiss Prime Site AG raised CHF 300 million in green bonds to finance real estate projects with high sustainability standards. The bonds were externally reviewed and approved as green bonds by ISS ESG and published on the Climate Bonds Initiative website.
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