Green bond

Green bonds for climate action Green bonds that are issued in order to raise finance for climate change solutions were in the past also called climate bonds. They are used for climate change mitigation or adaptation related projects or programs. These might be greenhouse gas emission reduction projects ranging from sustainable energy to energy efficiency, or climate change adaptation projects ranging from building Nile delta flood defences or helping the Great Barrier Reef adapt to warming waters. Climate bonds were first proposed in the 2000s, and have grown rapidly since then. , the total volume of climate bonds was estimated at 160 billions of dollars; of which 70 billions were issued in 2016. Climate and green bonds have now been issued by thousands of issuers around the world, including sovereigns, banks and companies of all sizes, and local governments. Like normal bonds, green bonds can be issued by governments, multi-national banks or corporations. The issuing entity guarantees to repay the bond over a certain period of time, plus either a fixed or variable rate of return. Most green bonds for climate action are asset-backed, or ringfenced, with investors being promised that all funds raised will only go to specified climate-related programs or assets, such as renewable energy plants or climate mitigation focused funding programs. The London-based Climate Bonds Initiative provided the world's first certification program for climate bonds. This has been used as a model for various countries to set up their own green bond listing guidelines. Climate bonds are theme bonds, similar in principle to a railway bond of the 19th century, the war bonds of the early 20th century or the highway bond of the 1960s. Theme bonds are designed to: • Allow institutional capital - pension, government, insurance and sovereign wealth funds - to invest in areas seen as politically important to their stakeholders that have the same credit risk and returns profile as standards bonds. • Provide a means for governments to direct funding to climate change mitigation. For example, this might be done by choosing to privilege qualifying bonds with preferential tax treatments. • Send a political signal to other stakeholders. Otherwise, for operational purposes, theme bonds largely function as conventional debt instruments. They are risk-weighted and credit rated in the usual way based on the creditworthiness of the issuer, and tradable, market conditions permitting, in international secondary bond markets. These instruments can theoretically be issued at all levels of the fixed income market, from sovereigns to corporate. Role in sustainable finance == Benefits ==

The growth of bond markets provides increasing opportunities to finance the implementation of the Sustainable Development Goals (SDGs), Green bonds are becoming an increasingly prevalent form of green finance, particularly for clean and sustainable infrastructure development and their large funding needs. They offer a vehicle to both access finance from the capital markets and deliver green impacts that can be verified against standards. In developing countries, green bonds are already financing critical projects, including renewable energy, urban mass transit systems and water supply. Green bonds mobilised over $93 billion in 2016 to projects and assets with positive environmental impacts. Of total global bond issuance, however, this is still around just 1%.. Given that the marginal green bond holder is long-termist in nature, green bonds experience less churn. This results in a weaker price discovery mechanism and structurally muted realised volatility. This is akin to the volatility laundering mechanism observed in less liquid markets. However, unlike volatility laundering by substituting for less liquid assets, substituting for green bonds does not encumber exit liquidity as they are at least as marketable as conventional comparators. This perceived positive downside convexity benefit is not necessarily an arbitrage and must be evaluated against the greenium, or green pricing premium, often incurred by green bond investors. ==Scale==

The European Investment Bank issued an equity index-linked bond in 2007, which became the first fixed income product among socially responsible investments. This "Climate Awareness Bond" structure was used to fund renewable energy and energy efficiency projects. Afterwards, The World Bank became first in the world to issue a labelled "green bond" in 2008, which followed a conventional "plain vanilla" bond structure, contrary to the European Investment Bank's equity-linked Climate Awareness Bond. The green bond market has subsequently increased rapidly in issuance. From 2015 to 2016, the Climate Bonds Initiative reports that there was a 92% increase in green bonds issuance to $92 billion, with different types of issuers starting to issue green bonds. Apple, for example, became the first tech company to issue a green bond in 2016, and Poland became the first sovereign country to issue a green bond at the end of 2016. In 2021, the European Investment Bank was the leading issuer of green and sustainability bonds among multilateral development banks, with sustainability funding reaching €11.5 billion equivalent. As of at least 2017, China held the largest share (23%) of the green bond market. The Business and Sustainable Development Commission describes at least US$12 trillion in market opportunities for business from sustainable business models. The United Nations estimates an annual funding gap of $2.5 trillion is needed for the achievement of the Sustainable Development Goals (SDGs), and of this, US$1 trillion is needed annually for sustainable energy alone. A large number and broad range of projects and assets that contribute to achieving the 17 SDGs need this funding for their development and operations.'''' One of the SDGs where 'green finance' has been successfully mobilised is on sustainable energy and climate action. The Paris Agreement on climate change entered into force in November 2016, after 196 countries committed to reducing greenhouse gas emissions. Significant quantities of finance are now needed to convert country commitments (Nationally Determined Contributions, NDCs) to implementation and a low-carbon, climate-resilient economy. Despite recent increases in volumes of climate finance, a significant funding gap will arise unless new sources and channels of finance are mobilised. Existing international public finance dedicated to climate change is unable to achieve the rapid change required in meeting the finance gap alone. Furthermore, public sector balance sheets do not have the capacity to fund the amounts needed, and so an estimated 80–90% of funding will need to come from the private sector. Bank balance sheets can take only a proportion of the private finance needed so the capital markets have to be leveraged, along with other sources such as insurance and peer-to-peer. According to the Climate and Development Knowledge Network, the demand for green bonds has grown quickly on the investor side, with asset owners and managers diversifying their investment portfolios and seeking positive impact beyond financial return. In the light of the global commitment to shift to a green and low-carbon economy, the green bond market has the potential to grow substantially, while attracting more diverse issuers and investors. Emerging and frontier markets are building the markets, financing facilities, and investment-grade debt and equity products for climate bonds and green investments more aggressively than most Western, developed economies. == Reporting ==

The issuance of green bonds has led to considerable debate due to the lack of uniform rules governing them. Two primary voluntary regulatory standards govern the issuance of green bonds: the privately established Green Bond Principles (GBP) by the International Capital Market Association (ICMA) and the publicly organized Green Bond Standard (GBS) by the European Union. Both frameworks aim to achieve standardization within the green bond market, providing a uniform standard for varying stakeholder groups. Despite the increased push for standardization, disparities persist in the issuance of green bonds, their post-reporting practices, and their alignment with issuer climate targets. Many issuers fall short in establishing long-term climate goals, frequently limiting their targets to a 10-year horizon. As a result, one key study found that green bonds predominantly serve short-term objectives, offering limited support for achieving long-term climate goals. Additionally, there is a lack of detailed breakdowns regarding how the capital raised through green bonds is allocated to specific projects, highlighting the need for enhanced transparency and reporting practices. == Criticism and controversies ==

The green bond market has attracted international criticism with some questioning the green credentials of certain bonds. This criticism pertains both to the projects that are funded, as well as the sustainability credentials of the issuers. In May 2017, the Climate Bonds Initiative refused to list a "green" bond issued by Repsol. The bonds proceeds would be allocated to initiatives meant to improve the efficiency of the company's oil and gas production operations. The non-governmental organization argued that even though the projects would reduce emissions, the company's sustainability strategy did not go far enough from an environmental perspective to classify it as green. This criticism was extended to Vigeo Eiris, the company that reviewed the Repsol bond's green credentials. More generally, the academic community and market participants have identified the susceptibility of voluntary green-labelling to greenwashing and adverse selection as a function of the perceived lack of regulatory oversight and the inherent, albeit anecdotal, capital arbitrage opportunity presented to some issuers through the green pricing premium, or "greenium". In the primary market, this premium can exhibit varying spreads, ranging from -85 to +213 basis points, while the secondary market typically observes a more conservative average "greenium" of -1 to -9 basis points. == Examples ==

United States Voters in the City of San Francisco approved a revenue bond authority in 2001, in the form of a city charter amendment (Section 9.107.8) known as the "solar bonds," to finance renewable energy and energy conservation measures on homes, businesses and government buildings. The campaign for solar bonds, Proposition H, was motivated by the need for the city to take meaningful action on climate change. The solar bond authority was being used as part of the city's renewable energy program, administered by the San Francisco Public Utilities Commission CleanPowerSF, a Community Choice Aggregation program. As of 2024, California's municipally-run Community Choice Aggregation programs were the largest issuers of Green Bonds in the United States. United Kingdom In 2020, the UK's first ever local government green bond, for West Berkshire Council, closed after reaching its £1mn target five days early. Announced on Wednesday 14 October 2020, 22% of the funds raised came from West Berkshire residents, who invested an average of £3,500. The Community Municipal Investment attracted 640 investors in total. In September 2021, the UK's inaugural "green gilt" sale drew over £100bn from investors, making it the highest ever for a UK government bond sale. Canada In Canada, The Community Bond, an innovation in social finance that allows benevolent organizations to issues bonds outside of traditional regulatory oversight, is being used as a "Green Bond" by environmental groups like Solarshare to build community owned solar farms, ZooShare to finance a biogas plant, and Hallbar.org as means to finance energy saving home upgrades and LEED certified building construction. European Union In 2022, the European Investment Bank issued EUR 19.9 billion in Climate and Sustainability Awareness Bonds, and increased its climate and sustainability funding portion of overall investment from 21% in 2021 to 45% in 2022. On 21 December 2024, the European Union Green Bonds Regulation comes into force, allowing the issue of "European Green Bond" (or "EuGB") by companies, regional or local authorities and EEA supra-nationals. ==See also==