Green Bond is a fixed-income instrument designed to support climate-related or environmental projects in countries around the world. It aims to allow investors to generate revenues whilst supporting projects that could help the world achieve the objective set by the Paris agreement in 2015.
What is it exactly?
Bonds are a fixed income instrument in which investors lend their money against a fixed rate (unlike a typical investment where they would receive variable dividends depending on the financial performance of the company and own part of the company). A bond can be contracted through an I.O.U where the lender and borrower include all details (length, interest rate, payment terms...).
Companies, states and other types of organization typically issue bonds in the markets to fund their project. States would use bonds to finance the construction of a new airport, subway or school whilst companies would finance their business expansion or other projects they may have.
In recent years, we have seen a sudden spike in sustainable investments, where investors support environmentally friendly projects and show how we can make an impact whilst yielding revenues.
How important is it?
In 2018, globally, the 3 most important sectors issuing green bonds have been Buildings (1 843 bonds), Transports (1 361 bonds) and Energy (1 139 bonds).
Past $1 Trillion issuance mark in September 2019.
Represents 1-2% of global fixed income assets.
Analysts expect that green bonds will reach roughly $500Bn by the end of 2021.
Countries such as Italy have risen nearly $9Bn to support the various green projects they have currently.
But how green it really is?
Whilst investing in eco-friendly projects contributes to reducing the carbon emissions from our global economy, one could argue that it depends on what we mean from eco-friendly projects. Indeed, the definition really varies from country to country. In China, for instance, the operator of 3 gorges dam has raised nearly $800 million in green bonds for projects in Europe, as it might seem like an eco-friendly project, dams have often been criticized as being a source of water pollution and forest destruction.
The same goes with geothermal energy, it has been often criticized for its impact on the earth's crust and the many artificial earthquakes it causes because of the drilling needed. Yet investors rushed to buy bonds at face value and underestimate the possible deeper environmental harms they may cause.
Who can invest in green bonds?
It's generally the same as other types of bonds, institutional investors including pension funds, insurance companies and asset managers can invest in such financial instrument. The EU is likely however to encourage said investors to integrate sustainability criteria to avoid false environmental claims known as greenwashing, as said previously.
The future of green bonds and advice:
As sustainability becomes a global concern and the number of green project increase, green bonds are likely to swell throughout time. Nonetheless, legislation will have to be made to regulate this bond market and hence avoid the "greenwashing" phenomenon to enhance the true impact your money could have.
Alternatively, when putting your money in institutional investors make sure that you are investing in a project that has proven its sustainability.