Green bonds hold the key to fighting climate change

India made its biggest contribution to the global green bond market last month through the Hyderabad-based Greenko group’s $950 million green bond.

Latest reports reveal that Greenko’s bond issuance comes at a time when India’s emerging green economy will require additional investments of around $80 billion till 2022, growing more than threefold to $250 billion during 2023-30.Greenko Energy is backed by GIC Holdings and Abu Dhabi Investment Authority.

Helping firms to clean up their act, latest research finds that the boom in green bonds is driving improvements in the sustainability of public companies.

A green bond is a bond specifically earmarked to be used for climate and environmental projects. These bonds are typically asset-linked and backed by the issuer’s balance sheet, and are also referred to as climate bonds

A recent study published by the US-based National Bureau of Economic Research, presents initial findings on the environmental benefits delivered by green bonds. The paper states that $141 billion of green bonds were issued in 2018.

Titled ‘Green Bonds: Effectiveness and Implications for Public Policy’, the study points out that “Green bonds are a recent innovation in sustainable finance. Green bonds are debt instruments (i.e., “bonds”), whose proceeds are committed to the financing of low-carbon, climate-friendly projects (i.e., “green”). Issuers of green bonds include corporations, municipalities, government entities, and supranational institutions”

Author Caroline Flammer points out that addressing climate change requires an enormous amount of funding – the OECD estimates that $93 trillion in infrastructure investment will be needed in the next fifteen years to achieve a low-carbon future. In comparison, the world’s GDP was about $80 trillion in 2017. This tremendous financing need calls for private solutions in addition to nations’ efforts to address climate change.

Green bonds are one such instrument whose proceeds are committed to the financing of low-carbon, climate-friendly projects.

More specifically, green bonds finance projects aimed at energy efficiency, pollution prevention, sustainable agriculture, fishery and forestry, the protection of aquatic and terrestrial ecosystems, clean transportation, sustainable water management and the cultivation of environmentally friendly technologies.

According to the UNDP, green bonds can mobilize resources from domestic and international capital markets for climate change adaptation, renewables and other environment-friendly projects. They are no different from conventional bonds, their only unique characteristic being the specification that the proceeds be invested in projects that generate environmental benefits. In its simplest form, a bond issuer will raise a fixed amount of capital, repaying the capital (principal) and accrued interest (coupon) over a set period of time. The issuer will need to generate sufficient cash flows to repay interest and capital.

Green bonds were traditionally demanded by environmentally and socially responsible investors but market opportunities extend beyond this category of investors. Combined with continuing growth in corporate green bonds, the Climate Bonds Initiative (CBI) believes the labelled green bond market can reach US$ 300bn of issuance by 2018. China and India have emerged as key markets, with a 73% share of green bonds issuances in emerging markets.

Green bond developments across the globe reflect an increasing trend. According to a new report released by the CBI, the US ranked first with $34 billion issued, followed by China with US $31 billion and France with $14 billion. Germany ranked as the fourth largest country in terms of green bond issuance in 2018, with 60% of the proceeds going for renewable energy projects. Recently, Fiji has issued green bonds and blue bonds, which specifically support ocean environmental projects, on the London Stock Exchange.

The world’s first financial facility to offer green bonds for sustainable soy production in Brazil was launched recently at London Climate Action Week. It plans to provide low-interest credit lines to Brazilian soy and corn farmers who commit to using degraded pasture and avoid clearing forests and native grassland for agriculture. For farmers, the initiative will offer an important complement to official credit lines.

The facility is expected to provide $1 billion over the next four years to fund the production of more than 180 million tonnes of responsible soy and corn, worth around US$ 43 billion over the next decade. The investment will contribute to national targets of agricultural expansion into currently underutilized land, and the first US$ 300 million bond issuance is planned for the planting season of 2020.