What is a Green Bond
Green bonds were created to fund projects that have positive environmental and/or climate benefits. The majority of the green bonds issued are green “use of proceeds” or asset-linked bonds. Proceeds from these bonds are strictly earmarked for green projects and are backed by the issuer’s entire balance sheet. There have also been green “use of proceeds” revenue bonds (link is external), green project bonds and green securitised bonds.
Benefits for issuers outweigh costs
Green bonds have some additional transaction cost because issuers must track, monitor and report on use of proceeds. However, many issuers, especially repeat green bond issuers, offset this initial cost with the following benefits:
- Highlights their green assets/business
- Positive marketing story
- Diversify their investor base (as they can now attract ESG/RI specialist investors)
- Joins up internal teams in order to do the investor roadshow (environmental team with Investor relations and other business)
Rapid growth of the green labelled market
The green bond market has seen strong growth, with the market really starting to take off in 2014 when USD37bn was issued. In 2018, issuance reached USD167.3bn, setting yet another record. The green bond market kicked off in 2007 with the AAA-rated issuance from multilateral institutions European Investment Bank (EIB) and World Bank. The wider bond market started to react after the first USD1bn green bond sold within an hour of issue by IFC in March 2013. The following November there was a turning point in the market as the first corporate green bond issued by Vasakronan, a Swedish property company. Large corporate issuers include SNCF, Berlin Hyp, Apple, Engie, ICBC, and Credit Agricole.
The first green muni bond was issued by Massachusetts in June 2013. Gothenburg issued the first Green City bond in October 2013. US states are major green bond issuers, but issuers also include Province of Ontario, City of Johannesburg, and Province of la Rioja (Argentina). Local government green bonds continue to grow.
SolarCity (now Tesla Energy) issued the first solar ABS in November 2013. The biggest ABS issuer is Fannie Mae. ABS includes solar ABS, green MBS, green RMBS, green CMBS, PACE ABS, auto ABS and receivables ABS - so far. This momentum has continued, with over USD1tr in green bonds having been issued cumulatively by 2020 at global level.