Over the past few years, the popularity of green bonds has soared as a way of channelling money towards climate-friendly purposes. In June, Apple raised $1bn (£745m) in a bond dedicated to financing clean energy and environmental projects. The offering came just over a year after the company issued its first green bond of $1.5bn (£1.2bn) – the largest issued by a US corporation, as a response to the 2015 Paris climate change agreement.
A green bond offers a financial return through the payment of its coupon like any other bond, but with one key difference: the money raised is exclusively assigned to finance projects and business activities labelled as green. Examples include, but are not limited to:
• Renewable energy
• Energy efficiency
• Sustainable transportation
• Low-carbon projects
• Sustainable water management
There is still a primary focus on achieving the maximum financial return, but this consideration is balanced by environmental objectives.
Green bonds generally have a medium-term maturity of five to 10 years, are given credit ratings like other bonds and are issued in multiple currencies and from many issuer jurisdictions.
At the end of June this year, the total market value of green bonds stood at $118bn (£88bn). Although this represents a fraction of the overall £100trn bond market, demand is growing and the market is expected to double in size again this year, according to Moody’s. The climate-aligned bond universe is valued at $694bn (£517bn), six times the size of the green bond-only universe.
When did they first emerge?
The labelling of green bonds is a relatively recent activity; the first green bond was issued by the World Bank in 2008, in collaboration with SEB, the leading Nordic Bank and Scandinavian Pension Funds. This followed on from the release, the previous year, of a Climate Awareness Bond by the European Investment Bank, which was the first to introduce the concept of tying revenues to climate investment.
Corporate involvement gradually became more pronounced until, in 2016, the number of green bonds issued by the corporate market outstripped those issued by international organisations like the World Bank.
China overtook the US to be the largest issuer of green bonds last year, a third of bond issuance growth was driven by the country. China needs at least $300bn of green investment per annum over the next five years to help counteract environmental damage caused by the country’s rapid industrial growth.
- A green bond offers a financial return through the payment of its coupon.
- Investors are increasingly identifying projects related to the shift to a lower carbon economy.
- US President Trump’s rejection of the Paris Agreement popularised green investment
The 2015 Paris Agreement saw 150 nations agree to limit the global temperature increase to 2 degrees celsius, signalling a step change in the way governments are addressing climate change.
Recognising the opportunity, forward-thinking investors are increasingly identifying projects related to the shift to a lower carbon economy. Growth sectors such as renewable energy need financing.
By 2020, the UK needs to generate 15 per cent of its energy from wind, wave, solar and other renewable sources.
We are also seeing an increase in environmental awareness, particularly among the millennial generation, which has resulted in investors becoming more interested in how and where their money is invested.
Subsequently, we have seen demand for environmental, social, and governance (ESG) factors to be included in the investment process by fixed-income investors, which is something that can be fulfilled by green bonds.