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0 What are Green Bonds
The idea of green bonds was born when a Swedish pension fund wanted to invest in climate-related projects but did not know how to find these projects, and they turned to the World Bank. Their need for a financial instrument that met their needs sparked conversations and planning, which led to the World Bank issuing the first green bond in 2008, thereby connecting financing from investors to climate projects. You can learn more about the history of green bonds here.
Investopedia defines a green bond as a fixed-income instrument specifically earmarked to raise money for climate and environmental projects. These bonds are typically asset-linked and backed by the issuing entity’s balance sheet, so they usually carry the same credit-rating as their issuers’ other debt obligations. Investors can buy/invest in green bonds, knowing that their funds will go towards climate and environmental projects. Examples of projects are clean technology, climate change mitigation or adaptation, renewable energy, sustainable waste management, and more.
Ontario government launched the first Green Bond program in Canada on November 2, 2014, with a bond issue of $500 million. Proceeds went towards transit and sustainable infrastructure projects. The government expanded its initially planned $500 million offering to $1 billion after receiving $1.8 billion in investor orders.
Green Bonds impact on Climate Change
It’s hard to pin the responsibility of tackling climate change to one government or organization. Climate Change is a global problem that requires lots of funding, research, and development. With that, it requires a lot of financial capital to support the research and development. Green bonds raise awareness of the challenges of climate change and enable financial institutions, pension funds, and other investors to invest in the advancement and progress towards tackling climate change. It gives investors a way to support climate change without forfeiting financial returns as it would through donations. Furthermore, due to the nature of the investment being in bonds and having financial returns, investors are willing to invest more significant amounts knowing that it is a very safe investment.
Shifting Financial Perspectives
Initially, it was prevalent for investors to look for the most profitable and safe investment opportunities, even if it meant investing in opportunities that may have neglected social values or opportunities which took advantage of globalization opportunities and capitalism. However, today’s thinking is shifting. Although stakeholders are still looking for investment opportunities that are financially profitable and safe, social value is also a growing concern. Stakeholders want to invest in corporations taking responsibility for their environmental and social impacts, whether that means incorporating environmental management systems to reduce their impact, investing in the community where their facilities are located, or standing up for social causes and social justice.
With the rise of climate change awareness in the past two decades, banks have adapted to the trend and started issuing green bonds. The ongoing recovery from the Covid-19 Pandemic and the trend of “Building Back Better,” green bonds are leading the way and surpassing all expectations in 2021 so far. According to the Climate Bond Initiative, in 2020, $297bn in Green Bonds were issued. The 2021 issuance as of when this article is being written is $355 bn, at the beginning of Q4. The speed is picking up with Green Bonds, and with the overall impacts of climate change seen globally, there are no signs of slowing down anytime soon.
References:
Green Bonds Fact Sheet for Investors, https://www.riacanada.ca/content/uploads/2019/02/Green-Bonds-Fact-Sheet.pdf
10 Years of Green Bonds: Creating the Blueprint for Sustainability Across Capital Markets, https://www.worldbank.org/en/news/immersive-story/2019/03/18/10-years-of-green-bonds-creating-the-blueprint-for-sustainability-across-capital-markets
Province of Ontario Green Bonds, https://www.ofina.on.ca/greenbonds/greenbonds.htm
Strong Demand for Ontario’s First Green Bond, https://news.ontario.ca/en/release/30630/strong-demand-for-ontarios-first-green-bond
Green Bonds, https://www.investopedia.com/terms/g/green-bond.asp
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