Green bonds are an increasingly attractive mechanism for both private and public sector organizations to raise capital for projects, assets or other activities that benefit the economy, environment and society. The global green bond market is growing rapidly. Eight years ago, green bonds did not exist, but fast forward to 2014 and the value of green bonds stood at over US$53 billion dollars outstanding.
Perhaps inevitably in a fast-growing market, challenges and confusion can arise as organizations assess whether issuing a green bond is the right course of action for them and seek to understand the process involved.
A green bond, like any other bond, is a fixed-income financial instrument for raising capital through the debt capital market. In its simplest form, the bond issuer raises a fixed amount of capital from investors over a set period of time, repaying the capital when the bond matures and paying an agreed amount of interest (coupons) along the way.
The key difference between a ‘green’ bond and a regular bond is that the issuer publicly states it is raising capital to fund ‘green’ projects, assets or business activities with an environmental benefit, such as renewable energy, low carbon transport or forestry projects. Bonds can also be used to fund projects with a social or community benefit such as improving healthcare or social services, and these are typically known as ‘social’ or ‘social impact’ bonds.
The labeled green bond market tripled in size between 2013 and 2014, with US$37 billion issued in 2014. Historically, supranational organizations such as the European Investment Bank and the World Bank, along with governments, have been the most prolific issuers of green bonds, accounting for all labeled issues between 2007 and 2012. However, there has since been a sharp rise in the number of corporate green bonds issued.
In 2014, bonds issued by corporations in the energy and utilities, consumer goods, and real estate sectors accounted for one third of the market. Substantial further growth is predicted and it is forecast that in 2015 the value of green bonds issued will reach US$100 billion.
A green bond, like any other bond, is a fixed-income financial instrument for raising capital through the debt capital market. In its simplest form, the bond issuer raises a fixed amount of capital from investors over a set period of time, repaying the capital when the bond matures and paying an agreed amount of interest (coupons) along the way.
A green bond is a tax-exempt bond which is issued by federally qualified organizations and/or municipalities for the development of brownfield sites. Brownfield sites are areas of land that are under utilized, have abandoned buildings, or are under developed. They often contain low levels of industrial pollution.
These bonds are created to encourage sustainability and the development of brownfield sites. The tax-exempt status makes purchasing a green bond a more attractive investment when compared to a comparable taxable bond.
Globally, Green Bonds issues amounted to almost $35 billion worldwide in 2014 while the market in India is still nascent/non-existent. The first such green (infrastructure) bond issuance in India by YES Bank will catalyse the market for green infrastructure bonds in India and allow responsible investors to facilitate funding towards Renewable and Clean Energy projects.
Some notable recent corporate and government green bonds include:
Private sector green bonds
YES BANK: The first green bond in India was issued in February 2015 by the country’s fourth-largest private sector bank. The bond will fund renewable energy and energy efficiency projects. KPMG in India will provide assurance on the management of proceeds each year during the 10-year life of the bond.
National Australia Bank: the bank raised AU$300 million (US$250 million) for wind and solar energy farms in December 2014. It was the first major green bond to be certified under the Climate Bonds Standard.
Stockland: in October 2014, the property firm was the first company to issue a green bond in Australia, raising EUR300 million (US$380 million) to fund green building projects. KPMG in Australia provided assurance over the use and management of proceeds and will continue to assure Stockland’s annual performance reports.
GDF Suez: the utility company was the world’s largest corporate issuer of green bonds in 2014, raising EUR2.5 billion (US$3.4 billion) in total for renewable energy and energy efficiency projects.
Unilever: the first corporation in the fast moving consumer goods (FMCG) sector to issue a green bond, and the first to issue in the Sterling market. The company raised GBP250 million (US$415 million) in 2014 for greenhouse gas (GHG), water and waste reductions, to support its ‘Sustainable Living Plan’.
Public sector green bonds
Île de France: the French regional government that covers Paris raised EUR600 million (US$830 million) for a range of projects such as installing renewable energy in schools and providing energy efficient social housing. Île-de-France was the world’s largest municipal issuer of green bonds in 2014.
Massachusetts: the US state issued the first municipal green bond in 2013 to fund a range of environmental projects including public building energy efficiency improvements, habitat restoration and water quality improvements.
