The ESG Investors Digest Basic Investing

Explaining Green Bonds

Initiative Climate Funds

Helpful terminology

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.

Using debt capital markets to fund climate solutions

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 earmarked(link is external) for green projects but 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(link is external) bonds.

Types of green 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)

See the full list of green bonds issued here

Green Bonds are standard bonds with a bonus “green” feature

The green “use of proceeds” bond market has developed around the idea of flat pricing – where the bond price is the same as ordinary bonds. Prices are flat because the credit profile of green bonds is the same as other vanilla bonds(link is external) from the same issuer. Therefore, green bonds are pari pasu(link is external) to vanilla issuance.

Investor Appetite

Investors with $45tn of assets under management have made public commitments to climate and responsible investment – green bonds can help them achieve their pledges in fixed income. Read more here.


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