By Dhangfun (Kaede) Karnasuta - Thailand
In an ever-evolving world where concern for our environment is becoming increasingly recognised, green bonds have served as a way to help pave a more sustainable future and combat the current climate crisis. Investors can align their financial goals with their values and contribute to positive change. Governments, corporations, and investors are using green bonds as a backbone for the future of sustainable finance and a greener world (Segal).
What are green bonds?
Green bonds are fixed-income investments used to raise funds specifically for initiatives with positive environmental impacts, such as renewable energy, energy efficiency, clean transportation, and waste management projects ("Green Bond"). Like traditional bonds, green bonds provide investors with a guaranteed return on their investments and a commitment to allocate the funds exclusively to finance sustainable projects. They may also offer tax incentives, making them more attractive to investors, and can be issued by various organisations, particularly governments, corporations, and financial institutions.
Differences between green bonds and traditional bonds
Touched on briefly before, traditional bonds and green bonds both work as debt instruments where issuers borrow money from investors and commit to repaying the principal amount with interest over a specified period. However, they differ significantly in how the funds are used and the transparency provided. Traditional bonds can be used for various purposes, from small business expansion to large infrastructure projects, without any requirement to cover specifics on reporting receipts for the capital invested. In contrast, green bonds are strictly allocated for projects with positive environmental impacts, and investors in green bonds are continually updated on the environmental outcomes of funded projects, ensuring full accountability and transparency in their transactions. Furthermore, green bonds are an attractive option for those wanting to align their portfolios with sustainability goals, as institutional investors and asset managers are increasingly incorporating environmental, social, and governance (ESG) into investment decisions, which provides the green bond market with a more unique kind of demand than the traditional bond market (Bhatia).
However, investors may potentially receive lower returns from green bonds than from traditional bonds because the green bond market is still growing and less established, whereas the traditional bond market is more developed. Despite this disadvantage, green bonds offer investors the opportunity to contribute to a more sustainable future (Villanova and Conde).
Real-life examples
As of 2024, green bonds have a market value of US$525.74 billion, but they are estimated to reach up to US$1.033 trillion by 2031 (Rai). Large household names have become major issuers of green bonds. Apple, Pepsi, many massive banks such as JP Morgan, and governments all around the world, like China, Russia, the EU, and more, have also gotten into this major phenomenon ("How The $1 Trillion Green Bond Market Works").
In 2023, the European Union became the largest issuer of green bonds globally, with a commission raised of €12 billion through its NextGrenerationEU bond programme, becoming the largest green bond transaction to date. The initiative aims to support energy efficiency, clean energy, and climate change adaptation projects, aligning with the EU's broader environmental sustainability goals ("NextGenerationEU Green Bonds"). Moreover, numerous corporations are now becoming interested in the new market of green bonds, as these large corporations are acting as a leading light to their development.
The future of green bonds
The future of green bonds is something debated: what effect would this have on our future? What certainty do we have to know that sustainable finance is beneficial and not detrimental to our society? Others may also question the success of green bonds in directly addressing climate change. As this type of finance is relatively new and just recently started to gain recognition, there is no clear proof it is a guarantee for success. However, currently, it is heavily backed up by governments in countries such as China and many more.
Furthermore, investors and corporations are also trusting green bonds more ("Where Is Sustainability Headed in 2024?"). Due to transparency and standardisation, the performance of green bonds is easily tracked because of technological advancements, making their success vital to the issuers, as unsatisfactory execution can be spotted quickly. Thus, green bonds could be considered foolproof because of technological advancements that could help prevent failure from going too far ("Forces Shaping the Sustainable Bond Market in 2024").
Green bonds are essentially “paving the way to a sustainable future" of sustainable finance; increased awareness and publicity of this type of bond will increase demand and grow the market further. With the help of green bonds, more types of sustainable finance within the ESG goals will be introduced and exposed to society, such as blue bonds, green suk suk, and green loans (Redfield).
Conclusion
To conclude, despite green bonds' current limitations surrounding investor returns, they will undoubtedly play a pivotal role in the future as the foundations for building a more sustainable and environmentally responsible society. It bridges the gap between economic growth and earth preservation by offering a financial mechanism for funding projects with positive environmental impacts. The growing market for green bonds, supported by central governments, corporations, and investors, leans towards favourable outcomes for the union between sustainable development and mainstream finance. While challenges and uncertainties may still need to be addressed, the combination of transparency and accountability inherent in green bonds is a foundation for their success. When demands continue for green bonds, they will likely drive our world's efforts to combat the climate crisis at hand. This innovative approach to climate change inspires confidence and fosters a greener world for generations to come.
Bibliography
Segal, Troy. "Green Bond: Types, How to Buy, and FAQs." Investopedia, 27 Apr. 2024, www.investopedia.com/terms/g/green-bond.asp. Accessed 8 Sept. 2024.
"Green Bond." Corporate Finance Institute, corporatefinanceinstitute.com/resources/esg/green-bond/. Accessed 8 Sept. 2024.
Bhatia, Hardik. "Green Bonds Vs Traditional Bonds: Understanding Key Differences." Sustvest, 2 Aug. 2023, blog.sustvest.com/green-bonds-vs-traditional-bonds/. Accessed 8 Sept. 2024.
Villanova, Patrick, and Arturo Conde. "Pros and Cons of Investing in Green Bonds." Smart Asset, 23 Jun. 2024, smartasset.com/investing/are-green-bonds-a-good-investment. Accessed 8 Sept. 2024.
Rai, Ankur. "Green Bond Market Analysis." Coherent Market Insights, 1 Feb. 2024, www.coherentmarketinsights.com/market-insight/green-bond-market-6086#:~:text=The%20green%20bond%20market%20size,sustainability%20and%20climate%20change%20intensifies. Accessed 8 Sept. 2024.
"How The $1 Trillion Green Bond Market Works." Youtube, uploaded by CNBC, 28 May 2021, www.youtube.com/watch?v=ruXLhpXvhOE.
"NextGenerationEU Green Bonds." Commission, commission.europa.eu/strategy-and-policy/eu-budget/eu-borrower-investor-relations/nextgenerationeu-green-bonds_en. Accessed 8 Sept. 2024.
"Where Is Sustainability Headed in 2024?" JP Morgan, 29 Jan. 2024, www.jpmorgan.com/insights/esg/sustainability/green-economy-outlook-sustainability-trends-for-2024. Accessed 8 Sept. 2024.
"Forces Shaping the Sustainable Bond Market in 2024." BNP PARIBAS, 22 Feb. 2024, cib.bnpparibas/forces-shaping-the-sustainable-bond-market-in-2024/. Accessed 8 Sept. 2024.
Redfield, Noah. "6 Types of Sustainable Debt." Harvard Business School, 23 Aug. 2022, online.hbs.edu/blog/post/types-of-sustainable-debt. Accessed 8 Sept. 2024.
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