Not everyone is familiar with financial terms, so let‘s start by defining what a bond is. Very briefly, it is a financial instrument that represents debt obligations and involves borrowing money with the promise of paying it back in full along with interests over time. The guarantee of that promise is known as a bond. It is a type of investment similar to stocks but considered to be less volatile and risky.
So, now you might be wondering why I am writing about investments in a sustainability blog, right? How can bonds be an instrument for saving the world? Well, basically because there are many investors with a lot of money in the wallet willing to invest in projects (labeled green) that brings positive impacts for the environment and for the society. Today, green bonds are considered an important financial tool for climate action due to its potential to fund the transition to a low-carbon economy.
Green Bonds explained in two minutes:
It has emerged in the past decade as an effective and innovative financial instrument that provides long-term, large-scale financing solutions needed for the required investments in projects aimed to address environmental challenges. Green bonds are virtually the same thing as conventional bonds. The difference is that for the former the capital should be invested in projects that generate environmental benefits. Projects financed by green bonds include renewable energies, clean transportation, biodiversity, sustainable agriculture, etc. They provide a convenient, yet a risk-managed platform for responsible organizations, both private and public, to invest in green projects.
Besides its important role as a financing tool, green bonds make an immensely important contribution to initiating a deeper change in the financial sector by promoting accountability and transparency through better environmental disclosure, evaluation methodologies and a pragmatic dialogue between institutions in the financial sector.
More prevalent in Europe than in the US or Asia as an investment asset, the first green bond was issued by the European Investment Bank (EIB) in 2007. The simple concept behind it has expanded to other labeled bonds, including social bonds and blue bonds. Green bonds are among the fastest-growing financial assets in recent years. One of the major reasons behind its boom is the increasing importance of climate change on the global agenda.
How does it work? Green Bonds raise funds for new and existing green projects with environmentally sustainable benefits aiming to address key areas of concern such as climate change, natural resources depletion, loss of biodiversity and/or pollution control, etc.
Who issues green bonds? They can be issued by corporations, governments, international organizations, and universities. Who invests in green bonds? Institutional investors, such as pension funds, insurance companies, banks, and investment funds.
Corporate green bonds became popular in the last years. For example, in 2014, Unilever issued a £250M green bond in order to cut in half the amount of waste, water usage and greenhouse gas emissions of existing factories. In 2017, Apple issued a $1B green bond to finance renewable energy and energy efficiency at its facilities and in its supply chain.
A recent study has shown that corporate Green Bonds not only helps to address environmental challenges but are also good for the business. This financial tool triggers a positive market response, improve financial and environmental performance, and attract long-term and green investors. The growth of bond markets provides increasing opportunities to finance the implementation of the Sustainable Development Goals (SDGs) and green economy projects. Furthermore, it also fosters green innovations and holds significant promise for fighting climate change globally with or without governments support or action.
Can you also invest your savings in green bonds?
If you ever wondered how to “do well by doing good” with your own money, today there are many funds that allow you to combine purpose and investments with financial gains. If you are interested and considering to invest responsibly, do a quick research about green funds or impact investing available in the market and start changing the world with your own investment assets!