Rapid growth of the green labelled market
This momentum has continued, with over USD500bn in green bonds currently outstanding.
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 for green projects but are backed by the issuer’s entire balance sheet. There have also been green "use of proceeds" revenue bonds, green project bonds and green securitised bonds.
Types of green bonds
|Type||Proceeds raised by bond sale are||Debt recourse||Example|
|"Use of Proceeds" Bond||Earmarked for green projects||Recourse to the issuer: same credit rating applies as issuer's other bonds||EIB "Climate Awareness Bond" (backed by EIB); Barclays Green Bond|
|"Use of Proceeds" Revenue Bond or ABS||Earmarked for or refinances green projects||Revenue streams from the issuers though fees, taxes etc are collateral for the debt||Hawaii State (backed by fee on electricity bills of the state utilities)|
|Project Bond||Ring-fenced for the specific underlying green project(s)||Recourse is only to the project's assets and balance sheet||Invenergy Wind Farm (backed by Invenergy Campo Palomas wind farm)|
|Securitisation (ABS) Bond||Refinance portfolios of green projects or proceeds are earmarked for green projects||Recourse is to a group of projects that have been grouped together (e.g. solar leases or green mortgages)||Tesla Energy (backed by residential solar leases); Obvion (backed by green mortgages)|
|Covered Bond||Earmarked for eligible projects included in the covered pool||Recourse to the issuer and, if the issuer is unable to repay the bond, to the covered pool||Berlin Hyp green Pfandbrief; Sparebank 1 Bolligkredit green covered bond|
|Loan||Earmarked for eligible projects or secured on eligible assets||Full recourse to the borrower(s) in the case of unsecured loans. Recourse to the collateral in the case of secured loans, but may also feature limited recourse to the borrower(s).||MEP Werke, Ivanhoe Cambridge and Natixis Assurances (DUO), OVG|
|Other debt instruments||Earmarked for eligible projects||Convertible Bonds or Notes, Schuldschein, Commercial Paper, Sukuk, Debentures|
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)
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 from the same issuer. Therefore, green bonds are pari pasu to vanilla issuance.
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.