Understanding Green Bonds – What are they?
Green bonds, also known as climate bonds have contributed to the redefinition of socially-responsible investing. Previously such investments meant buying a stock in a company that proposed to conduct environmentally responsible actions. However, now this concept may entail investing in green bonds that have a direct environmental impact.
They are offered by companies who are undertaking projects and initiatives to facilitate actions aimed at climate benefits. For instance, projects organized to contribute to clean water, renewable energy or habitat restoration. Green bonds hold dual benefits for investors; investors generate an income while directly contributing to environmentally responsible actions. Therefore, they ensure resource mobilization in domestic and international capital markets for projects aimed at:
- Climate change adaptation
- Renewable energy initiatives
- Environmentally benefitting projects
According to a report by Segal (2020) green bonds are classified as a fixed-income tool that is designated to generate money for climate and environmental benefits. They may seem desirable as there are tax incentives attached to them. In essence, green bonds possess no significant difference from conventional bonds – their only unique characteristic is that the money raised is purely used for environmentally friendly projects.
Green Bond Trends & Patterns
The first green bond was issued by the World Bank in 2009. Since then their issuance has increased and in 2019, around $157 billion were invested in green bonds.
The efficacy and popularity of green bonds can be gauged from how large multinational corporations in the United States are gaining interest in them. A Forbes (2017) report highlights that in 2016 and 2017, Apple issued green bonds worth $ 1.5 billion and $ 1 billion, respectively. The latter was aimed at financing energy efficiency and renewable energy projects in its own organization.
Both private and government organizations are considering the potential of green bonds evident by organizations as diverse as Toyota and New York’s Metropolitan Transportation Authority issuance of green bonds. The Forbes (2017) report expected investment in green bonds to rise from $81 billion in 2016 to $150 billion in 2017.
When examining the Canadian market there is widespread evidence of issuance and investment in green bonds. In 2019, the Royal Bank of Canada allocated EUR 500 million for green bond offerings for projects relating to renewable energy and green buildings.
Major Investors in the Green Bond Market
The increasing demand for green bonds is emerging from a number of investors focusing on different investment types. Major investor categories include:
- Mainstream Institutional Investors – State Street & Amundi
- Specialist ESG & Responsible Investors – ACTIAM, Mirova, Natixis
- Corporate Treasuries – Barclays & Apple
- Sovereign & Municipal Governments – California State Treasurer
- Retail Investors – World Bank issuance for retail investors through Merrill Lynch Wealth Managers & Morgan Stanley Wealth Managers.
Blockchain’s Role in the Green Bond Market
Green bonds are assisting in combating environmental degradation and blockchain technology can aid this process by boosting confidence and lowering the cost of issuance within the bond market through digitization. This offers advantages to all stakeholders involved – from issuers to investors.
Blockchain holds the potential to directly impact the green bonds ecosystem by:
- Lowering costs
- Increasing transparency
- Enhancing efficiency
It is essential to understand the focal point of Blockchain as institutions are primarily interested in the potential impact of Distributed Ledger Technology (DLT). This technology is transforming capital markets by allowing transactional data to be securely shared across stakeholders while providing an immutable and auditable record; the feature is extremely beneficial as it allows for the automation of the entire transaction process.
According to an HSBC report the main advantages of utilizing blockchain technology for green bond issuances include:
- Credibility – enabled through increased transparency offered by blockchain technology, which is important in developing relationships between issuers and investors. It assists in monitoring the evolution of environmental projects and allows for transactions and payments to be carried out automatically.
- Efficiency – blockchain is highly prized as it reduces time, costs and eradicates third-party intervention to a great extent.
- Lower Chances of Fraud – as a result of built-in encryption, autonomous transfer of value and asset tokenization.
Given the state of rampant environmental degradation and climate change, in a world with advancing technological solutions, blockchain holds the potential to transform and digitize the green bond market.
It can boost confidence in the market by increasing efficiency, transparency and reducing costs. Owing to this investors can feel a better sense of security. MetaFinance leverages blockchain technology to break down the barriers for investors to easily transact in green investments – allowing everyone to contribute to shaping our collective future.