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Understanding Green Bond

29 Sep 2022 00:00:00 | Update: 28 Sep 2022 22:55:20
Understanding Green Bond

A green bond is a type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects. These bonds are typically asset-linked and backed by the issuing entity's balance sheet, so they usually carry the same credit rating as their issuers' other debt obligations.​

Dating back to the first decade of the 21st century, green bonds are sometimes referred to as climate bonds, but the two terms are not always synonymous. Whereas climate bonds specifically finance projects that reduce carbon emissions or alleviate the effects of climate change, green bonds represent a broader category of instruments related to projects with a positive environmental impact.

Green bonds are designated bonds intended to encourage sustainability and to support climate-related or other types of special environmental projects. More specifically, green bonds finance projects aimed at energy efficiency, pollution prevention, sustainable agriculture, fishery and forestry, the protection of aquatic and terrestrial ecosystems, clean transportation, clean water, and sustainable water management. They also finance the cultivation of environmentally friendly technologies and the mitigation of climate change.

Green bonds may come with tax incentives such as tax exemption and tax credits, making them a more attractive investment versus a comparable taxable bond. These tax advantages provide a monetary incentive to tackle prominent social issues such as climate change and a movement toward renewable sources of energy. To qualify for green bond status, they are often verified by a third party such as the Climate Bond Standard Board, which certifies that the bond will fund projects that include benefits to the environment.

As recently as 2012, green bond issuance amounted only to $2.6 billion. But in 2016, green bonds began to sprout. Much of the action was attributable to Chinese borrowers, who accounted for $32.9 billion of the total, or more than one-third of all issuances. But the interest is global, with the European Union and the United States among the leaders too. In 2017, green bond issuance soared to a record high, accounting for $161 billion worth of investment worldwide, according to a report from the rating agency Moody's. Growth slowed a bit in 2018, hitting only $167 billion, but rebounded the following year thanks to an increasingly climate-aware market.