The Money & Financing Behind Green Bonds

The Future of Sustainable Debt

Here at Rapunzl we love green! From greenbacks & money to green beans and everything in between. It’s the best color there is.

Just take a look at Rapunzl’s logo!

Green represents life, cleanliness, and this beautiful place we call Earth. So naturally, this week we decided to take a look at how money becomes truly green: green bonds.

So What are Green Bonds?

Well, a green bond is pretty much what it sounds like. Green bonds are fixed-income securities that come in both taxable and tax-exempt forms. This is similar to corporate or government bonds.

However, there’s one wonderful difference.

You guessed it; green bonds are eco-friendly. This means capital raised funds projects that will have a positive environmental impact and/or mitigate the effects of climate change.

And The Different Types of Green Bonds?

There are a handful of different types of green bonds; but the most common are green “ use of proceeds “ bonds. These are asset-linked bonds which are backed by the entirety of the issuer’s balance sheet. Capital is then set aside for green projects.

Green securitized bonds are a different type of green bond backed by a group of green projects or assets. For example, Solar City issues green securitized bonds backed by the solar panel leases they offer to households.

The Growing Green Market

The green bond market is relatively very young. The first green bond ever was issued just ten years ago by the European Investment Bank in 2012. But despite a short history, the market shows great promise and is expanding rapidly.

In 2015, the market was worth $41.8 billion, more than four times its 2013 level. Issuances more than doubled in 2016. Also, Moody’s projects the green bond market to pass the $200 billion mark by the end of 2017.

The young market shows no signs of weakness. China continues to pour more and more money into environmentally sustainable projects. Last year, Chinese green bonds accounted for roughly a third of the entire market. Analysts predict they are looking to rapidly increase their issuance for the coming years.

Green bonds are particularly attractive to investors for a number of reasons. Firstly, they retain flat pricing. So that means there is no additional cost associated with buying a green bond versus a comparable standard bond. But they do carry the added bonus of having a positive environmental benefit.

Furthermore, green bonds offer greater transparency and help many companies meet their environmental commitments while pursuing corporate responsibility missions.

Hence, it comes as no surprise a wide range of investors are buying up green bonds. From BlackRock, Morgan Stanley, and Barclays, to Apple and the Central Bank of Peru, everyone is going green.

So, why Issue Green?

Issuing green bonds is advantageous to many companies. It allows them to attract capital from certain classes of investors who may not otherwise take notice of their projects

It also reinforces a positive brand image and can be an effective marketing tool.

Additionally, many companies prefer the free-market nature of green bonds. This is in contrast to the regulatory difficulties often associated with programs like cap & trade, which have a minimal impact; pollution taxes, which are ultimately just passed on to the consumer rather than the polluter; or green subsidies which often require disproportionate amounts of government lobbying to obtain.

Hence, green bonds may be an easy and efficient medium for companies to raise capital and follow environmental regulations.

But how will these green bonds affect our investments? Let’s take a deeper look as we step closer to achieving financial fluency.

Investing in the Future

Global institutions are finally coming to terms with the fact that climate change and pollution are problems. If unaddressed, it cost society greatly. These costs will be shared across corporate profits, political stability, access to resources, and human life.

This realization has been, in part, an impetus for the recent creation and rapid growth of the green bond market.

This cooperation between the public and private sector has been hailed by the UN. They described it as “one of the most significant developments in the financing of low-carbon, climate-resilient investment opportunities.”

The Bottom Line:

The quintessential purpose of these bonds is to efficiently transfer capital from investors hoping to mitigate their environmental impact and support sustainable enterprise to companies or projects working to solve these issues.

These projects are often undertaken in the very communities they intend to support; many of which are in the developing world, where the effects of environmental degradation are no longer cautionary news stories. Instead, we are seeing dystopian realities of unbreathable air, mass extinction of biodiversity, and violence to secure scarce resources.

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Originally published at https://blog.rapunzlinvestments.com on November 30, 2017.