Green bonds represent one of the fastest growing impact investing trends, and for good reason. Green bond issuance has soared in recent years and is expected to hit $200 billion in 2019, up from $167 billion last year—and $42 billion in 2015. Given the capital needed to achieve the Paris Agreement’s goals, there could be room for the market to keep growing.
What Are Green Bonds?
Green bonds are debt instruments issued by companies and public bodies to finance projects with positive environmental benefits. Many green bond–financed projects have focused on renewable energy, including wind, solar, and hydro initiatives. Others have focused on reducing energy consumption or greenhouse gas emissions.
Many impact investors are attracted to green bonds because these investments return fixed income streams while aligning with investors’ environmental goals. Issuers found that funding projects through green bonds allows them to reduce the cost of debt. Green bonds have been so popular with impact investors that issuers may be able to sell them at lower interest rates compared to conventional bonds. This popularity also means that offering green bonds can bring favorable attention to issuers.
Green Bonds in Action
Companies like Apple and Bank of America have made headlines for issuing record levels of green bond debt. With $1.7 billion in issuance this year and $9.8 billion since 2014, French utility Engie has been the largest issuer of green bonds so far in 2019 and has become the largest corporate issuer overall. The company uses the proceeds from its green bonds to invest in renewable energy, energy efficiency, natural resource preservation, and the reduction of CO2 emissions.
Municipalities may also issue green bonds to finance projects in areas like mass transit and pollution management. However, some have argued that municipalities have not taken full advantage of these opportunities. Examples of significant municipal green bond issuers include New York’s Metropolitan Transit Authority, the California Health Facilities Financing Authority, and the Massachusetts Water Resources Authority.
Some have questioned whether green bonds are always as sustainable as they are marketed to be, claiming that a lack of universally accepted standards leaves them open to “greenwashing.” China intends to release its own standards, following criticism that it had allowed companies to issue bonds under the “green” label even when those bonds financed coal projects.
To combat the broader risk of greenwashing, groups like the Green Bond Principles and the Climate Bonds Initiative offer best practices, standards, and certifications. Plans for an EU Green Bond Standard are under way, too.