Green Bonds: A Fixed-Income Impact Opportunity

February 2, 2015

One of Toniic’s newest members, BNP Paribas recently launched the first World Bank Green Bond linked to an equity index. For the Toniic members who are looking at how to create impact across asset classes, having fixed income socially responsible products such as green bonds is extremely valuable. Toniic co-founders, Charly and Lisa Kleissner are also the recent recipients of the BNP Paribas Philanthropy award.

A Green Bond, is a debt instrument issued to raise financial capital for the exclusive support of projects with specific environmental benefits. A relatively new asset class, the Green Bond originated to satisfy demand from Scandinavian pension funds looking to incorporate fixed- income climate change products to their investment portfolios. Responding to the demand of institutional investors, the first Green Bond was issued in 2008 by the International Bank for Reconstruction and Development (IBRD), one of five institutions that comprise the World Bank Group. The first issue was originally worth 2.325 billion SEK ($USD 3.53 million). Its proceeds were earmarked for select IBRD environmental projects tackling global carbon emissions or climate change resilience.

Green bonds are tied to a very specific climate-related or otherwise environmentally beneficial purpose or technology, and are explicitly labeled as “green” at the time of issuance. They are also the first investment grade “plain vanilla” security whose proceeds are earmarked and used to finance climate projects; issuers borrow for a defined period of three to 25 years at a fixed interest rate (Gustke, 2013). Unlike green stocks or green equity-indexed bonds, Green Bonds do not usually expose investors to the risks of the specific green projects funded by the proceeds, as they are often backed by large development banks or companies (Gustke, 2013).

Once limited to issuers from large international financial institutions, the total value of outstanding Green Bonds doubled in 2013 as the type of issuers broadened and investors warmed to the green market. According to the Climate Bonds Initiative (CBI), an investor-focused non-profit, around $USD 7.8 billion-worth of explicitly advertised Green Bonds were issued by the end of 2012, mostly by the World Bank and other multilateral lenders; $USD 6.4 billion of which is still outstanding. In February 2013, the IFC issued a $USD 1 billion Green Bond, over 20 new Green Bonds followed, with most new bonds worth over $USD 250 million. That same year, in a watershed event that significantly broadened the scope of issuers, the first corporate labelled Green Bonds were issued by Électricité de France, Vasakronan and Bank of America Merrill Lynch.  By the end of 2013 the market stood at approximately $USD 15 billion in outstanding bonds. (Kidney, 2014)  As of 2014, more than $USD 19.9 billion in Green Bonds were issued worldwide and are projected by the CBI to reach $USD 40 billion by years end (Gustke, Quarterly Investment Guide, 2014).

It is exciting to see the growth of the green bond market and expect this growth to continue as more investors are thinking about the alignment of their values and their investments.

One of the important issues related to green bonds is the question of what counts as green? Please check out this link for more of an exploration of this question: Setting Standards in a Booming Market: What Makes Green Bonds Green?

One example of a green bond project issued by the World Bank’s IBRD is this project in China. For more project examples, please see, World Bank Green Bonds

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Jenna Nicholas 150

by Jenna Nicholas, Toniic Fellow

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