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Green bonds briefing


Realizing the potential of the green bond market


06 August 2014

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Overview


Green bonds offer the potential to raise billions in capital to fund renewable energy projects and a host of other sustainable technologies to enable the transition to a sustainable economy. But uncertainty among institutional investors about the environmental benefits of green bonds may limit this potential. A lack of transparency in the green bonds market has reputational risks for organizations issuing green bonds. Surging interest among companies in issuing green bonds could exacerbate these challenges unless something is done.

Trucost believes that natural capital quantification and valuation offers issuers and investors the opportunity to develop a green bond market that is robust, credible and transparent. By quantifying the environmental benefits of green bonds and putting a monetary value on those benefits, all players will be able to compare performance of different issuances on a like-for-like basis. Such a move would increase competition in the market, enhancing the contribution green bonds could make towards transitioning to a greener economy.

Extract


Green bonds are fixed-income instruments aimed at financing clearly defined projects that generate direct environmental benefits such as renewable energy, energy efficiency, water conservation and climate change adaptation. These were pioneered in 2006 by supranational organisations such as the World Bank, the European Investment Bank and the African Development Bank as a means to finance the transition towards a low-carbon economy.


In 2008 the French Nord-Pas de Calais region was the first local authority to issue a green bond, raising €50m to finance projects ranging from railways to construction to the reclassification of brownfield land. This initiative has since been replicated by a number of local governments in the US, Canada, France, and Sweden seeking to fund renewable energy and low-carbon infrastructure projects, as well as ground-breaking environmental developments like ecological corridors. Emerging economies are also exploring the benefits of green bonds. On June 9th 2014, Johannesburg in South Africa issued its first green bond. Many companies are now using green bonds. In 2014, the market saw a rapid increase in the number of corporate green bond issuances as large multinationals including EDF, Unilever and GDF Suez sought ways to finance environmentally beneficial capital investments and projects.


The myriad names and approaches inherent to green bond issuance, and the speed at which they are growing, may lead to confusion in the market. As a result, issuer environment, social and governance ratings, and verification and certification initiatives such as the Green Bond Principles are being introduced to improve clarity.