The Green Bond: Coupling Sustainability with Finance

Usman W. Chohan has an MBA from Desautels (2014) in Strategy and Leadership. He has served as a consultant at the World Bank Institute (WBI), and as Special Situations Analyst in Global Equities at Natcan Investment Management, investment arm of the National Bank of Canada. He has been a participant in various important climate initiatives in 2015 including the Pacific Island Development Forum (PIDF) 3rd Summit in Suva, Fiji.   

The current COP21 climate summit offers the ideal backdrop for financial experts to consider the melding of financial instruments with a sustainability reform agenda. Green bonds offer a remarkable innovation in this regard, combining the design of fixed-income securities with a funding program for green projects. The primary difference in the assessment of Green bonds against regular bond securities is that they are also subject to a rubric of environmental impact beyond the standard bond metrics such as maturity, coupon, price, and credit quality.  The market size for Green Bonds has increased dramatically in the past few years, amounting to only $4 billion in 2010 but representing more than $37 billion in 2014. Multilateral Development agencies have taken the lead in issuing Green Bonds, and the World Bank [1] has touted Green Bonds as an important avenue for funding climate-related green initiatives in 2015, having itself been involved in more than 100 Green Bond transactions that cumulatively account for more than $8.5 billion in 18 different currencies [2]. Some of the major multilateral issuances outside the World Bank include the African Development Bank’s (AfDB) $500m issue (2013), the European Investment Bank (EIB) €600 million Climate Awareness Bond (2007). Other major players in the market include large corporations, banks, utilities, as well as regional and municipal governments. The issuance credit rankings range from AAA for the multilateral agencies to sub-invesment (<BBB) for certain utilities and corporations. Investors in Green Bonds include many parties interested in developing or enhancing their environmental credentials, which becomes possible through the application of the rubric of environmental awareness that Green Bonds are necessarily subjected to. An important consideration in the Green Bond process, not unlike other securities, is the requirement for strong oversight mechanisms that confirm the adherence of projects to the stipulated Green Bond criteria. To bring a sense of standardization to the assessment process, a group of banks in conjunction with the International Capital Markets Association [3], developed the Green Bond Principles (GBP) as guidelines for Green Bond participants to adhere to. The major project areas that fall into the Green Bond category include: renewable energy, sustainable waste management, biodiversity conservation, energy efficiency, and water resource management, among others.  Although the breakneck growth of Green Bonds is indeed encouraging, what provides greater encouragement to market participants is the diversity of instruments that fall into the Green Bond category, with funding expanding into newer, more interesting, and more sustainable projects. As the COP21 summit brings together world leaders in sustainability, the consideration of Green Bonds as a successful and fast growing vehicle for financing sustainability projects should provide draw praise and provide inspiration for the minds seeking to meld financial returns with green initiatives.

 
Notes:
[1] The World Bank. What Are Green Bonds? 2015.
[2] Ibid.
[3] International Capital Markets Association. Green Bond Principles. 2015.