Financing the future: green bonds
Driving the transformation to a low-carbon planet
Since its inception in 2007, the green bond market has grown over USD 100 billion. So how do green bonds work and why are they so highly recommendable? What’s in it for investors, issuers – and most importantly, Planet Earth?
Climate change affects us all. By the end of the 21st century, our global economy should meet the needs of humanity and be in balance with Earth’s resources. We need to decarbonize our energy consumption and transform our ‘take, make and waste’ economy into a circular economy. This requires a huge effort, both politically and financially. According to the World Economic Forum, at least USD 700 billion should be invested every year to ensure that the global average temperature rise remains within the 2°C limit ¹. The private sector is expected to contribute the majority of this investment.
¹ World Economic Forum, 2013. The Green Investment Report: The ways and means to unlock private finance for green growth.
One of the climate products that is applied, is the green bond – a fixed-income financial instrument like a normal bond, with an additional commitment to raise capital for projects or activities with high environmental benefits. Green bonds enable vast amounts of capital to be directed from the bond markets towards the development of a low-carbon and circular economy, resulting in financial and sustainability returns.
Green bonds in The Netherlands
Green bonds are very popular in The Netherlands. Organizations like De Nederlandse Waterschapsbank started early to issue green bonds, followed by Tennet, and several Dutch retail banks. Also, a Dutch network company issued green bonds for the investment in smart grids which facilitate local sustainable energy production and consumption. Dutch investors in green bonds are most likely institutional investors. Pension fund service provider PGGM is a buyer of green bonds, partly because PGGM wants to be ‘green’ as well, partly because bonds are attractive for long term investors and because green bonds issued by AAA rated parties have low default risks.
Benefits for issuers and investors
Which brings us to the benefits of green bonds. For issuers, green bonds are a tangible commitment to sustainability, enhancing their reputation, providing access to more progressive and long-term investors, increasing the chances of success for fundraising at favorable terms, and improving employee awareness of the company’s sustainability goals and approach. For investors, green bonds are an opportunity to participate in a fast-growing debt instrument category, removing the cost of environmental due diligence, differentiating in the market, and managing risk. For both, green bonds are an opportunity to engage with stakeholders on the business strategy to integrate finance and sustainability.
Different shades of green
With green bonds being relatively new financial instruments, there are some challenges to overcome. For instance, it should be very clear what the impact of the bond on sustainability is. There are (voluntary) standards and guidelines for green bonds, but also ‘different shades of green’ and the risk of ‘greenwashing’. Also, both issuers and investors should make sure that the bonds are aligned with their strategic sustainability goals. For instance, a pension fund might very well invest in green bonds for sustainable homes for its participants, to make sure that these participants will be able to live in affordable homes after their retirement. This would fit into their strategic goals as a pension fund.
Reporting and assurance
Other challenges are reporting and assurance on green bonds. Solid reporting requires the introduction of appropriate systems and resources for data monitoring and control. Also, it would be best if issuers used existing reporting guidelines and indicators, such as the Reporting framework of the UN Principles for Responsible Investment (UN PRI) or the Global Reporting Initiative (GRI) Guidelines. Assurance on these data is not (yet) mandatory, but would definitely increase investors’ trust in the bonds.
The full report on green bonds can be found online. Would you like more information on both sustainability reporting and assurance? Please contact Annemieke Huijbrechtse-Truijens via +31882882071.