How Have Green Bonds Helped Companies Invest in Sustainable Infrastructure and Technologies?

Key takeaways:

• Introduction
• Factors behind the growing preference for green bonds
• Launch of green bonds by multinational entities

Green bonds are fixed-income debt instruments that are specifically used to fund environmentally sustainable projects. Like all other bonds, green bonds, too, offer stated returns and are typically asset-linked with the backing of the issuer’s balance sheet. On July 5, 2007, the European Investment Bank (EIB) issued its first green bond to fund clean energy projects and climate action plans. Since then, several multinational companies, civil societies, governmental agencies, and multilateral entities have been issuing these financial instruments for investing in renewable power projects, clean transportation technologies, waste management systems, energy efficiency initiatives, pollution control programs, and green building schemes.

Increasing demand for green bonds influencing industry growth

Since the Rio Earth Summit in 1992, the focus on climate action initiatives has increased significantly. Furthermore, the Paris Climate Accords in 2015 introduced the concept of Intended Nationally Determined Contributions (INDCs) which allowed countries to declare their sustainability and net-zero goals as per their domestic governance frameworks and economic growth models. Consequently, countries like China, the US, India, European Union, and Russia, announced their emission reduction targets to bring down the pace of global warming and climate change. These multilateral deals and arrangements have led to a rise in demand for novel sustainability-promotion initiatives, thus expanding the scope of green bonds.

Apart from the obvious environmental benefit, green bonds help investors diversify their portfolios. The investment options offered by these debt instruments aid clients in going beyond traditional stocks and shares, thus opening new avenues of income generation. Furthermore, the yields offered are much higher than conventional financial bonds, which has attracted many investors across the globe in recent years. To support eco-friendly infrastructure projects and clean transportation initiatives, certain governments have passed laws to provide tax exemptions and credits on green bonds, thus making them a wise investment option.

Multinational investment banks and companies promoting green bonds

The green bonds industry, which accounted for $582.6 billion in 2023, is expected to gather a revenue of $1,555.1 billion by 2033, rising at a CAGR of 10.1% during 2024-2033. Over the last few years, several leading investment banks, multilateral institutions, and private equity companies have launched green bonds, thus creating favorable conditions for the growth of the market. For example, in July 2021, Symbiotics, an impact investing platform, unveiled its green bond in partnership with Samunnati, India’s largest agri-enterprise. The press release issued by the company highlighted that the entire USD 4.6 million proceeds earned through this debt instrument were to be used for sustainable farming practices, thus making it India’s first-ever 100% agricultural green bond. The press statement further stated that this new financing mechanism has helped small farmers and FPOs get short-term loans, thereby enhancing their ability to buy new machines and other capital goods.

Similarly, in February 2022, Bank for International Settlements (BIS), announced the launch of a new green bond specifically to fund sustainable projects in the Asia-Pacific region. The aim of this novel debt instrument launched by BIS was to provide capital to central banks of countries in APAC, who were then expected to forward this money to corporate entities working on renewable energy projects and other such climate-friendly initiatives. This dollar-denominated fund was designed by BIS in close collaboration with the Asian Development Bank.

On the other hand, in February 2024, Goldman Sachs, an investment banking company, unveiled the Goldman Sachs Global Green Bond UCITS ETF. Developed in collaboration with Solactive, a German capital market firm, this new debt instrument is among the first-ever passive green bonds designed to track a bespoke index. As per the press statement issued by Goldman Sachs, the fund is available on the London Stock Exchange, SIX Swiss Exchange, the Borsa Italiana, and Xetra.

To sum it up, the concept of green bonds has now become hugely popular owing to the growing awareness regarding environmental sustainability. The increasing emphasis on eco-friendly infrastructure projects and clean transportation initiatives has expanded the scope of the industry. Furthermore, the launch of innovative products by multilateral institutions, international banks, and governmental agencies is expected to open new avenues for the growth of the market in the coming period.

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