The Evolution of Green Bonds

In 2007, the United Nation’s Intergovernmental Panel for Climate Change published a report that linked activity by humans to global warming. According to the World Bank this new data, along with increasing occurrences of natural disasters, prompted a group of Swedish pension funds to think about how they could use their investment capital in a way that could be helpful. A relationship was established between the pension funds and the World Bank to create an investment that would have positive environmental impact but also control the risk borne by the pension funds.

The Swedish pension funds, SEB Bank, the World Bank, and the Centre for Inter- national Climate and Environmental Research (CICERO) collaborated to create a way for the global bond markets to be part of the solution. To ensure that investment capital, provided for sustainability projects, resulted in positive environmental benefits, a set of eligibility criteria was created, and in November 2008, the World Bank successfully issued its first green bond.

The World Bank green bond issuance raised awareness of the challenges of climate change and revealed the potential for investors to support climate solutions through safe investments without giving up financial returns. Notably, it helped form the basis for the Green Bond Principles , a consortium of banks, issuers, and investors whose voluntary process guidelines promote disclosure, transparency, and integrity. Yet, it wasn’t until the first $1 billion green bond was sold by International Finance Corporation in 2013 that conventional bond market investors began to take notice. By 2014, the Pension Boards had made its first green bond investment, issued by EIB (European Investment Bank), where proceeds were earmarked to support lending projects in the fields of renewable energy and energy efficiency.

According to Heike Reichelt, Head of Investor Relations and New Products at the World Bank, “Green bonds help investors address the Environmental (E), Social (S), or Governance (G) risks that can have a material effect on returns.” Use of proceeds from a bond issuance determines how and why it’s green, while the very characteristics that support the green qualification also likely result in a less risky investment due to advantageous E, S, or G factors.

Originally, issuers of green bonds were mostly multi-lateral development banks. As the market has grown, issuers now include corporations, utilities, and municipalities as well as many sovereign states and government-sponsored agencies. Today green bonds are available to investors across the globe and in at least 20 currencies. High level green bond categories include climate change mitigation, climate change adaptation, natural resource conservation, biodiversity conservation, and pollution prevention. More plainly, the most common uses of proceeds for capital raised from selling green bonds to investors has been related to energy, 35%; buildings, 26%; transport, 24%; water, 7%; and waste, 2%.

All issuers that conform to the Green Bond Principles measure, track, and report on the environmental impact of their investments. Second-party opinions of green bond issuers’ frameworks ensure that their bonds are in line with market expectations and industry best practices. A second-party opinion verifies that projects align with the Green or Social Bond Principles. Sustainalytics and MSCI, two well-known providers, continue to expand their coverage and depth of green bond analysis.

Now more than ever fixed-income investors may align their investments with their values, be they environmentally or socially inclined. No longer do sustainable investors need to accept below market returns to do good for the environment or groups of people in need. Now a double-bottom-line of doing good for society and doing well with investment returns is simultaneously achievable.