green bonds

green bonds
Name	Green bonds
Type	Financial instrument
Introduced	2007
Issuer	Sovereign, municipal, corporate, supranational
Currency	Multiple
Maturity	Short, medium, long-term
Purpose	Finance environmental and climate-related projects

green bonds are fixed-income securities designed to raise capital for projects with environmental and climate benefits. They connect projects such as renewable energy installations, public transport infrastructure, flood defenses, and energy efficiency retrofits to investors including pension funds, sovereign wealth funds, and development institutions. Market growth has involved participation from supranational organizations like the World Bank and the European Investment Bank, alongside national agencies and corporate issuers.

Overview

Green bonds mobilize capital through debt instruments issued by entities such as Treasury agencies, municipalities, corporations, and international financial institutions like the International Monetary Fund and Asian Development Bank. Proceeds are earmarked for projects aligned with policy frameworks such as the Paris Agreement and the Sustainable Development Goals. Market participants include underwriters from investment banks like Goldman Sachs, asset managers such as BlackRock, rating agencies like Moody's Investors Service, and verification providers including KPMG. Secondary markets trade green bonds on exchanges such as the London Stock Exchange and the Shanghai Stock Exchange.

History and Development

The modern green bond market began when multilateral development banks explored labeled environmental debt in the 2000s, with early issues by the World Bank and later by the European Investment Bank. Post-2015 expansions followed the Paris Agreement and private placements by corporations including Apple Inc. and Toyota Motor Corporation. Sovereign green bond benchmarks emerged from issuers like France and Mexico, while subnational pioneers included State of California and City of Gothenburg. Growth was also driven by initiatives from standard setters and network organizations such as the Climate Bonds Initiative and the International Capital Market Association.

Market Structure and Instruments

Instruments span ordinary green bonds, green revenue bonds, green project bonds, and green asset-backed securities issued by entities like Fannie Mae and European Investment Bank. Structures include plain vanilla fixed-rate notes underwritten by banks like JPMorgan Chase and structured products distributed via dealers including Morgan Stanley. Sovereign green bonds use mechanisms similar to conventional sovereign debt managed by treasuries such as UK Debt Management Office models. Secondary market liquidity is supported by market makers, custodians such as State Street Corporation, and electronic trading platforms operated by exchanges like the New York Stock Exchange.

Standards, Certification, and Taxonomy

Standardization efforts include voluntary frameworks such as the Green Bond Principles from the International Capital Market Association and certification schemes by the Climate Bonds Initiative. National taxonomies have been developed by jurisdictions including the European Union with its EU Taxonomy Regulation, and by agencies in China and India. Verification and assurance services are provided by professional firms such as Deloitte, PwC, and Ernst & Young. Credit rating adaptations for green credentials have been proposed by S&P Global Ratings and Fitch Ratings.

Issuers, Investors, and Market Participants

Major issuers include supranationals like the World Bank, sovereign states such as France and Germany, municipalities like City of Paris, and corporations including Alphabet Inc. and Iberdrola. Investors range from institutional investors such as CalPERS and Norwegian Sovereign Wealth Fund to retail investors through green bond funds managed by firms like Vanguard and BlackRock. Intermediaries encompass underwriters, legal advisors including Linklaters, and external reviewers such as DNV GL. Development finance institutions like Asian Infrastructure Investment Bank play catalytic roles.

Impact Assessment and Reporting

Issuers typically publish allocation reports and impact reports with metrics aligned to standards from International Organization for Standardization and guidance by the United Nations Environment Programme Finance Initiative. Impact indicators include avoided greenhouse gas emissions, megawatt-hours of renewable generation, and number of low-carbon transport passengers served. Third-party verification and post-issuance audits often involve firms such as SGS and Bureau Veritas. Reporting frequency varies; annual disclosure is common, with some issuers aligning with frameworks from Task Force on Climate-related Financial Disclosures.

Risks, Criticisms, and Controversies

Critiques include concerns over greenwashing highlighted by researchers at institutions like University of Oxford and investigative reports by media outlets such as Financial Times. Debates revolve around the rigor of standards versus national taxonomies like the EU Taxonomy Regulation, potential misallocation by large asset managers such as BlackRock, and the effectiveness of labeled finance in driving additional climate mitigation per studies from Intergovernmental Panel on Climate Change. Credit risk, liquidity risk, and regulatory uncertainty involve actors including central banks like the European Central Bank and supervisors such as the Financial Stability Board. Controversies have arisen when proceeds finance projects viewed as contentious by NGOs like Greenpeace or when sovereign allocations prompt political scrutiny in parliaments such as the European Parliament.

Category:Finance Category:Environmental finance