Here at Rapunzl we love green! From greenbacks to green beans and everything in between, we think it’s the best color there is. Just take a look at our logo! Green represents life, cleanliness, and this beautiful place we call Earth. So naturally, we decided to use our financial fluency tools to take a closer look at how money becomes truly green: green bonds.
What are Green Bonds?
Well, a green bond is pretty much what it sounds like. Similar to a standard corporate or government bond, green bonds are fixed-income securities that come in both taxable and tax-exempt forms.
However, there’s one wonderful difference.
You guessed it; green bonds are eco-friendly, meaning they raise capital to fund specific projects that will have a positive environmental impact or help to mitigate the effects of climate change.
There are a handful of different types of green bonds, but the most common are green “use of proceeds” bonds, which are asset-linked bonds backed by the entirety of the issuer’s balance sheet but set aside to be used for green projects.
Green securitized bonds are a different type of green bond backed by a group of green projects or assets. For example, Solar City issues green securitized bonds backed by the solar panel leases they offer to households.
The Growing Green Market
The green bond market is relatively very young, seeing as the first green bond ever was issued just ten years ago by the European Investment Bank, with the first corporate green bonds being issued in 2012.
Despite a short history, the market shows great promise and is expanding rapidly.
In 2015, the market was worth $41.8 billion, more than four times its 2013 level. Issuances more than doubled in 2016, and Moody’s projects the green bond market to pass the $200 billion mark by the end of 2017.
The young market shows no signs of weakness as China continues to pour more and more money into environmentally sustainable projects. Last year, Chinese green bonds accounted for roughly a third of the entire market, and they are looking to rapidly increase their issuance year over year.
Green bonds are particularly attractive to investors for a number of reasons. Firstly, they retain flat pricing, which means there is no additional cost associated with buying a green bond versus a comparable standard bond. But they do carry the added bonus of having a positive environmental benefit.
Furthermore, green bonds offer greater transparency and help many companies meet their environmental commitments while pursuing corporate responsibility missions.
Hence, it comes as no surprise a wide range of investors from BlackRock, Morgan Stanley, and Barclays, to Apple and the Central Bank of Peru are buying up green bonds.
So, why Issue Green?
Issuing green bonds is advantageous to many companies and allows them to attract capital from certain classes of investors who may not otherwise take notice of their projects
It also reinforces a positive brand image and can be an effective marketing tool.
Additionally, many companies seem to prefer the free-market nature of green bonds to the regulatory difficulties often associated with programs like cap & trade (which highly-pollutive, highly-profitable companies can often sidestep with minimal effect on their bottom line), pollution taxes (which can be passed on to the consumer), and green subsidies (which often require disproportionate amounts of government spending).
Hence, green bonds may prove to be an easy and efficient medium through which companies with ample cash can abide by environmental regulations.
But how will these green bonds affect our investments? Let’s take a deeper look as we step closer to achieving financial fluency.
Investing in the Future
Global institutions are finally coming to terms with the fact that climate change and pollution are problems that, if unaddressed, will cost society greatly in terms of corporate profits, political stability, access to resources, and human life.
This realization has been, in part, an impetus for the recent creation and rapid growth of the green bond market.
This cooperation between the public and private sector to work towards a cleaner, brighter future has been hailed by the UN as, “one of the most significant developments in the financing of low-carbon, climate-resilient investment opportunities.”
The quintessential purpose of these bonds is to efficiently transfer capital from investors who wish to (or must) mitigate their environmental impact or support sustainable enterprise to companies or projects that are directly working to combat the effects of climate change and environmental degradation.
These projects are often undertaken in the very communities they intend to support, many of which are in the developing world, where the effects of environmental degradation are no longer cautionary news stories, but have instead materialized into unbreathable air, mass extinction of biodiversity, and violence to secure scarce resources.
By surrounding yourself with a greater understanding of the markets, you can continue to step closer to financial fluency. For these reasons, it is imperative we understand the importance and function of green bonds if we want to continue to invest smarter in our future.