They're a debt instrument public and private entities issue to finance eco-friendly projects. They're a thriving form of sustainable investment.
Sustainable finance has become crucial to initiatives on reducing the devastating effects of the climate crisis. One of its most revered instruments are green bonds, a form of eco-friendly financing issued by public and private entities.
To understand what they are, we must first get to grips with bonds, financial instruments to achieve long-term liquidity that return investors’ money with interest. They're different to other short-term bonds (like government bonds).
Green bonds also set themselves apart through sustainable objectives. They finance projects that help reduce the effects of climate change or protect the environment. They fall under the category of ESG (environmental, social and governance) and can benefit investors by offsetting emissions in proportion to their outlay.
The European Investment Bank (EIB) issued the first green bonds in 2007 in what was a giant leap towards building a responsible banking industry. More investors are now leaning towards green bonds. According to the Climate Bonds Initiative (CBI), in 2020 USD 270 billion (c. EUR 240 billion) were issued in green bonds.
What type of project can green bonds finance?
Ana has recently paid off her mortgage. With less outgoings, she can now save a lot more. She’s contemplated investing some of her savings for quite some time. However, she’s looking for a responsible investment that generates returns while protecting the planet and society.
After checking her options, she pinpoints green bonds and wants to find out more about the projects her investment could help run. The main uses of green bonds include:
By investing in green bonds, Ana will be doing her part to help achieve UN Sustainable Development Goals (SDGs) 6 (“clean water and sanitation”); 7 (“affordable and clean energy”); 11 ("sustainable cities and communities"); and 13 (“climate action”).